What the Fed isn't saying about inflation

Oct 13, 2022

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The worst of the inflation war might be behind us. But you won't hear Federal Reserve officials say so.

Despite signs that inflation pressures are easing — with import prices falling, supply chain snarls unwinding, retailers restocking shelves — topline inflation data has remained stubbornly high, our Victoria Guida writes ahead of today's consumer price report, due at 8:30 a.m. That's helped feed a steady drumbeat of remarks by Fed officials that they can't let up yet.

Victoria points out the uncomfortable truth: Fed officials got it badly wrong in 2021. Sure, there were factors they couldn't have foreseen, such as Russia's invasion of Ukraine, which scrambled supply chains and sent energy and commodity prices soaring. But other shocks could be lurking around the corner.

" I can totally understand them being gun shy," said Omair Sharif, president of Inflation Insights. "You don't want to say there's light at the end of the tunnel until you're certain there's actually light at the end of the tunnel."

The White House is also cautious, but a little less so. Council of Economic Advisers member Jared Bernstein tells Victoria the administration is trying to avoid wishful thinking. But he said supply chain improvements, whether thanks to policy or not, should "eventually ease, to some degree, inflationary pressures."

"I think we're moving pretty quickly down that path," he added.

Big wild card: The job market — Low unemployment and steadily rising wages run the risk that consumers will keep supporting higher and higher prices, particularly for services.

Economists expect today's report will show headline inflation moderated in September, to 8.1 percent from a year earlier, compared to 8.3 percent in August, while prices excluding food and energy edged up.

IT'S THURSDAY — Why does this short week feel so long? Send us your tips, story ideas or feedback to get us over the Friday finish line: kdavidson@politico.com and ssutton@politico.com.

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Driving The Day

IMF Managing Director Kristalina Georgieva has a press conference on global policy at 8 a.m. … Consumer Price Index out at 8:30 a.m. … Jobless claims out at 8:30 a.m. … World Bank President David Malpass speaks at 8:45 a.m. … CFTC Chair Rostin Behnam speaks at 12:15 p.m. at the Institute of International Finance's conference …

STABLECOINS — In an appearance at DC Fintech Week, Rep. Patrick McHenry (R-N.C.) said he's still optimistic that he can broker a deal on a stablecoin bill with House Financial Services Chair Maxine Waters (D-Calif.) and the Biden administration in the coming months. While draft text circulated prior to the October recess, McHenry signaled there are still differences over the role of federal regulators and how the dollar-pegged digital assets are held.

"We've come up with a pretty ugly baby , but it is a baby nonetheless," he said. "We're grateful and hopeful that this ugly baby can grow and prosper into something that is a little more attractive."

Also: Federal Reserve regulatory czar Michael Barr on Wednesday warned banks to be cautious in experimenting with issuing their own dollar-denominated virtual tokens, citing potential risks, Victoria writes.

YELLEN: INFLATION TOP PRIORITY — Bloomberg's Chris Condon: "Treasury Secretary Janet Yellen said that while there's a collective need to shore up the global economic outlook, the 'path forward' begins with addressing domestic challenges. 'In the United States, our top economic priority is to bring down inflation while maintaining a strong labor market,' Yellen said in remarks prepared for delivery Wednesday to the Bretton Woods Committee's International Council in Washington."

Regulatory Corner

WHITE HOUSE WEIGHS ALUMINUM BAN — Bloomberg's Joe Deaux and Jenny Leonard: "The Biden administration is considering a complete ban on Russian aluminum — long shielded from sanctions due to its importance in everything from automobiles and skyscrapers to iPhones — in response to Russia's military escalation in Ukraine."

Aluminum on the London Metal Exchange jumped on the news.

SEC MOVES ON 'CODIFIED' DISCRIMINATION — Investment advisers can consider diversity, equity and inclusion factors when recommending asset managers for clients — and do not need to explicitly weed out firms based on size or years of experience — SEC staff said Wednesday. The guidance comes fifteen months after a group of leading executives and officials across the investment business urged the agency to implement the policy, writing in a report that "discrimination against diverse [asset managers] has effectively been codified in diligence checklists." — Declan Harty

ALSO — Broker-dealers will soon have more flexibility in how they maintain electronic records under new rules from the SEC, Declan reports.

Fed File

FOMC MINUTES — FT's Colby Smith: "Federal Reserve officials signalled they are more concerned about doing too little to rein in soaring US inflation than doing too much and doubled down on plans to tighten monetary policy so it constrains the economy, according to an account of their latest meeting."

WHAT PIVOT? — Bloomberg's Steve Matthews: "[Federal Reserve Bank of St. Louis President James] Bullard's prescience has made him a favorite policymaker for Wall Street to follow … Right now, amid growing concern that tight money will trigger recessions in the US and beyond, the question at the top of Wall Street's collective mind is: When will the Fed ease up? It's natural that investors should turn to Bullard for an answer."

HIGH BAR — Bloomberg's Matthew Boesler: "The bar for a Federal Reserve pivot away from monetary policy tightening is 'very high' amid ongoing strength in underlying inflation, Minneapolis Fed President Neel Kashkari said."

Economy

YOU CAN'T EVEN QUIET QUIT THESE DAYS — NYT's Jeanna Smialek and Sydney Ember on how labor market conditions are affecting HR decisions: "Chad Pritchard and his colleagues are trying everything to staff their pizza shop and bistro, and as they do, they have turned to a new tactic: They avoid firing employees at all costs . Infractions that previously would have led to a quick dismissal no longer do … Consistent transportation issues have ceased to be a deal breaker. Workers who show up drunk these days are sent home to sober up."

THEN AGAIN — It's unclear how long those conditions will persist. Third quarter earnings reports might offer some clarity. From NYT's Peter Eavis and Joe Rennison: "Many investors are fretting that the Federal Reserve's determination to tame inflation and cool the economy will have caught up with company performance by now … That could prompt companies to lay off workers and cut investment in the coming months, which would increase the chances of a recession in the United States."

COLD AND COSTLY WINTER — Bloomberg's Julia Fanzeres: "Americans trying to keep warm this winter are poised to spend the most on heating in at least 25 years . US households face an average power bill of $1,359 this winter, the highest since at least 1997, according to the Energy Information Administration."

Crypto

A SECOND TORNADO CASH LAWSUIT — Sam writes: Crypto policy think tank Coin Center's "lawsuit, which the group filed Tuesday in the U.S. District Court for the Northern District of Florida, claims that Treasury's Office of Foreign Assets Control overstepped its authority when it issued sanctions to block transactions that used Tornado's open-source software to scramble the origin and destination of certain crypto transactions."

BITCOIN MINING — Sen. Elizabeth Warren (D-Mass.) and seven other Democrats fired off a letter to the Electric Reliability Council of Texas on Wednesday demanding information on the subsidies that have been offered to crypto mining firms, as well as the impact those businesses have had on the grid, consumers and climate change.

The letter marks the latest entry in Warren's push to rein in mining firms that require tremendous amounts of energy to produce Bitcoin and other digital assets.

"Cryptominers' energy use rivals that of entire countries, and taxpayers — in Texas or anywhere in the nation — shouldn't subsidize their profits, especially when the energy grid is on the verge of collapse," Warren said.

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Fly Around

Pension funds, used to thinking in decades, have been thrown into real-time firefighting mode by the crisis roiling British markets. — WSJ's Julie Steinberg

Russia's president said Europe was to blame for its energy crisis with policies that starved the industry of investment as EU states struggled on Wednesday to agree on a gas price cap to offset its impact on consumers. — Reuters' Robert Muller and Marek Strzelecki

Blackstone Group's investment in Resolution Life is the latest example of a private-equity firm linking up with an insurer to secure more assets to manage and an insurer handing over management of its assets in search of higher returns. — WSJ's Miriam Gottfried

From PitchBook, the private markets data provider: "For the first time in over a decade, take-privates surpassed $100 billion for the second consecutive year . In a major departure from the past, private debt funds have stepped in where banks left off to finance these deals."

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