The squeaky wheel: Bullard prods Fed to go big

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Feb 15, 2022 View in browser   By Kate Davidson and Aubree Eliza Weaver Presented by EMMA Labs from the Municipal Securities Rulemaking Board 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. WHEN ONE FED OFFICIAL MOVES THE MARKET — Does the Fed lead the markets, or do the markets lead the Fed? It's a question practically as old as the central bank. Here's a new one: If one Fed official helps lead markets in one direction, does the rest of the central bank's policy-setting committee have an obligation to follow? St. Louis Federal Reserve President James Bullard raised eyebrows Monday when he suggested that the Fed "has to follow through and ratify" market expectations of a half-percentage-point interest rate increase next month, or risk losing credibility. The eyebrow-raising part is that Bullard appears to be part of the reason market expectations for such a move have recently jumped to 90 percent. Inflation in January was higher than economists expected, the Labor Department said Thursday, prompting federal-funds futures markets to raise their bets for a half-percentage-point rate hike in March — something that hasn't happened since 2000. Those expectations climbed even higher Thursday afternoon, after Bullard first said he favored such a move. Other Fed officials, however, have signaled they are not necessarily sold on the idea. Asked on Monday about his market-moving comments, Bullard acknowledged that he's just one person on the Federal Open Market Committee and said he'd make his case when policymakers meet next month. Still, if the Fed doesn't do what the markets expect, Bullard told CNBC's Steve Liesman, "it makes it appear that we're not defending our 2 percent inflation target." We asked former Fed Vice Chair Don Kohn what he makes of this logic. First off, Kohn said, Bullard talks frequently but is often not at the center of the committee. Second, this is an instance where what he said "fell on fertile ground" — that is, markets were already contemplating this possibility, and he raised it further, Kohn said. Finally, thinking through how markets will react to a policy decision is often part of the discussion. "The people in favor of a particular policy that's built into markets always argue that not doing it would cost something," Kohn said. "I can remember a couple of those discussions — 'Markets have X built in, we need to do X or we'll disappoint.' But I think in the end, doing the right thing is what you need to do, and let the markets adjust." The Fed's credibility, he added, "will depend on achieving the objectives that Congress has given it. That's the key. And they've got to figure out how best to do that. Markets may anticipate them correctly, they may not." How best to do it? Kohn said the Fed has a number of options to continue shaping expectations and removing support for the economy, including through forward guidance about the path of policy — such as public remarks and the Fed's so-called dot plot — as well as decisions about the balance sheet. "The 50-basis-point increase is one option, but there are others, and they need to think about the combination of options that will best meet their needs," he said. Fed speak — Of course, it would help to hear from senior Fed officials themselves where they see policy heading. New York Fed President John Williams is scheduled to speak Friday, and Governor Lael Brainard is also set to discuss central bank digital currencies at an event Friday, though she could surely be asked about monetary policy. What about Powell? This is usually the time that Fed Chair Jerome Powell heads to Capitol Hill to deliver his semiannual monetary policy testimony. With Congress in recess next week and the Fed beginning its customary pre-meeting blackout period on March 5, we wouldn't be at all surprised to see the Senate Banking and House Financial Services committees announce hearings with Powell during the first week of March. 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.   RASKIN IN THE CLEAR — Meanwhile, Senate Banking is scheduled to vote this afternoon on President Joe Biden's Fed nominees. Sen. Jon Tester (D-Mont.), a Banking Committee centrist whose support is critical for advancement, said yesterday that he would support Sarah Bloom Raskin's nomination to be Fed vice chair for supervision, paving the way for all five nominees to advance to the Senate floor. The committee is also set to vote on Powell's nomination for a second term, Brainard's nomination to be the Fed's No. 2 and on economists Lisa Cook and Philip Jefferson to be governors on the Fed board. (Apparently the nominees have a new hashtag: #FedFiveNow). Of the five, Raskin had drawn the most blowback from Republicans over her views on climate-related risks to the financial system, and her role on the board of a state-chartered trust company that gained access to the central bank's payment system. "It is my expectation that she will be confirmed by the full Senate," Tester told Yahoo Finance's Brian Cheung on Monday, adding that he had a number of phone calls over the weekend with different senators who've raised concerns. The key question after today: Will the Senate vote on any of the nominations before the next FOMC meeting on March 15-16? In a video released by his office, Sen. Ben Ray Luján (D-N.M.) said he expects to be back to work in the Senate "in just a few short weeks," after suffering a stroke last month. Raskin and Cook will likely need to wait until then to ensure they have all 50 votes to win confirmation. IT'S TUESDAY — BU upsets Northeastern to take back the Beanpot! Sophomore Dylan Peterson scores the only goal of the game with 2:46 remaining, giving the Terriers the win for the first time since 2015. You love to see it. Enough news for you this week? Have more tips or story ideas? Email us at kdavidson@politico.com or aweaver@politico.com, or find us on Twitter @katedavidson or @aubreeeweaver.   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.     Driving the Day Senate Banking hearing on the Biden administration's stablecoin report at 10 a.m. … Women in Housing Finance discussion with former FDIC Chair Sheila Bair at 12 p.m.… Senate Banking votes on Fed nominees at 2:15 p.m. SCOOP: GOTTHEIMER REVEALS STABLECOIN BILL — From our Zachary Warmbrodt: Rep. Josh Gottheimer(D-N.J.) on Tuesday released draft text of a bill that would set up a new regulatory structure for certain stablecoins, including government-backed insurance akin to what's in place for bank deposits. The New Jersey Democrat's bill would create a "qualified" stablecoin designation — what he describes as a kind of "seal of approval" for consumers. The qualified stablecoins would be redeemable on demand on a one-to-one basis for U.S. dollars. They would be issued either by a bank or a non-bank that met certain rules, including regulation by the OCC and reserve requirements. Gottheimer expects a House Financial Services Committee markup on stablecoin legislation and broader crypto policy in the next couple months. THE NOT-SO-GOOD NEWS ABOUT DEFICITS —The Committee for a Responsible Federal Budget pushed back on Monday's MM with some reminders that the longer-term outlook for deficits and debt still isn't great. CRFB President Maya MacGuineas tells us: "It's good news about the deficit coming down and a monthly surplus in January, but it's important to keep in mind that 1) much of the monthly surplus was due to timing shifts and one-time events; 2) even while the deficit is coming down—which was expected after the Covid emergency improved—the debt is still growing at a hefty clip, and is projected to grow by over $1 trillion this year; and 3) the longer-term debt is projected to grow by $13 trillion over the next decade assuming no new borrowing. So we are far off from a fiscal victory." — And here's more from CRFB on what higher interest rates would mean for debt servicing costs. SEC, STATES HIT CRYPTO LENDER BLOCKFI WITH $100M PENALTY — From Sam again: "The Securities and Exchange Commission and 32 states said Monday that cryptocurrency startup BlockFi will pay $100 million to settle charges that it operated an illegal lending business, in what officials called a first-of-its-kind crackdown in digital asset trading." BANKING TRADE GROUP: STRESS TESTS STILL STRESSFUL — The Bank Policy Institute is out with a deep dive of the Fed's annual stress test of big Wall Street banks. They argue the test remains extremely severe — "for example the assumptions of a 5¾ percentage point increase in the unemployment rate, and a 55 percent drop in the stock market. There is a more pronounced economic downturn than in 2021, with the unemployment rate increasing an additional 1¾ percentage points." The upshot: "Our modeling indicates that the 2022 scenarios will result in stringent capital requirements, with likely some increases in capital requirements for banks on a biennial cycle and thus most recently tested in 2020." — Wall Street critics have argued the tests should be stricter still. FED ECONOMIST'S WIFE WEIGHS IN ON TRADING STORY — The wife of a Fed staffer who was the subject of a WSJ report on financial market trades in early 2020 told Reuters the trades were part of a rebalancing to comply with Fed ethics rules, after she inherited the securities in 2019. "I am devastated that my dad's unexpected death and the actions we took to comply with the rules are now being used to tarnish my husband's good name and public service," said Dominique Casimir-Stevens, the wife of John Stevens, an economist in the Fed's research and statistics division.     Inflation Watch INFLATION OUTLOOK FALLS FOR FIRST TIME SINCE OCTOBER 2020 — Bloomberg's Alexandre Tanzi: "U.S. consumers don't expect red-hot inflation levels to last in the long term. That's the takeaway from the January consumer survey from the Federal Reserve Bank of New York, which showed that the median one-year-ahead inflation expectations fell for the first time since October 2020, to 5.8 percent." CENTRAL BANK SHOULD WEIGH ASSET SALES TO CURB INFLATION — In an interview with WSJ's Nick Timiraos Friday, Kansas City Fed President Esther George said the Fed should consider selling bonds from its $9 trillion asset portfolio to address high inflation and guard against harmful effects that can result from raising short-term rates above long-term rates. Jobs Report Brian Brooks, former acting comptroller and Bitfury CEO, and Michael Carpenter, the former CEO of Ally Financial, have joined the board of Protego Trust Bank, which received permission from the OCC earlier this month to operate a national trust bank. Maura Pally is joining Blackstone as executive director of the Blackstone Charitable Foundation. Pally was most recently executive vice president of the Clinton Foundation, and worked previously at Bloomberg Philanthropies and the State Department. Justin Slaughter is joining crypto firm Paradigm as policy director. Slaughter worked most recently as director of the SEC's Office of Legislative and Intergovernmental Affairs, and as senior adviser to former SEC acting chair Allison Lee. 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.   Fly Around The pace of blank-check mergers failing to cross the finish line is accelerating as the industry grapples with waning investor interest. — Bloomberg's Bailey Lipschultz Stocks closed lower on Wall Street Monday as the U.S. moved to close its embassy in Ukraine amid heightened geopolitical tensions over the thousands of Russian troops that have been amassing on the border. — AP's Damian J. Troise and Alex Veiga President Joe Biden came into office with a plan to fix inflation — just not the particular inflationary problem that the country now faces. — AP's Josh Boak Consumer advocates and animal welfare groups have launched a campaign against predatory puppy loans.   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.       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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