The Fed's sleeper risk

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Feb 17, 2022 View in browser   By Kate Davidson and Aubree Eliza Weaver Presented by EMMA Labs from the Municipal Securities Rulemaking Board Programming Note: We'll be off this Monday for Presidents Day but will be back in your inboxes on Tuesday, Feb. 22. 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. Minutes from the Federal Reserve's January meeting told us little we didn't already learn from Chair Jay Powell's press conference last month. But they did offer clues about one concern that's been overshadowed by elevated inflation and by the debate over the size of rate increases: the risk of a Russian invasion of Ukraine. Geopolitical tensions came up four separate times in the minutes released Wednesday from the Jan. 25-26 meeting, and Russia was mentioned explicitly twice. Fed staff pointed to rising geopolitical risks as factors behind a sharp drop in equity markets last month and movements in foreign asset prices. And Fed officials cited "the possibility of geopolitical turmoil that could cause increases in global energy prices or exacerbate global supply shortages" as a risk that could lead to higher inflation than they currently expect. And they flagged "the potential for escalating geopolitical tensions" as a risk to the economic outlook. While the threat of a Russian invasion in Ukraine has dominated headlines in recent weeks, it hasn't figured prominently in the discussion about the path of U.S. monetary policy. That debate has focused on whether the Fed should raise rates by a half-percentage-point at its next meeting, as inflation data continue to point to a sizzling hot economy with widespread price pressures. San Francisco Fed President Mary Daly on Sunday pushed back on the need for a supersized increase and said it's too early to predict how many rate hikes will be appropriate this year. "We have Ukraine right now, geopolitical risk," she said on CBS's Face the Nation. "We are just coming out of our homes after Omicron … We have another print before the March meeting on both the employment, the jobs report and inflation." Geopolitical risks, Daly said, add to uncertainty Americans are already facing about the pandemic and the economy. "So this is just another factor, and uncertainty we know affects consumer sentiment and ultimately affects consumer demand." Officials' apparent concern about Russia-related risks has gone largely unnoticed, compared to the focus on the size of rate hikes and inflation worries, said Ellen Meade, a former senior Fed economist who worked on central bank communications. That those risks were mentioned several times in the minutes raises questions about whether, and to what extent, this is factoring into decisions about the appropriate size of a rate increase next month, she added. "It is an argument for 25 basis points in March," Meade said, "and is likely to still be an argument for 25, even if some FOMC participants and some incoming data appear to point to 50." If Russia invades Ukraine, it could push oil prices up 20 percent, to $110 a barrell, RSM US economists Joe Brusuelas and Tuan Nguyen said in a research note Wednesday. "Together with the spillover effect on natural gas prices, consumer confidence and uncertainty, the conflict would shave a little less than 1% from gross domestic product over the next year and cause inflation to rise by close to 2.8 percentage points to over 10%," they estimated. Wage worries — The Fed minutes also reiterated that officials are keeping a close eye on wages as they assess whether inflation pressures are becoming entrenched, or leading to a spiral that pushes wages and in turn prices ever higher. Rising inflation is wiping out some of the biggest wage gains workers have seen in decades. Still, the Fed's plans to tamp down price pressures has labor advocates and Democratic Party allies increasingly anxious that they'll cut off the expansion before all workers have a chance to benefit, our Victoria Guida reports. While incomes grew rapidly last year, real wages, which are adjusted for inflation, dropped 1.9 percent for private-sector employees in 2021, according to the Labor Department. Victoria explains: "Because of that dynamic, it's possible that the Fed could increase take-home pay while lowering the overall pace of wage growth, as long as inflation is reduced by a larger amount. "The job market itself is also strong, with worker shortages in some industries, raising the possibility that the Fed could dampen demand for labor without necessarily hurting those currently employed." IT'S THURSDAY — Calling Nickelodeon fans! Don't miss this sweet interview with Treasury Secretary Janet Yellen and Nick News correspondent Rory Hu. They talk about math, the Mint, the new Maya Angelou quarter and more. Have a tip, feedback or story idea this week? Let us know: kdavidson@politico.com, aweaver@politico.com, or on Twitter @katedavidson or @aubreeeweaver. A message from EMMA Labs from the Municipal Securities Rulemaking Board: EMMA Labs is the Municipal Securities Rulemaking Board's new innovation sandbox – where we work together with market participants and the FinTech community to create the future of municipal bond market transparency. Learn more about the MSRB's EMMA Labs platform.   Driving the Day Senate Finance hearing on IRS customer service challenges at 10 a.m. … Senate Banking hearing on the state of the American economy with testimony from the Council of Economic Advisers members at 10 a.m. … Committee for a Responsible Federal Budget hosts a discussion with Sens. Mitt Romney (R-Utah) and Angus King (I-Maine) on trust fund solutions at 11 a.m. … House Financial Services hearing on the role of the IMF in a changing global landscape Thursday at 12 p.m. ANOTHER WRINKLE IN THE RASKIN SAGA? — Our Victoria Guida reports: The Colorado Division of Banking has entered the chat. Republicans have been raising suspicions about Fed nominee Sarah Bloom Raskin's time as a board member at fintech Reserve Trust, during which time they received access to the Fed's payments system (after initially being denied). The Kansas City Fed, which approved the application, pushed back on suggestions that Raskin did anything improper, saying Reserve Trust was approved after it "changed its business model and the Colorado Division of Banking reinterpreted the state's law in a manner that meant RTC met the definition of a depository institution." Not quite, says Colorado. "We consider the statement that the division 'reinterpreted the state's law' as a misrepresentation of our practice," division spokeswoman Rebecca Laurie said in a statement earlier reported by CNBC. In an email to POLITICO, she confirmed that Reserve Trust's legal status had indeed changed between denial and approval. They simply dispute that it was related to a reinterpretation of a law. The Kansas City Fed declined to comment. The upshot: Remember Republicans have been holding up Raskin's nomination in part because they say she has not provided enough information about the Reserve Trust situation. A source familiar with the matter also said Sen. Pat Toomey's office sought another phone call with Raskin before the scheduled committee vote on Tuesday that never came together. (A Banking committee spokesperson acknowledged Toomey had sought another briefing with Raskin, but said, "The reality is Senator Toomey does not lack information, he just doesn't like Sarah Bloom Raskin's answers.") The Colorado response makes the whole situation a bit more legally confusing, but doesn't seem to fundamentally change what we know. FIRST LOOK: BANK BRANCHES CLOSING RAPIDLY SINCE COVID — From Victoria again: A new analysis from the National Community Reinvestment Coalition found that more than 4,000 bank branch locations have closed since the onset of the pandemic in March 2020. That's about 200 per month on average, which is double the rate of the previous 20 months. "The disappearance of local branches is a disruptive and ominous shift for vulnerable communities and communities of color that were already under-capitalized, under-invested and underserved by the financial system," NCRC President and CEO Jesse Van Tol said in a statement. "This new data is a wake-up call for community leaders, policy makers and the financial sector itself." The metro area that was hardest hit: Portland, Oregon.     YELLEN URGES VACCINE COORDINATION AT G-20 HEALTH FORUM — Treasury Secretary Janet Yellen this morning called on a global task force to develop a clear plan for improving vaccine deployment around the world, which she said will help end the pandemic and bolster global growth. "We must and can ensure that every country has the access, the means, and the capacity to vaccinate their populations," Yellen said in remarks prepared for delivery at a G-20 global health seminar. "We need strong coordination among national governments, multilateral institutions, and bilateral partners so that vaccine supplies quickly get to where they are needed and, once they are there, that the capabilities and resources are in place to get vaccines into arms." — Finance chiefs from the world's biggest economies are holding their first gathering of the yearThursday and Friday, with the pandemic, inflation and taxes set to dominate talks, Bloomberg's Enda Curran and Eric Martin report. CRYPTO FIRMS LAUNCH ANTI-MONEY LAUNDERING COMPLIANCE PLATFORM — Our Sam Sutton: "More than a dozen cryptocurrency exchanges and trading platforms have launched a trade group to standardize their compliance with global anti-money laundering rules." VULNERABLE SENATE DEMS TRY TO RUN AS TAX-CUTTERS — Our Burgess Everett and Marianne LeVine: "Vulnerable Senate Democrats are attempting a bold strategy: Running for reelection as the real tax-cutters in Congress, even if it pits them against some of their caucus colleagues. A quartet of the chamber's most endangered Democrats are backing a proposal to suspend the federal gas tax through the end of the year and urging their party to embrace it as a signature economic pitch ahead of the midterms. And more ideas are on the way to ease voters' pocketbooks." U.S. SANCTIONS ON RUSSIAN BANKS ARE THE WEST'S MOST POTENT ECONOMIC THREAT — Reuters' Catherine Belton: "For NATO members, the most powerful measure against Russia were it to invade Ukraine would be U.S. sanctions cutting off Russian state banks from the dollar, according to Russian executives, bankers, and former senior U.S. sanctions officials. The United States has warned that Russia could invade as early as this week." REGULATORS LOOKING INTO WHETHER SHORT SELLERS IMPROPERLY INFLUENCED STOCK PRICES — NYT's Matthew Goldstein and Emily Flitter: "Some Wall Street investors have made a profession out of exposing companies with shoddy or even fraudulent operations while betting that their share prices will fall. But Justice Department officials have been looking into whether some of these activist investors, known as short sellers, may be taking their tactics too far. "Prominent short sellers including Carson Block and Andrew Left have received search warrants as part of an ongoing investigation into possible manipulation of stock prices, according to two people familiar with the investigation. Details of the investigation were reported earlier by Bloomberg News and The Wall Street Journal."   BECOME A GLOBAL INSIDER:  The world is more connected than ever. It has never been more essential to identify, unpack and analyze important news, trends and decisions shaping our future — and we've got you covered! Every Monday, Wednesday and Friday, Global Insider author Ryan Heath navigates the global news maze and connects you to power players and events changing our world. Don't miss out on this influential global community. Subscribe now.     Jobs Report Tammy Weinrib, former Societe Generale Vice President of Financial Crime Compliance, is joining Binance.US as its chief compliance officer. Weinrib, who previously was a deputy chief compliance officer at Gemini, is tasked with leading the crypto platform's anti-money laundering and know-your-customer programs.   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 U.S. shoppers spent more at the start of the year as the Omicron wave of Covid-19 started to recede and consumers absorbed a four-decade increase in prices. — WSJ's Harriet Torry More than six in 10 workers are choosing to work from home — rather than doing so because their office is closed, a report out Wednesday from Pew Research Center found. — Our Eleanor Mueller Meanwhile, Wall Street is largely back in the office while regulators stay home, Bloomberg reports. The great rotation on Wall Street into stock funds and out of bonds risks falling apart. — Bloomberg's Lu Wang A message from EMMA Labs from the Municipal Securities Rulemaking Board: One of the first Active Lab prototypes being put to the test on EMMA Labs is a keyword search engine. The enhanced search prototype can unlock information contained in hundreds of thousands of regulatory disclosure filings submitted in PDF document form on the EMMA website by state and local governments and other issuers of municipal bonds. A search of filings submitted from January 2020 to March 2021 found more than 50,000 COVID-19 related municipal bond disclosures by state and local governments. Read the case study here.     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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