Powell punctuates Fed pivot

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Jan 27, 2022 View in browser   By Kate Davidson Editor's Note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day's biggest stories. Act on the news with POLITICO Pro. Federal Reserve Chair Jerome Powell on Wednesday delivered the news everyone was expecting — a rate increase is likely in March— and put the exclamation point on the Fed's lightning-fast pivot toward tighter monetary policy. He emphasized the risks of inflation while downplaying labor-market concerns that were front of mind for policymakers just a few months ago. "I think there's quite a bit of room to raise interest rates without threatening the labor market," he said, sending markets swooning. It was just one of several surprisingly frank moments from Powell, who managed to strike a hawkish tone while emphasizing that it's nearly impossible to say with any confidence what the path of policy will be this year given how uncertain the economic outlook is. A few takeaways — Powell was candid … Powell is known for his straightforward, plainspoken manner. But he surprised even some longtime Fed watchers at his press conference with his blunt assessment of the labor market (at maximum employment), inflation risks (they've gotten worse) and financial conditions (not overly worrisome). "I found him to be more hawkish than I would have expected given the type of volatility we've seen in markets recently and given the fact that there's still a number of unknowns in terms of economic data," said Greg Daco, chief economist at EY Parthenon. … But also adroit At the same, Powell repeatedly stressed that the Fed must remain nimble and respond to the data as it comes in. And neither the statement nor Powell offered many details about the pace of policy tightening. He was asked, for example, about whether the Fed may raise rates by a half-percentage-point at once or raise rates at consecutive meetings. He didn't take either option off the table, and instead responded with a list of reasons why the current economic situation is very different from any previous tightening cycle. "They've really, I thought, methodically prevented themselves from getting into any kind of box caused by market expectations that they would proceed at any particular pace," said Bill Nelson, chief economist at the Bank Policy Institute and a former senior Fed official. "I thought that that was very well done." Maximum employment: Now and Later Powell has emphasized in recent months that stable prices — in essence, tighter monetary policy now — will be essential to see further gains in the labor market over a longer expansion. But are we at maximum employment? our Victoria Guida asked. Powell made a distinction between maximum employment now, and maximum employment over the longer term, suggesting that we may have reached the former, but the latter could be even higher. "I would say that most FOMC participants agree that labor market conditions are consistent with maximum employment, in the sense of the highest level of employment that is consistent with price stability — and that is my personal view." But he continued: "In the particular situation we're in now, the level of maximum employment that's consistent with stable prices may increase, and we hope that it will as more people come back in the labor market, as participation gradually rises. And the policy path that we're broadly contemplating would be supportive of that outcome as well." What's with the fiscal drag? Powell rattled off a handful of reasons why inflation pressures may ease on their own this year, including much less support from fiscal policy. It's an argument the White House, and Powell's colleague Lael Brainard, have been flagging since last summer: As pandemic aid programs recede, fiscal policy will pose a headwind to growth and help keep inflation in check. Some economists aren't convinced we'll see much of a drag. "We know that a lot of the stimulus that went out the door last year was saved," said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. "We know that state and local governments, because their own finances were better than anticipated, have built up a couple hundred billion dollars they haven't spent." "That war chest should help smooth out those fiscal impulse measures over this year," he added. Watching wage growth Powell again mentioned very strong wage growth as something policy makers are carefully monitoring as they assess whether elevated inflation is becoming entrenched, and consider the path of future rate increases. At the December meeting, Powell flagged a surprising wage jump in the employment cost index as one factor that led to the Fed's hawkish pivot. The latest ECI report is due out Friday. "The question will be how the Fed interprets signs that indeed wage growth has broadened, that it has firmed and that it's showing more signs of persistence," Daco said. "That I think is going to be the key guide for Fed policy in 2022." IT'S THURSDAY — You thought we were over the hump? Buckle up, we'll get our first read of fourth-quarter GDP today. Have ideas, tips or suggestions for MM? Send them our way: kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson or @aubreeeweaver.   JOIN FRIDAY TO HEAR FROM GOVERNORS ACROSS AMERICA : As we head into the third year of the pandemic, state governors are taking varying approaches to public health measures including vaccine and mask mandates. "The Fifty: America's Governors" is a series of live conversations featuring various governors on the unique challenges they face as they take the lead and command the national spotlight in historic ways. Learn what is working and what is not from the governors on the front lines, REGISTER HERE.     Driving the Day Fourth-quarter GDP data, December durable goods data and initial weekly jobless claims released at 8:30 a.m. … December pending home sales data at 10 a.m. … National Credit Union Administration meeting at 10 a.m. FIRST IN MM: GOVERNMENT WATCHDOG URGES GENSLER TO FIRE SEC IG — The Project on Government Oversight, in a blistering letter to SEC Chair Gary Gensler Monday , urged the agency to fire its inspector general, after an independent panel recommended the IG's removal in 2019 for "serious misconduct." The Integrity Committee, a federal panel that investigates allegations of wrongdoing against IGs, concluded that Carl Hoecker abused his authority by conducting a "remarkably biased and flawed" internal probe into two of his employees, and later misled investigators and improperly confronted a witness, Reuters reported. He was temporarily suspended without pay but has remained in the job. Failure to remove Hoecker "undermines the integrity of the office of the SEC IG, and therefore undermines the SEC's commitment to accountability," wrote Danielle Brian, POGO's executive director. He can only be removed by a majority vote of the five-member commission. SEC PROPOSES PRIVATE FUND DISCLOSURES — Our Zachary Warmbrodt: "The SEC on Wednesday proposed rules that would require private equity and hedge funds to give regulators a near-real-time window into their operations during major market events. "The proposal would revise "Form PF" rules under the 2010 Dodd-Frank law that require private funds to make confidential disclosures on a quarterly and annual basis. The changes … would force the funds to report on certain events within one business day, including 'extraordinary' investment losses at hedge funds." CFPB PLOTS CRACKDOWN ON JUNK FEES — Our Katy O'Donnell: "The CFPB is seeking public input on a range of fees Financial companies charge customers, ahead of a crackdown the agency said could save consumers billions of dollars. In a request for information published Wednesday, the CFPB asked for feedback on fees linked to several financial products including bank accounts, credit cards, mortgages and student loans." Comments are due by March 31. CRYPTO ADVOCATES BLAST HOUSE CHINA BILL — Our Sam Sutton: "Cryptocurrency proponents are blistering a House billdesigned to bolster the United States' economic competitiveness with China, saying it could subject financial institutions to unchecked monitoring and oversight from the Treasury Department." FACEBOOK'S CRYPTOCURRENCY VENTURE TO WIND DOWN, SELL ASSETS — WSJ's Peter Rudegeair and Liz Hoffman: "Facebook's ambitious effort to bring cryptocurrency to the masses has failed . The Diem Association, the consortium Facebook founded in 2019 to build a futuristic payments network, is winding down and selling its technology to a small California bank that serves bitcoin and blockchain companies for about $200 million, a person familiar with the matter said. CRYPTO LENDING FIRMS CELSIUS NETWORK, GEMINI FACE SEC SCRUTINY — Bloomberg's Joe Light, Matt Robinson and Zeke Faux: "The U.S. Securities and Exchange Commission is scrutinizing cryptocurrency firms Celsius Network, Voyager Digital Ltd. and Gemini Trust Co. as part of a broad inquiry into companies that pay interest on virtual token deposits, according to people familiar with the matter. "The SEC enforcement review focuses on whether the companies' offerings should be registered as securities with the watchdog, said the people, who weren't authorized to speak publicly." WHAT SHOULD THE WHITE HOUSE DO TO COMBAT INFLATION? — WaPo's Jeff Stein and Rachel Siegel asked independent experts for their ideas , and rounded up 12 proposals, from curbing spending to corporate break-ups to investing in child care. Among the contributors: the Manhattan Institute's Brian Riedl, Jain Family Institute economist Claudia Sahm, New School professor Darrick Hamilton. BOOK CLUB: VARTANIAN INKS BOOK DEAL ON CYBER INSECURITY — Former regulator and banking lawyer Tom Vartanian has signed a deal with Prometheus Books for "Unhackable: How a New Internet Can Prevent a Financial Armageddon." The book will be "a work of research, history, and analysis that explains how the increasing insecurity of the internet is threatening a … global financial disaster, and what we can do to solve cyberspace insecurity," according to Publishers Marketplace. Vartanian is the former executive director of the Program on Financial Regulation and Technology at George Mason University's law school. FED WATCH AP's Chris Rugaber — How Fed hikes could affect mortgages, car loans, card rates WSJ's Michael Derby — Jerome Powell's comments over the past year show mounting inflation concern Bloomberg's Lu Wang and Vildana Hajric — Jittery markets buckle as Powell signals they must go it alone Jobs Report Diane Ellis, director of the division of research and insurance at the FDIC, will retire on May 31 after a 34-year career at the agency, the FDIC announced Wednesday. Alexis Goldstein , financial policy director at the Open Markets Institute, is joining the CFPB "to work on a range of issues," a bureau spokesperson confirmed. Goldstein, who previously worked at Americans for Financial Reform after a stint on Wall Street, has called for greater scrutiny of cryptocurrencies.   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     Fly Around Trucks are taking over American roads, fueled by a rise in pandemic online shopping and disruptions to global supply chains. —WSJ's David Harrison The European Central Bank has warned lenders with significant Russian exposure to ready themselves for the imposition of international sanctions against Moscow if it invades Ukraine. — Financial Times' Martin Arnold, Laura Noonan, Owen Walker and Stephen Morris China on Wednesday published revised rules designed to strengthen financial firms' ability to combat money laundering. —Reuters Bank of America Corp is raising the base salary for senior bankers, according to a person familiar with the matter, its latest attempt to retain top talent in one of the most competitive years for pay on Wall Street. —Reuters' Mehnaz Yasmin   Follow us on Twitter Mark McQuillian @mcqdc Kate Davidson @KateDAvidson Aubree Eliza Weaver @aubreeeweaver Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary   Follow us

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