A big test of Powell's support

Jun 21, 2022

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Powell, Take 2 — It's a short week, but it's shaping up to be another extraordinary one, as Federal Reserve Chair Jerome Powell heads to Capitol Hill for his semi-annual congressional testimony, just days after he oversaw the biggest interest-rate increase since 1994.

He'll testify before the Senate Banking Committee first on Wednesday, then the House Financial Services Committee on Thursday.

In another era, Powell might expect to be pummeled by lawmakers over his efforts to cool the economy, which have sent the stock market into a nosedive and led to a sharp tightening of broader financial conditions. Instead, he has had the benefit of widespread political support — from Democrats and Republicans in Congress, and the West Wing — to do what it takes to tame decades-high inflation.

But there's no guarantee that will last . This week's hearings could offer the first glimpse of whether that support is beginning to crack.

In its monetary policy report released last week, the central bank declared that its commitment to restoring price stability is "unconditional" — a new buzzword for Fed watchers. That could open Powell up to some pointed questions, Wrightson ICAP chief economist Lou Crandall said in a note Monday.

"By its very nature, a dual mandate means that the FOMC cannot have a truly unconditional commitment to either of its two objectives," Crandall said. "Friday's monetary policy report argues that price stability is 'necessary for sustaining a strong labor market,' which is true enough in the long run.

"However, the Fed always faces difficult questions about timing and about the amount of economic damage that it will have to accept. How the FOMC will balance those considerations over the course of this cycle is uncertain."

Translation: What happens if this landing is bumpier than Powell predicts? And how far will he and his colleagues go to bring inflation back to their 2 percent objective if the labor market starts to significantly deteriorate?

Crandall thinks Fed officials would be willing to accept a partial victory now and rely on "opportunistic disinflation " to finish the job later, rather than deliberately sending the economy into a recession.

Lawmakers (and Democrats in particular) may be tougher than usual in pressing Powell to essentially describe the FOMC's pain threshold, and what happens if things go seriously south with the labor market before inflation is back near 2 percent.

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.

Federal Reserve Chair Jerome Powell speaks into a microphone at the House Financial Services Committee.

Fed Chair Jerome Powell will testify before a Senate panel Wednesday and House lawmakers Thursday. | Win McNamee/Getty Images

On the Republican side, Powell will surely face questions about the report's acknowledgment that current economic conditions call for interest rates to be set much higher this year — between 4 percent and 7 percent — if the Fed relied only on several simple mathematical formulas to make policy decisions.

While the central bank only uses those policy rules as a guide, they will likely feed GOP criticism that the Fed waited much too long to begin reining in inflation and needs to move more aggressively now. (Look for some lawmakers, like Sen. Pat Toomey (R-Pa.), to lay the blame on the Fed's new framework.)

Not inevitable — Meanwhile, fiscal policymakers were out this weekend with a resounding chorus: A recession is not inevitable.

President Joe Biden himself weighed in Monday, following remarks over the weekend from Treasury Secretary Janet Yellen and National Economic Council Director Brian Deese:

"I was talking to Larry Summers this morning, and there's nothing inevitable about a recession," Biden told reporters Monday. "I think we're going to be able to get a change in Medicare and a reduction in the cost of insulin."

Summers, the former Treasury secretary, has said a recession is "more likely than not" by the end of next year — a call that many Wall Street banks have also made in recent weeks and months.

Biden and congressional Democrats are continuing to work toward a deal on legislation that could combat price pressures and revive parts of the president's agenda. It may do little to actually help inflation in the near term, but passing something (anything!) could give some Democratic incumbent senators a jolt come November, according to a May survey by Hart Research Associates.

Data watch — After Powell flagged his concerns last week about inflation expectations, we expect Fed officials and Wall Street will be closely watching the University of Michigan's final reading of consumer inflation expectations on Friday.

The preliminary reading, released the Friday before the June Fed meeting, showed a jump that rattled Powell and his FOMC colleagues. Any further signs that expectations are drifting up is another check in the "tighter policy" column.

IT'S TUESDAY — Add this one to the tight labor market file: Virgin Atlantic last week announced it has eased a ban on flight attendants showing tattoos on duty, following similar changes at Alaska Airlines and United Airlines. (Among the reasons for the change: Relaxing dress codes can help broaden the pool of job candidates.)

Have tips, story ideas or feedback? Email us at kdavidson@politico.com or aweaver@politico.com, or find us on Twitter @katedavidson or @aubreeeweaver.

A message from Grayscale:

As other countries approve spot Bitcoin ETFs, the U.S. is falling behind. SEC approval is critical for both investors and the future of the digital asset ecosystem. That's why Grayscale Investments is currently seeking regulatory approval from the SEC to convert the company's flagship fund — Grayscale Bitcoin Trust (GBTC) — into an ETF. CEO Michael Sonnenshein connected with POLITICO Focus to discuss the pending SEC approval and the future of the cryptocurrency landscape. Read on for more.

DRIVING THE WEEK

FED SPEAK — In addition to Powell's testimony, we'll hear from a slew of other Fed speakers this week. Cleveland Fed President Loretta Mester speaks today at noon, and Richmond Fed President Tom Barkin speaks to the National Association for Business Economics at 11 a.m., and at a 3:30 p.m. event titled "The Recession Question."

On Wednesday, Chicago Fed President Charles Evans will speak, and Barkin and Philadelphia Fed President Patrick Harker will both speak at a symposium co-hosted by the Philadelphia Fed. On Friday, St. Louis Fed President James Bullard and San Francisco Fed President Mary Daly will also speak.

ALSO TODAY — Existing home sales data released at 10 a.m. … White House Council of Economic Advisers member Heather Boushey speaks at a Washington Post Live event at 4 p.m.

LATER THIS WEEK — House Financial Services subcommittee hearing on updating the Community Reinvestment Act Wednesday … House Financial Services markup of pending legislation Wednesday … Senate Banking hearing on reauthorizing the National Flood Insurance Program Thursday … University of Michigan consumer sentiment and inflation expectations final reading released Friday.

YELLEN VISITS TRIBAL NATION, WITH A NEW TREASURER — Janet Yellen will become the first Treasury secretary to visit a Tribal nation Tuesday when she visits South Dakota's Rosebud Indian Reservation.

And she'll be doing it with a new Treasurer: Biden announced this morning that he has named Lynn Malerba as the first Native American Treasurer of the United States. Malerba became the 18th chief of the Mohegan Tribe in 2010, and is the first woman to serve in the position in the Tribe's modern history.

In recent decades, the role of U.S. Treasurer — who has direct oversight over the U.S. Mint, Bureau of Engraving and Printing and Fort Knox — has often been filled by Latina women. Malerba's appointment means the U.S. currency for the first time will have the signature of a Tribal leader and Native woman, Treasury said.

Treasury also announced the creation Tuesday of a new Office of Tribal and Native Affairs, which Malerba will oversee. That follows the creation last year of a Tribal team at Treasury that helped administer the $30 billion in pandemic aid programs directed toward Tribes.

— In her first trip to Canada as Treasury secretary on Monday, Yellen and Canadian Finance Minister Chrystia Freeland also touted the virtues of friend-shoring, our Zi-Ann Lum reported from Toronto.

'WE GREW TOO QUICKLY' — Our Sam Sutton: "Crypto's growing influence in Washington is in danger of fading as the market collapses and the industry shrinks.

"Coinbase, a publicly traded exchange and one of the largest global crypto marketplaces, slashed 18 percent of its workforce this week to brace for the slide. Billionaires Cameron and Tyler Winklevoss said they would lay off one-tenth of the workforce at their exchange. Even Crypto.com, which signed a $700 million deal to put its name on Los Angeles's NBA arena just seven months ago, has cut 260 of its staff through 'targeted reductions.'"

"We grew too quickly," Coinbase CEO Brian Armstrong wrote in a company blog post.

—Many investors and workers are feeling this crypto crash more acutely than previous ones, write WSJ's Corrie Driebusch and Paul Vigna: "When the dust settles, some crypto products and companies may no longer exist."

BIDEN'S INCREDIBLE SHRINKING INFRASTRUCTURE PLAN — Our Tanya Snyder digs into an issue we flagged in MM back in April: Inflation has slashed billions from the value of the president's signature infrastructure law, forcing states to cancel or delay projects as costs balloon.

—WSJ's Julie Bykowicz also reports: "Construction projects across the U.S. are running short on labor just as $1 trillion in federal infrastructure money starts to kick in, leading companies to get creative in their quest to attract and retain workers."

GAS TAX PAUSE DECISION COULD COME BY END OF THE WEEK — Reuters: "U.S. President Joe Biden said on Monday that a decision on whether to pause a federal gasoline tax could come by the end of this week, as the United States struggles to tackle soaring gasoline prices and inflation, now at its highest in 40 years."

Meanwhile, the average price for a gallon of gas dipped below $5 over the weekend, but prices could rise again before the July 4 holiday weekend, Axios reported.

A message from Grayscale:

Fed File

SUPPORT FOR 75 IN JULY — Fed Governor Chris Waller "expressed early support for another 0.75 percentage point interest rate rise at the central bank's next meeting in July, in anticipation that inflation will not moderate sufficiently to slow the pace of monetary tightening," the FT's Colby Smith wrote. Waller "affirmed the central bank's commitment to tackling the worst inflation problem in more than forty years, saying it was 'all in on re-establishing price stability.'"

A SLOW RETURN TO FED'S TARGET — Cleveland Fed President Loretta Mester said Sunday it will take "a couple of years" for inflation to return to the Fed's 2 percent target, the FT's Felicia Schwartz reported.

"'I'm not predicting a recession,' she said. 'The recession risks are going up, partly because monetary policy could have pivoted a little earlier than it did. We're doing that now by moving interest rates up but, of course, there's a lot of other things going on as well," she said on CBS's Face the Nation."

FED HIKES MAY MARK START OF TOUGH NEW ECONOMIC CLIMATE — WaPo's David J. Lynch: "When the Federal Reserve raised interest rates last week by the largest amount since 1994, it did more than declare war on inflation. The U.S. central bank also launched a high-stakes test of the economy's ability to shed its dependence on limitless credit and tolerate higher borrowing costs for consumers, businesses and the government."

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Inflation Watch

SMALL BUSINESSES FALL BEHIND ON HIRING AS INFLATION TAKES ITS TOLL — WSJ's Ruth Simon: "Owners of many small companies say inflation has added to the pressures of an already tight job market, making it increasingly difficult to keep pace with the wages and benefits offered by large employers. …"

"Sixty-three percent of small-business owners say that hiring challenges are affecting their ability to operate at full capacity, according to a June survey of more than 825 small businesses for The Wall Street Journal by Vistage Worldwide Inc., a business coaching and peer advisory firm."

THE LONG-PREDICTED CLIFF MAY FINALLY HAVE ARRIVED — NYT's Jeanna Smialek and Ben Casselman: "[A]s savings run dry and consumers struggle under the weight of higher prices and rising interest rates, early cracks are beginning to show — and are likely to widen from here."

—One bright spot: "The U.S. moratorium on home foreclosures ended nearly a year ago, but the sizzling housing market is still protecting many delinquent mortgage borrowers from losing their homes," WSJ's Akiko Matsuda writes.

Fly Around

A London-listed fund linked to Nelson Peltz's Trian Fund Management has come under pressure from a group of insurgent investors seeking to shake up its board "to improve governance and restore trust". — FT's Harriet Agnew and Joshua Oliver

A selloff that saw US stocks sink into a bear market last week amid red-hot inflation data and a sharp Federal Reserve rate hike will likely ease in the second half, according to JPMorgan Chase & Co. — Bloomberg's Sagarika Jaisinghani

Transportation Secretary Pete Buttigieg said he is pushing airlines to stress-test their summer schedules to ensure they can operate all their planned flights with the employees they have, and to add customer-service workers. — AP's David Koenig

A message from Grayscale:

The U.S. digital asset marketplace has been rapidly evolving for years, with more consumers than ever before collecting, trading and using cryptocurrency. But as other countries approve spot Bitcoin ETFs, some are concerned that the U.S. hasn't kept pace. That's why Grayscale Investments, the world's largest digital currency asset manager, is seeking SEC approval to convert its flagship fund, Grayscale Bitcoin Trust (GBTC), into an ETF. Grayscale Investments CEO Michael Sonnenshein joined POLITICO Focus for a conversation on how spot Bitcoin ETFs could promote financial accessibility and safety and why GBTC is the best-suited option for the transition. Read on for more.