A SEPtember to remember

Sep 19, 2022

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Wall Street is taking center stage in Washington this week — CEOs from the biggest retail banks visit Capitol Hill for two days of testimony, and the Federal Reserve is set to deliver another mega, three-quarter-percentage-point rate increase.

Who will steal the headlines? It may not actually be a person, but rather, a table.

The Fed's quarterly Summary of Economic Projections, the SEP, released alongside its post-meeting policy statement, could provide the most important news of the week about the direction of the U.S. economy — and how much worse Fed officials see things getting as they wrangle inflation.

The SEP shows officials' median estimates for future inflation, unemployment, gross domestic product and interest rates. It also includes the so-called dot plot, which shows each individual's forecast for rates over the coming years.

Officials haven't updated their projections since June, and this month's release will likely show substantial revisions, following a surprise inflation reading last week that showed underlying price pressures still very high.

"After seeing August CPI, they'll mark up their inflation forecasts more than they otherwise would have, so they'll mark up their dots and unemployment rate projections more as well to lean against the higher inflation," said former Fed Governor Larry Meyer in a note to clients. "In other words, the level of policy that is 'sufficiently restrictive' will be deemed to be at least slightly higher."

What exactly does that mean? The Fed is likely to signal that it expects interest rates to be higher for longer — though how high they go, how quickly they get there and how long they stay there is still uncertain.

An American flag flies over the Federal Reserve building in Washington.

Federal Reserve officials are expected to raise interest rates another three quarters of a percentage point when they meet this week. | Patrick Semansky/AP Photo

Economists surveyed by the Financial Times expect the Fed will lift its benchmark policy rate above 4 percent — from the current range of 2.25 and 2.5 percent — and hold it there beyond 2023, per FT's Colby Smith and Caitlin Gilbert.

The tricky part for policymakers : How to weigh the potential market response. As of Sunday afternoon, markets expected the federal funds rate would reach 4.25 percent by the end of the year, and peak around 5 percent next year, according to CME Group. A Fed forecast below that could be viewed as dovish by markets, Meyer noted, prompting an unhelpful loosening of financial conditions.

Many economists also expect to see a big downgrade to officials' forecasts for GDP growth this year, along with slightly higher unemployment and higher inflation.

"Though the SEP may continue to reflect the soft landing narrative, the combination of a higher terminal rate, below-trend growth and rising unemployment should reinforce the Fed's commitment" to battling inflation, Deutsche Bank economists wrote, "even if it comes at the cost of recession."

IT'S MONDAY — Kate is back from vacation (and just in time for FOMC and the Bank CEO hearings). Please send tips, story ideas and feedback to kdavidson@politico.com and ssutton@politico.com.

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DRIVING THE WEEK

SEC Chairman Gary Gensler speaks at the Clinton Foundation Global Initiative meeting at 11:30 a.m. Monday … Housing starts and building permits data released Tuesday … Senate Banking hearings on tightening Russian sanctions Tuesday … House Financial Services hearings on alternative payment systems Tuesday …

Existing home sales data released Wednesday … House Financial Services hearing with large retail bank CEOs Wednesday … Fed policy statement and Fed Chair Jerome Powell press conference Wednesday … Senate Banking hearing with big bank CEOs Thursday … Treasury Undersecretary Nellie Liang speaks at a Brookings Institution event on digital assets Thursday.

CRYPTO'S ICE BATH — From Sam: "The crypto lobby applauded President Joe Biden's March 9 executive order on digital assets as a crucial step toward bringing regulatory clarity to their industry.

"They're much less pleased with its early returns. The White House unveiled a crypto policy framework on Friday that was largely focused on a litany of risks that digital asset businesses could pose … and while the papers nodded at the technology's potential to speed up payments and financial settlements, administration officials say those outcomes remain a work in progress…

"For an industry that often complains about 'regulation by enforcement,' this isn't the outcome they'd hoped for. 'It's just a focus on enforcement with no cooperation [between regulators] and no policy recommendations,' Michelle Bond, the CEO of the Association for Digital Asset Markets, said in an interview Friday. 'That, in my mind, is definitely a bad outcome.'"

The reports also encouraged further study of a Federal Reserve-issued digital dollar — otherwise known as a central bank digital currency. Rep. Jim Himes (D-Conn.), who released a Fed digital dollar proposal earlier this year, told POLITICO on Friday that "that there's a commitment there to keep progress going." He added that he was encouraged that the CBDC recommendations highlighted "the importance of us remaining competitive and at the forefront of technological innovation'

BANK CEO HEARINGS — What should we expect from the big bank CEO hearings this week? A GOP Senate Banking aide tells MM: "Expect Ranking Member Pat Toomey (R-Pa.) and Senate Banking Republicans to make the case that banks should stick to the business of banking, and stay out of contentious social and political issues, like global warming, abortion, and gun control.

"Republicans will send a clear warning to these financial institutions: If banks don't reverse course, they should expect more backlash from Republicans, which could include Republicans seeking to pressure banks to advance their social and political objectives when they're in power."

—Speaking of staying out of it: The Committee for Better Banks' Wells Fargo Organizing Committee released a statement today calling on Wells Fargo CEO Charlie Scharf and other big bank CEOs to publicly commit to remain neutral to workers' union organizing efforts.

TIGHTER EXPORT CONTROLS — White House national security adviser Jake Sullivan said Friday the U.S. needs to tighten its export control regime for advanced technology products, such as semiconductors, to keep foreign "competitors" from catching up, our Doug Palmer reported.

NEW RULES FOR REGIONALS? — WSJ's Andrew Ackerman scoops: "A group of President Biden-appointed bank regulators are considering new rules to require large regional banks to add to financial cushions that could be called on in times of crisis. The steps under consideration include requirements that the regional firms raise long-term debt that can help absorb losses in case of their own insolvency, according to three people familiar with the matter."

NAME YOUR PRICE — NYT's Alan Rappeport: "As the United States and its Western counterparts race to finalize the mechanics of an oil price cap intended to starve Russia of revenue and stabilize global energy markets, a crucial question remains unresolved: How should the price be set?"

— Also, Deutsche Bank in a report last week lowered its year-end forecasts for the price of crude oil, citing reduced supply risks. "Russian reprisal and deliberate curtailment of oil supply is a low probability," research analyst Michael Hsueh wrote. Still, House Democrats are pressing President Joe Biden to keep releasing oil from the U.S.'s emergency stockpile through at least the end of the year, CNN's Matt Egan reports.

Join POLITICO Live on Tuesday, Sept. 20 to dive into how federal regulators, members of Congress, and the White House are seeking to write the rules on digital currencies, including stablecoins. The panel will also cover the tax implications of crypto, which could be an impediment to broader adoption and the geopolitical factors that the U.S. is considering as it begins to draw regulatory frameworks for crypto. REGISTER HERE.

Economy

IRS HIRING WOES — WSJ's Richard Rubin: "The Internal Revenue Service now has plenty of money. Its next challenge: finding people."

LABOR ANGST BEYOND WAGES — Bloomberg's Katia Dmitrieva and Augusta Saraiva: "The key issue that almost triggered the first US railroad strike in 30 years and threatened to hobble the economy wasn't wages, but sick leave, highlighting broadening worker demands in a tight labor market."

ENERGY BILL SHOCK— WSJ's Katherine Blunt and Jennifer Hiller: "Natural-gas prices have more than doubled this year because of a global supply shortage made worse by the war in Ukraine, and they are expected to remain elevated for months as fuel is needed to light and heat homes during the winter. … From New Hampshire to Louisiana, customers' electricity rates are increasing."

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FED WATCH

BERNSTEIN ON HOUSING COOLDOWN — Bloomberg's Shiyin Chen: "The US Federal Reserve … has helped to cool the overheated housing market even though inflation across the country is still 'uncomfortably high,' White House economic adviser Jared Bernstein said."

WHAT'S DRIVING PRICES? — WSJ's Tom Fairless: "Even as some prices such as for gasoline signal tentative easing of inflation pressure, the Federal Reserve and other central banks remain preoccupied with one that shows the opposite trend: the price of labor."

BEYOND THE FED — FT's Valentina Romei: "Investors are pricing in a sharper surge in interest rates over the coming months after the world's major central banks strengthened their resolve to tackle soaring prices, signalling they would prioritise inflation over growth."

JOIN THURSDAY FOR A GLOBAL INSIDER INTERVIEW : From climate change to public health emergencies and a gloomy global economic outlook, the world continues to deal with overlapping crises. How do we best confront all of these issues? Join POLITICO Live on Thursday, Sept. 22 at 10:30 a.m. EDT for a virtual conversation with Global Insider author Ryan Heath, featuring World Bank President David Malpass, to explore what it will take to restore global stability and avoid a prolonged recession. REGISTER HERE.

Jobs Report

Lazard Ltd. hired Sarah Al-Suhaimi as chair of its financial advisory business in the Middle East and North Africa as the boutique investment bank looks to boost its operations in the region from a hub in Saudi Arabia, Bloomberg's Matthew Martin reported.

Fly Around

The U.S. dollar is experiencing a once-in-a-generation rally. For the rest of the world, that is a big problem. — WSJ's Chelsea Dulaney, Megumi Fujikawa and Rebecca Feng

The underlying pressures driving inflation in Canada are likely to peak in the fourth quarter of this year, economists told Reuters, though most see signs fast rising prices are becoming entrenched and warn a recession may be needed to avoid a spiral. — Reuters' Julie Gordon and Fergal Smith

UBS is hiring a team of "content reviewers" to ensure that Chinese research publications by its analysts are free from "sensitivities", in a move that one rival said amounted to self-censorship. — FT's Tabby Kinder

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