Why Wall Street bets the Fed will blink on rate hikes

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Feb 01, 2023 View in browser   By Zachary Warmbrodt Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. The Fed this afternoon will likely slow its attack on inflation for the second FOMC meeting in a row, with the smallest rate increase that we’ve seen since March 2022. Financial markets are betting this is just the beginning of the Fed’s retrenchment, and our colleague Victoria Guida has a new piece out this morning explaining why. Will doves cry? Victoria’s reporting digs into the new makeup of the Fed and why it suggests a possible course change on rates, as inflation continues to show signs of easing. The Fed’s seven-member board includes three governors appointed by Biden, who also promoted Vice Chair Lael Brainard. Other Fed officials with a vote on rates — such as Chicago Fed President Austan Goolsbee — are economists who are sympathetic to workers. And some nonvoting Fed leaders — including Boston Fed President Susan Collins — could also make the case for further moderation. Brainard has started to lay the groundwork for a gentler approach to the labor market by suggesting that large profit margins can help companies retain workers without further raising prices, particularly if improving supply chains help them save costs elsewhere. Goolsbee, before he joined the Fed in January, warned that acting too aggressively to counteract inflation caused by supply problems — like those that contributed to rising prices throughout the pandemic — could run the risk of a recession without cooling prices, creating the dreaded “stagflation.” The market is betting on rate cuts, with investors pricing in a greater than 75 percent chance that interest rates will be lower at the end of the year than they will be in June, according to CME FedWatch. Former Kansas City Fed President Thomas Hoenig told Victoria “there’s a pretty strong view that they will ease sooner than they say they will.” “The pressure would be to say, ‘Well, we’re just about there, we can ease back.’” Is the soft landing here? Mike Konczal, a director of macroeconomic analysis at the Roosevelt Institute, argued on Twitter Tuesday that the current state of the economy “is as Goldilocks as it gets.” “Over the last 3 months, inflation has come down exactly as a soft-landing would predict, wage growth didn't persist but moderated with the reopening to solidly high levels within late 1990s ranges, and the economy added 750,000 new jobs,” he tweeted. “The Fed has lost its excuse for a recession.” Welcome to Wednesday — Keep an eye out for that green comet, and please send news tips to zwarmbrodt@politico.com and ssutton@politico.com.   JOIN POLITICO ON 2/9 TO HEAR FROM AMERICA’S GOVERNORS: In a divided Congress, more legislative and policy enforcement will shift to the states, meaning governors will take a leading role in setting the agenda for the nation. Join POLITICO on Thursday, Feb. 9 at World Wide Technology's D.C. Innovation Center for The Fifty: America's Governors, where we will examine where innovations are taking shape and new regulatory red lines, the future of reproductive health, and how climate change is being addressed across a series of one-on-one interviews. REGISTER HERE.     Driving the Day FOMC will announce its interest rate move at 2 p.m., followed by a Jerome Powell press conference at 2:30 p.m. … President Joe Biden and Speaker Kevin McCarthy will meet … House Financial Services will vote on its new structure and rules at 1 p.m. … Brainard, Bernstein close to clinching top White House roles— POLITICO’s Ben White reports that Fed Vice Chair Lael Brainard is poised to be the next director of the White House National Economic Council, with long-time Biden confidant Jared Bernstein likely to be the next chair of the Council of Economic Advisers. Multiple senior Biden aides and others close to the process described the hires as as close to assured, but no formal announcement is set yet. CFPB proposes credit card fee cap — CFPB Director Rohit Chopra will propose new restrictions on credit card late fees ahead of today’s meeting of the White House Competition Council, our Sam Sutton reports. The administration is also calling on Congress to pass a law that would crack down on fees for concerts, airlines and internet service. The CFPB said its credit card proposal would reduce late fees by as much as $9 billion per year. Biden, McCarthy debt limit meeting prep— Biden and McCarthy will kick off debt limit discussions today, and expectations could not be lower. Few members of either party expect the discussion to produce any breakthroughs, according to our Hill and budget reporters. The GOP is hoping that Biden “shows a shred of openness to taking its demands seriously, even as very few of its members specify what they want Biden to negotiate on.” A few things you should know: — House Republicans will hold a debt limit meeting this morning before McCarthy talks with Biden. — Biden plans to seek a commitment from McCarthy that the U.S. will never default on its financial obligations. — Administration officials will unveil their proposed budget for the coming fiscal year on March 9, as they demand that House GOP leaders reveal their own proposals for spending cuts. Coming soon: Action at the Financial Services and Banking Committees — POLITICO’s Eleanor Mueller and your MM host have more details on what the next several weeks will look like at House Financial Services and Senate Banking. House Financial Services Chair Patrick McHenry has nearly a dozen committee meetings planned through the end of March, according to sources familiar with the schedule, which hasn’t been announced. Some highlights from Eleanor’s reporting: — A full committee China hearing next Tuesday. — Votes on data privacy legislation Feb. 28 followed by votes on capital formation bills March 28-29. Both will be preceded by hearings on the topics. — Testimony from Fed Chair Jerome Powell on March 8. — A full committee hearing on digital assets on March 9. House Financial Services will hold its first meeting of the year today at 1 p.m. to vote on its organization and rules. One point of friction between Republicans and Democrats will likely be McHenry’s decision to scrap the diversity and inclusion subcommittee set up by Rep. Maxine Waters when she was chair. The committee’s organization plan would codify McHenry’s plan to make D&I part of the other Financial Services subcommittees. Democrats plan to respond with an amendment on diversity and inclusion. “People will be able to speak for or against it,” Waters told Eleanor. “To the degree you have diversity and inclusion, you get better responses to deal with the complicated problems of our society" Senate Banking Chair Sherrod Brown told MM that his first hearings this year will be on housing and crypto. He said the committee is getting off to a slower start than expected, which he blamed on Republicans not settling their committee assignments. “We planned to have a hearing this week on housing and then next week on crypto and that’s been pushed back at least a week,” he said Tuesday. A GOP seat on Banking is expected to go to Brown’s fellow Ohioan, J.D. Vance, sources tracking the process said. Brown said he also heard Vance had been in the mix, as well as Sens. Tommy Tuberville, Katie Britt and Ted Budd. Brown’s crypto hearing plan is not totally clear yet, but he said part of the goal is to “smoke out what’s happening internationally with crypto” from a national security perspective, including countries using it to “run weapons and drugs and all kinds of unseemly activities that crypto can enable.”   DOWNLOAD THE POLITICO MOBILE APP: Stay up to speed with the newly updated POLITICO mobile app, featuring timely political news, insights and analysis from the best journalists in the business. The sleek and navigable design offers a convenient way to access POLITICO's scoops and groundbreaking reporting. Don’t miss out on the app you can rely on for the news you need, reimagined. DOWNLOAD FOR iOS– DOWNLOAD FOR ANDROID.     Markets NYSE pressed to pay up after trading glitch— Bloomberg reports that stock brokerages and market makers have submitted thousands of claims to NYSE to cover losses arising from last week’s malfunction that disrupted trading. But individual investors will probably only recoup a fraction of their losses, if anything, under the NYSE liability rules. Regulatory Corner First in MM: Trade groups press SEC over communications probes  — From our Declan Harty: A pack of Wall Street trade groups, led by the Managed Funds Association, wants the SEC to back off from probing investment managers' communications and record-keeping practices. In a letter to SEC Chair Gary Gensler sent Tuesday, the groups questioned the sweep’s scope and warned that it raises “serious privacy implications.” Manchin backs anti-ESG measure — Sen. Joe Manchin(D-W.Va.) will co-sponsor a Republican-led resolution that would nullify the Biden administration’s new rule allowing retirement plan managers to consider ESG factors, our Jordan Wolman reports. Sen. Mike Braun (R-Ind.) plans to introduce the Congressional Review Act resolution as soon as this week. Crypto Binance hired same Washington lobbyists as — allegedly independent — U.S. affiliate — The FT reports that crypto exchange Binance used the same lobbyists as its affiliate Binance US, despite claims they operate separately. Fly Around European economy outpaced U.S., China— WSJ: “The eurozone economy grew faster than China and the U.S. last year, underlining how the fading Covid-19 pandemic continues to scramble traditional patterns of global growth.” Exxon Mobil reports record profit— WSJ: “Exxon Mobil Corp. rocketed to its highest-ever annual profit last year, riding surging oil prices to resurrect its status as one of America’s most prosperous companies and erase billions of dollars of losses incurred during the pandemic.” PayPal announces layoffs — Reuters: “PayPal Holdings Inc said on Tuesday it is planning to cut 7% of its workforce, or about 2,000 employees, the latest in a list of fintech firms to be hit by the economic slowdown.” People moves — Martha Gimbel, a labor economist and notable member of #EconTwitter, is departing as a senior adviser at the White House Council of Economic Advisers, a person familiar with the matter tells Victoria. Her last day is Friday.   Follow us on Twitter Mark McQuillian @mcqdc Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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