The Fed’s crisis of competence

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Jun 15, 2022 View in browser   By Ben White Presented by Meta With help from Ankush Khardori Federal Reserve Chair Jerome Powell attends a news conference today at the Federal Reserve Board Building in Washington. | Jacquelyn Martin/AP Photo CONFIDENCE MAN — The Federal Reserve remains perhaps the last widely respected institution in Washington, known for its super wonky, nonpartisan dedication to managing inflation and promoting full employment. It's not a political lightning rod like the Supreme Court. And everyone knows how little people care for Congress or President Joe Biden at the moment. Most people don't know exactly what the Fed is or what it does. But the bank's street cred for green eyeshade professionalism remains. Past chairs like Ben Bernanke, Janet Yellen, Alan Greenspan and famed inflation-buster Paul Volcker remain (mostly) revered figures in the economics world. That golden reputation is now very much on the line. Current chair Jerome Powell and his colleagues at the central bank obviously got it terribly, horribly wrong when they said the current run of historic inflation that began in late 2020 as Covid eased would be "transitory" and level off well before now. Obviously, that did not happen. Inflation popped to 8.6 percent in May, the highest level in 40 years, driven by soaring gas, food and housing costs. Perhaps even more important, consumer and business expectations for future inflation are starting to rise quite a bit. Central bankers obsess over expectations because they drive business and consumer behavior. If the Fed loses the confidence of businesses and consumers in its ability to control inflation, people will pull back on spending and investment in the near term, helping push the economy toward recession. That's why Powell stressed "public confidence" in the Fed's abilities during his press conference today following a big rate hike of 0.75 percent intended to slow down the economy and tamp down rampant price hikes. He mentioned the rise in inflation expectations multiple times as a reason for the larger-than-initially-forecast hike this month, along with inflation readings and signs that consumers, who drive around 70 percent of the economy, are finally starting to feel the pinch and pull back on buying stuff.  "There's always a risk of going too far or going not far enough," Powell said in response to a question from my colleague Victoria Guida. He added: "We think that the public generally sees us as very likely to be successful in getting inflation down to 2 percent. And that's critical. It's absolutely key to the whole thing that we sustain that confidence." The hike came after Powell said at the last meeting that he wasn't thinking about 75-basis-point hikes, leading to questions about whether the central bank's guidance is of much use to Wall Street and the general public anymore. Once that confidence in guidance is gone, the Fed loses one of its most powerful tools to influence economic behavior without resorting to draconian hikes almost guaranteed to bring recession and drive up unemployment. A defensive Powell insisted that the bank simply shifted its stance based on the persistence of inflation, drops in consumer confidence and the like. But the hike came after a rapid campaign by the central bank (over like two days) to turn 75 basis points into the new expectations. So markets kind of celebrated that the Fed was very much on the inflation case and might still somehow execute the magical "soft landing" in which inflation falls but unemployment doesn't rise much and severe recession is avoided. Not a lot of economists and market watchers share that confidence. And many fault the Fed for not moving much sooner and faster to tighten its policy on rates and giant infusions of cash into the economy. Today's hike got the Fed's target only to 1.6 percent, still quite low, meaning quite a bit of work remains to be done. The Fed gently began to try to "normalize" monetary policy before Covid hit. At that point it had no choice but to flood the zone with cheap money to avoid a depression. But as Covid's impact waned, the Fed had an opportunity in January of this year to restart its rate hiking campaign and more quickly draw down the gobs of government bonds and other securities it buys to essentially create money. Powell and his colleagues passed. And inflation continued to spike. Then Ukraine and the China lockdowns happened and drove it even higher. Now the Fed is finally waking up to the threat, but it could be too late. Forecasts, according to many economists, show we might ALREADY be in recession with a second quarter GDP report now expected to follow the first and come in flat or negative. "The Fed's acknowledgement that some rise in unemployment will be needed to get inflation down is a step toward reality," Peterson Institute for International Economics senior fellow Joseph Gagnon said in a note today. "But it is likely that either unemployment will have to rise above 4.1 percent or it will take longer than two years to return inflation to target." And Powell's ultimate bottom line was that taming prices is his absolute priority, suggesting he's willing to risk recession to do it. "The worst mistake we could make would be to fail. It's not an option," he said. "We have to restore price stability. We really do. It's the bedrock of the economy." Welcome to POLITICO Nightly. Reach out with news, tips and ideas at nightly@politico.com. Or contact tonight's author at bwhite@politico.com or on Twitter at @morningmoneyben. A message from Meta: Doctors can practice high-risk situations risk-free in the metaverse In the metaverse, future surgeons will be able to practice advanced procedures hundreds of times before seeing real patients – helping them gain experience and master their skills. The metaverse may be virtual, but the impact will be real. Learn how Meta is helping build the metaverse.   What'd I Miss? — Buffalo supermarket gunman charged with federal hate crimes: The white gunman who killed 10 Black people in a racist attack at a Buffalo supermarket was charged today and could face the death penalty. — Anthony Fauci tests positive for Covid-19: The 81-year-old infectious disease scientist, who to many has become the face of the government's coronavirus response, is experiencing mild symptoms, National Institutes of Health said in a statement. He is fully vaccinated and has received two boosters. —  FDA advisers endorse emergency use of Moderna, Pfizer Covid-19 vaccine in babies, toddlers: The panel — composed of pediatricians, infectious disease experts and vaccine researchers — voted unanimously today to recommend the agency authorize two Covid-19 vaccines for babies, toddlers and preschool-aged children, putting the country's youngest age group one step closer to immunizations nearly 2 1/2 years into the pandemic. — Biden launches plan to protect transgender youths' health care: He will order his health agency to begin efforts to ban conversion therapy and expand access to gender-affirming treatment after a slew of state attempts to limit transgender health care, particularly for children. — Loudermilk tour group taking basement photos 'raises concerns' for Jan. 6 panel: People who joined Georgia GOP Rep. Barry Loudermilk for a Capitol complex tour on Jan. 5, 2021, photographed and recorded places "not typically of interest to tourists, including hallways, staircases, and security checkpoints," according to materials released today by the select committee.   DON'T MISS DIGITAL FUTURE DAILY - OUR TECHNOLOGY NEWSLETTER, RE-IMAGINED:  Technology is always evolving, and our new tech-obsessed newsletter is too! Digital Future Daily unlocks the most important stories determining the future of technology, from Washington to Silicon Valley and innovation power centers around the world. Readers get an in-depth look at how the next wave of tech will reshape civic and political life, including activism, fundraising, lobbying and legislating. Go inside the minds of the biggest tech players, policymakers and regulators to learn how their decisions affect our lives. Don't miss out, subscribe today.     SOAPBOX DID TRUMP BELIEVE HIS OWN 'BULLSHIT'? — POLITICO Magazine contributing editorAnkush Khardori, an attorney and former federal prosecutor, emails Nightly: How do you establish in a criminal prosecution that someone — in this case former President Donald Trump — intentionally lied, particularly if they refuse to admit the truth? That's the question that has bedeviled legal observers since Monday's Jan. 6 hearing. The hearing featured former Trump administration and campaign officials testifying that they told Trump he had lost the 2020 presidential election and had no realistic chance of overturning the results through baseless claims of election fraud. Former Attorney General William Barr memorably said he told Trump, "I did not agree with the idea of saying the election was stolen and putting out this stuff, which I told the president was bullshit." Barr added that he thought that Trump had "become detached from realityif he really believes this stuff." This question — whether Trump was deluded or intentionally lying — was bound to be an important one in the hearings, which have spurred a variety of stories about whether the Justice Department should prosecute Trump. The New York Times ran an op-ed titled "The Future Criminal Case Against Donald Trump" by Neal Katyal, a former acting solicitor general during the Obama administration. A lot of people areunderstandably struggling with the question of how to assess Trump's mental state without what they see as "direct" evidence, which — ideally — would take the form of a contemporaneous admission from Trump that he knew the truth even as he was saying otherwise in public and private. Thus far, that evidence does not seem to exist. But that is not the end of the legal analysis. I used to prosecute financial fraud at the Justice Department, so I have some familiarity with how prosecutors grapple with this problem, which is not an unusual one. Prosecutors do not often find people who have become the focus of a criminal fraud inquiry admitting that they lied about something that might get them in serious legal trouble. Two axioms from the law of evidence come in handy: one, thatcircumstantial evidence is just as relevant and probative in our legal system as direct evidence, and two, that jurors can and should use their common sense when analyzing evidence, even in the most complicated cases. In fraud cases, prosecutors often establish that someone was intentionally lying about a key fact by demonstrating that they had been apprised of the truth — like establishing that someone lied about the weather outside by showing that they had just been outside themselves — particularly if it happens repeatedly over time. This is a way of establishing someone's culpable mental state through circumstantial evidence, and it is a perfectly acceptable investigative (and prosecutorial) methodology, even though it can be challenging in practice and requires careful attention to the particular facts, circumstances and context at issue. In Trump's case, the circumstantial evidence that he was intentionally lying about election fraud might include, among other things, the fact that he had been laying the groundwork for his election fraud claims formonths before the election; the brazenness of the misrepresentations (in particular, thevery glaring disconnect between the claims and reality); the repeated admonishments Trump received that what he was saying was false; and the fact that the people setting Trump straight included his own appointees and staff — all of whom, crucially, shared his interest in reelection. Some prominent former prosecutors-turned-commentators — includingDan Goldman , who worked on the first impeachment proceeding against Trump and is nowrunning for Congress in New York, andBarbara McQuade , who was a U.S. attorney in the Obama administration — have argued that Trump's rejection of his staff's expertise would provide a basis in a criminal trial for a "willful blindness" or "conscious avoidance" theory. This is when prosecutors try to establish someone's criminal intent by showing that they deliberately sought to avoid learning the truth about what they were saying. (The explanation of this concept from judges to jurors is often called an "ostrich instruction" because the theory is that the defendant has buried his head in the sand.) As a strictly legal matter, this approach is not necessary, nor is it clear that it should apply when someone is not really avoiding the truth but is, in fact, repeatedly hearing the truth and simply claiming not to believe it. In my experience, the theory also tends to be disfavored by many judges, who worry that it provides an indirect way of relaxing otherwise stringent criminal intent standards. It is very much a backup theory of criminal intent, not the default that prosecutors use in cases involving alleged lies. The Jan. 6 select committee will conduct its third public hearing Thursday, this time focused on the efforts by Trump and his allies, after his loss in the 2020 election, to persuade former Vice President Mike Pence to refuse to certify the results. As it continues its work, a couple of things are worth keeping in mind about a potential criminal investigation by the Department of Justice. The first: There is a long history of anti-Trump legal observers using dubious legal arguments to support their claims and offering predictions of Trump's imminent legal demise thathave turned out to be wrong (including byKatyal, Goldman andMcQuade themselves). So a healthy degree of skepticism and open-mindedness is warranted as we continue to learn more in the remainder of the committee's hearings. The second is equally important: Even if it can't be established that Trump knowingly lied about election fraud in 2020, he isn't off the hook for potential criminal liability. Here's why: The theory that Trump committed a crime by attempting to overturn the results through baseless claims of legal fraud is independent of another broad theory of criminal liability the committee has advanced — that the legal arguments offered by Trump's lawyers to Pence wereso obviously baseless that they could not have been sincerely held and therefore constituted an unlawful attempt to prevent the certification. That one would be trickier to apply to Trump than to his lawyers, because Trump would likely argue that he was acting in good faith based on the advice of his lawyers. But it is certainly something that those lawyers — particularlyJohn Eastman, who has practically become a household name owing to his central role — have to be worrying about.   A message from Meta:   AROUND THE WORLD MORE MONEY FOR UKRAINE — The United States will send more than $1 billion in weapons and humanitarian aid to Ukraine amid the country's ongoing war with Russia, Biden announced today, write Matt Berg and Lara Seligman. Biden spoke with Ukrainian President Volodymyr Zelenskyy this morning to reaffirm the United States' support for the war-torn nation, promising to "stand by Ukraine as it defends its democracy and support its sovereignty and territorial integrity in the face of unprovoked Russian aggression." In addition to artillery and ammunition, the United States will deliver coastal defense weapons and advanced rocket systems to assist the country's defensive forces in Donbas. All together, the security assistance will cost $1 billion. Another $225 million from the U.S, will be directed towards assisting those inside Ukraine, supplying safe drinking water, medical supplies, health care, food, shelter and money for families to purchase necessary items. SCOTUS' GLOBAL IMPACT — Abortion-rights advocates from around the world have met with congressional, USAID, HHS and State Department leaders to discuss worries that their countries will be next to see more restrictions if the Supreme Court overturns Roe v. Wade. In meetings last week, the activists said they spoke to officials not only about their fears of the international impact if Roe were to fall but also proposed changes to U.S. policy that has long restricted funding for abortions abroad, writes Daniel Payne. If the court strikes down Roe , the decision will likely increase political pressure to roll back access, embolden anti-abortion-rights activists and open an opportunity to shift momentum in countries where abortions have become more accessible in recent years, nearly a dozen activists across five organizations from Africa, the Americas, Asia and Europe told POLITICO.   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.     Nightly Number 930,160 The number of abortions performed in 2020, up from 862,320 in 2017, according to a survey of the nation's abortion providers conducted every few years by the Guttmacher Institute. The abortion rate — which takes into account changes in population — increased 7 percent, from 13.5 abortions per 1,000 women of reproductive age to 14.4 during that same time. Parting Image Activists rally today in support of the Deferred Action for Childhood Arrivals program on its 10th anniversary at the Capitol in Washington. | J. Scott Applewhite/AP Photo Did someone forward this email to you? Sign up here. A message from Meta: The metaverse may be virtual, but the impact will be real Meta is helping build the metaverse so aviation mechanics will be able to practice servicing different jet engines – preparing them for any complex job. The result: A more skilled workforce. Learn how Meta is helping build the metaverse.     Follow us on Twitter Chris Suellentrop @suellentrop Myah Ward @myahward   Follow us

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