Pushing back on Powell's war on inflation

Nov 02, 2022

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Fed Chair Jay Powell has spent months in a race against the clock to curb inflation before it becomes entrenched. Now, he's facing pressure from Washington and Wall Street to slow down.

Our Victoria Guida writes: "With the Fed poised to deploy another supersized rate hike on Wednesday, financial markets are showing signs of strain, the housing market is reeling from the highest mortgage rates in two decades and economists are cranking up their forecasts for a recession that could throw millions of people out of work.

"Against that backdrop, fears are mounting that Powell, who has vowed to do whatever it takes to kill the price spikes, is moving at literally blinding speed — jacking up borrowing costs before the Fed is even able to see the effects of its previous rate hikes on either inflation or the economy. …

"'In the interest of not completely wrecking the economy, it makes sense to slow down,' said Roberto Perli, head of global policy at investment firm Piper Sandler and a former senior staff member at the Fed.'"

Federal Reserve Chair Jerome Powell stands in front of an American flag reading from a piece of paper at a news conference.

Fed Chair Jerome Powell faces mounting pressure to slow down or pause interest-rate increases amid recession worries. | Jacquelyn Martin/AP Photo

A delicate balance: The Fed "will have to convince investors that going slower doesn't mean it's close to abandoning the fight against elevated prices. If that message fails, stocks and bonds could rally, undermining the Fed's efforts to rein in growth and spending, and therefore inflation. And that could force policymakers to eventually raise borrowing costs even higher."

On the other hand: At least one prominent economist says the Fed shouldn't let recession worries slow them down yet — and it probably won't surprise you whom.

In a Twitter thread Tuesday , former Treasury Secretary Larry Summers said calls for the Fed to pause rate hikes soon or risk a recession are "badly misguided," and come from economists with "a track record, since COVID, of being dismally wrong on inflation."

"If the [Federal Reserve] doesn't carry through on the market's current expectation that rates will approach 5 percent, markets and others will see it as an easing," he warned.

Summers later told MM: "We have all had the experience of being prescribed a course of antibiotics, taking them for a few days, feeling better and then not finishing the course of antibiotics. What often happens is that the bug we had comes back and is much more difficult to deal with the second time because it's become resistant.

"In the same way, if you don't do what is necessary to contain inflation, people have more of a sense of the inevitability of inflation."

IT'S WEDNESDAY — Kicking off Fed day with a breakfast of strong coffee and leftover Halloween candy. We hope you made a healthier choice. Have a tip, story idea or feedback to share? Let us know: kdavidson@politico.com and ssutton@politico.com .

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Driving the Day

ADP employment report released at 8:30 a.m. … SEC virtual meeting at 10 a.m. … Fed releases policy statement at 2 p.m. followed by Powell press conference at 2:30 p.m.

NOT YOUR GRANDPA'S GOP — Our Jordan Wolman: "The country's largest financial firms are bracing for a fresh wave of attacks on their sustainable investing efforts after the midterm elections — especially if Republicans take control of one or both houses of Congress … Republicans are planning to build on the momentum they've established in states like Texas, Louisiana and West Virginia, where officials have pulled millions of dollars out of BlackRock Inc. and other financial firms."

Meanwhile, federal regulators are still under pressure from progressives to keep leaning on financial institutions to roll back their fossil fuel investments amid dangerous climate change. "The majority of US financial firms' are at best paying lip service to taking action on climate, with many reneging their commitments when pressed to actually reduce emissions," Public Citizen and roughly 80 other organizations wrote in a letter to Treasury Undersecretary Nellie Liang and climate czar John Morton .

DEATH, TAXES AND INFLATION — Our Brian Faler: "Inflation could end up saving the ultra-wealthy next year nearly $700,000 on the tax that's imposed on their assets when they die. The estate tax … is indexed to consumer costs — and, because of soaring prices, the IRS says the point at which people have to begin paying the 40 percent levy next year will jump by an eye-popping $1.72 million per couple ."

BIPARTISAN INFRASTRUCTURE BOOST — WSJ's Amrith Ramkumar: "The Biden administration is starting to dole out billions of dollars for nascent climate industries such as battery metals. That is putting pressure on banks and investors to step up with additional funds to make good on their climate promises."

LOT OF BLUSTER — Bloomberg's Ari Natter and Jennifer A Dlouhy: "President Joe Biden's threat to slap a tax on oil-company profits is more bluster than threat as the clock runs out on the administration's efforts to tame fuel prices ahead of midterm elections."

Fed File

SILVER LINING — Bloomberg's Claire Ballentine: "Some lucky Americans are earning a higher interest rate on their high-yield savings accounts than they're paying on their mortgage. It's an odd disconnect that's resulted from the Federal Reserve's aggressive tightening this year."

FED UNDER ETHICS SPOTLIGHT — Reuters' Michael Derby: "A little more than a year after a trading controversy rattled the Federal Reserve's standing in Washington and beyond, new ethics missteps have hampered efforts by the U.S. central bank and its chief, Jerome Powell, to put the matter behind them."

DOES THE FED NEED A RECESSION TO QUELL INFLATION? — From the WaPo editorial board: "A recession would be unwelcome. But high inflation is a greater threat , and it is already here. Core inflation — which excludes volatile food and energy prices — clocked in at a 6.6 percent annual rate in September. Real wages are declining because price increases are swamping gains in the size of paychecks. Rising prices for food, housing, cars, clothes and other basic goods hit everyone, but they punish low-income people the hardest. In poll after poll, voters say inflation is one of their top concerns."

Economy

PROFITS RISE ALONG WITH PRICES — NYT's Isabella Simonetti and Julie Creswell: "[A]mid growing concerns that the economy could be headed for a recession, some food companies and restaurants are continuing to raise prices even if their own inflation-driven costs have been covered . Critics say the moves are all about increasing profits, not covering expenses."

WHEN WILL THE RATES HIT? — Our Eleanor Mueller: "Fewer workers got hired or quit their jobs in September, according to a Bureau of Labor Statistics report out Tuesday, even as the number of job openings bumped up to 10.7 million ."

Jobs Report

Michael Madowitz has joined the Washington Center for Equitable Growth as director of macroeconomic policy. He was most recently a senior economist at the Joint Economic Committee and worked previously at the Center for American Progress, Resources for the Future and the Brookings Institution.

Christina Wilkes is the new press secretary for the Department of Housing and Urban Development. She most recently was the press secretary for the General Services Administration. (h/t Daniel Lippman)

DON'T MISS A THING FROM THE MILKEN INSTITUTE'S MIDDLE EAST AND AFRICA SUMMIT: POLITICO is partnering with the Milken Institute to produce a special edition "Digital Future Daily" newsletter with insider reporting and insights from the Milken Institute's Middle East and Africa Summit happening November 17-18. Hundreds of global leaders will convene, highlighting the important role connection plays in advancing global well-being. Whether you're in-person at the event or following online, sign up for this special edition newsletter for daily coverage of the event. SUBSCRIBE TODAY .

Fly Around

Verified Twitter users may soon have to pay to keep their blue check marks. Elon Musk has signaled he wants to introduce a subscription model for Twitter Inc.'s verification process , a new strategy intended to add another revenue stream for the social-media company beyond advertising. — WSJ's Alyssa Lukpat

Countries across Europe are bracing for winter, taking extraordinary steps to decrease energy use and ramp up supply, and moving swiftly away from their longtime primary provider, Russia. — NYT's Liz Alderman and Patricia Cohen

The dollar bond prices of real-estate companies in China have plummeted to new lows , with some trading below 10 cents on the dollar, reflecting a loss of investor confidence in the sector. — WSJ's Rebecca Feng

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