A not-so-immaculate reception to those “soft landing” calls

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Sep 11, 2023 View in browser   By Sam Sutton Presented by 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. QUICK FIX NEW YORK — With the NFL season upon us, it’s important to remember that sports books clean up by convincing people to place low-probability wagers that only pay out if everything goes right: $5 gets you $90 if the San Francisco 49ers win and George Kittle gets a receiving touchdown and Christian McCaffery runs for 100-plus yards. It’s useful to think about the Federal Reserve’s attempt to execute a “soft landing” in similar terms: Unemployment can’t rise too sharply, growth must persist and inflation must keep falling in order for that bet to cash out. Many — including Treasury Secretary Janet Yellen and Fed economists — are optimistic about that outcome. But even with positivity emanating from President Joe Biden’s allies, the Democratic caucus and Wall Street, plenty of economists still don’t trust that parlay. Soft landing “narratives put up a good fight in the late innings of an economic cycle,” said Carl Riccadonna, the chief U.S. economist at BNP Paribas. At a briefing in a midtown conference room, Riccadonna, BNP Paribas USA Vice Chair Jean-Yves Fillion and other bank officials ticked through what could cause those narratives to fail: The nominal federal funds rate is now higher than U.S. growth, a dynamic that proved to be “a very ominous signal” in earlier economic cycles, Riccadonna said. Corporate profits, which tend to drive private sector investment, started to sag earlier this year. The number of U.S. companies that have filed for bankruptcy has spiked. Researchers at the Federal Reserve Bank of San Francisco estimate that consumers have plowed through more than three-quarters of the $2.1 trillion in savings they’d amassed during the pandemic. There are signs that lower-income consumers are becoming more price sensitive as they eat into those financial cushions and, as the labor market softens, spending among many households will soon be constrained by their paychecks. That would slow the economy. “The back half of the year is going to be very interesting in terms of watching for signals of economic stress,” Riccadonna said. “Then we head toward a mild contraction.” And BNP isn’t the only bank that still has a recession in its forecast. Deutsche Bank also anticipates the economy will tumble into negative territory. “We’ve long anticipated that the consumer would face a number of headwinds and that those headwinds would be concentrated in the latter half of this year,” Matthew Luzzetti, Deutsche’s chief U.S. economist, told your host. That’s increasingly a divergent view as other banks like Goldman Sachs and JPMorgan Chase lower the probability of an economic slump. But the headwinds described are real and could pose an obstacle as both the White House and the Biden campaign move to make the economy’s resilience a selling point to voters who’ve given the president low marks as prices continued to climb despite higher borrowing costs. We’ll get a clearer sense of the Fed’s progress on inflation when the Labor Department releases the consumer price index for August on Wednesday. Those challenges — along with the many economic headwinds facing Europe and China — aren’t necessarily cause for alarm. If there is a recession in the U.S., it’ll likely be mild. “I don’t see this, at least today, as a ‘run for cover’ chaotic environment,” Fillion said. Separately, Luzzetti noted that while he still anticipates a recession, “soft landing prospects have improved.” So can the Fed pull it off? It’s definitely possible. But Kittle didn’t score, so your host is out $5. IT’S MONDAY — The answer to Victoria Guida’s Friday trivia Q: Randal Quarles was the only Fed official who Sen. Rand Paul voted to confirm. But we’ll also give credit to anyone who guessed Judy Shelton. Paul voted to advance her nomination in a procedural vote, though she was blocked before she got to confirmation. Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com   A message from BPI: The Fed’s extreme Basel proposal will have real consequences for everyday Americans. These costly new capital rules will create a drag on our economy for years to come and will hurt working families and small businesses. Congress must take action to stop the Basel endgame before it’s too late.   Driving the Week Monday … The American Bankers Association's Economic Advisory Committee has a virtual meeting featuring commentary from several bank economists at 11:30 a.m. … CFTC Commissioner Christy Goldsmith Romero delivers opening remarks at the North American Securities Administrators Association’s fall meeting at 1 p.m. Tuesday … The NFIB optimism survey is out at 6 a.m. … The House’s China Committee holds a field hearing in New York City on threats posed to U.S. Financial Stability at 8:30 a.m. … SEC Chair Gary Gensler will testify at Senate Banking at 10 a.m. … The Senate Homeland Security holds a hearing on supply chains at 10:15 a.m. … Senate Banking has a hearing on housing supply at 2:30 p.m. … CFTC Commissioner Caroline Pham will keynote a Nasdaq conference at 8:20 p.m. … Wednesday … Consumer price index is out at 8:30 a.m. … Sen. Elizabeth Warren, CFPB Director Rohit Chopra and Gensler will speak at a Better Markets conference that kicks off at 9:30 a.m. … Senate Budget Committee holds a hearing on immigration and the economy at 10 a.m. … House Financial Services holds a CFIUS oversight hearing at 10 a.m. … CFTC Commissioner Kristin N. Johnson will speak on a DeFi panel at the EuroFi conference at 11:10 a.m. … Thursday … Producer price index and retail sales out at 8:30 a.m. … Treasury Secretary Janet Yellen will speak at a CFIUS conference at 9 a.m. … House Financial Services holds hearings on Basel III implementation at 10 a.m. and central bank digital currency policy at 2 p.m. … House Oversight holds a hearing on the Inflation Reduction Act at 2 p.m. … The SEC holds a closed meeting at 2 p.m. Friday … U.S. import prices will be released at 8:30 a.m. …   GO INSIDE THE WORLD’S BIGGEST DIPLOMATIC PLATFORM WITH UNGA PLAYBOOK: The 78th Session of the United Nations General Assembly will jam some of the world's most influential leaders into four city blocks in Manhattan. POLITICO's special edition UNGA Playbook will take you inside this important gathering starting Sept. 17 — revealing newsy nuggets throughout the week and insights into the most pressing issues facing global decision-makers today. Sign up for UNGA Playbook.     As I said — Reuters: “Investor hopes for US soft landing ride on inflation data” Remember Jared Cohen’s geopolitical swing states? — Reuters’s Nandita Bose, Francesco Guarascio and Trevor Hunnicutt: “U.S. President Joe Biden on Sunday secured deals with Vietnam on semiconductors and minerals as the strategic Southeast Asian nation lifted Washington to Hanoi's highest diplomatic status alongside China and Russia.” — Bloomberg’s Akayla Gardner and Jenny Leonard: “President Joe Biden said that China’s recent downturn may diminish any inclination by Beijing to invade Taiwan, adding that the country’s economic troubles have left his Chinese counterpart with ‘his hands full.’” Everyone feels the pinch — From your host: “A wall of debt is coming due for private equity-owned hospitals and nursing homes that threatens to undermine care for some of the most vulnerable Americans. That's triggering alarms in Washington.” So, will UAW strike? — Our Holly Otterbein, Zack Colman and Olivia Olander: “President Joe Biden is publicly predicting that auto workers won’t strike when their contracts with the Big 3 U.S. carmakers expire next week. But privately, White House officials are ‘aware’ that a strike is likely.” — We covered last week how the economic effects will depend on the size and duration of the strike. — “If we were to have a long strike in 2023, the state of Michigan and parts of the Midwest would go into a recession,” Patrick Anderson, chief executive officer of Anderson Economic, a firm that counts GM and Ford as clients, told Bloomberg. “When GM workers went on strike in 2019, you saw gross state product drop in Michigan in the fourth quarter, while in the rest of the country it was largely unaffected. That won’t be the case this time if the UAW goes through on its threat to strike all three companies.”   A message from BPI:   Fed File Shifting — The WSJ’s Nick Timiraos: “For more than a year, Federal Reserve policy makers were unanimous that they would rather raise interest rates too much than too little—that is how serious they considered the threat of persistently high inflation. That is changing.” On the Hill HFSC talks CFIUS — The House Financial Services Committee is gearing up for a hearing Wednesday on recent reforms that expanded CFIUS' jurisdiction to cover more kinds of transactions, like farmland. Lawmakers will hear from Treasury's Paul Rosen in an open session, and from DNI Director Lucas Cadena, Treasury's Brian Reissaus, Commerce's Adam Vaccaro, and DOD's Halimah Najieb-Locke in a classified setting, per a memo posted Friday. The majority has noticed two bills that would add the Agriculture secretary to CFIUS and require CFIUS to consider national security reviews for agriculture transactions. A third measure would direct U.S. representatives at the World Bank to vote down financing agreements with the Asian Infrastructure Investment Bank unless it meets certain criteria. — Eleanor Mueller   JOIN 9/19 FOR A TALK ON BUILDING THE NEW AMERICAN ECONOMY: The United States is undergoing a generational economic transformation, with a renewed bipartisan emphasis on manufacturing. Join POLITICO on Sept. 19th for high-level conversations that examine the progress and chart the next steps in preserving America’s economic preeminence, driving innovation and protecting jobs. REGISTER HERE.     Regulatory Corner What’s fair? — A U.S. District Court on Friday ruled that the Consumer Financial Protection Bureau overstepped its authority when it updated its examination guidelines last year to say that discriminatory conduct would count as “unfair.” The lawsuit, which was brought by the U.S. Chamber of Commerce, the American Bankers Association and other industry groups, is part of a broader effort to dismantle the consumer watchdog’s rulebook on the grounds its funding structure is unconstitutional. The Supreme Court announced earlier this year that it would hear the CFPB’s challenge to a Fifth Circuit ruling that would weaken the agency’s power. Woulda, coulda, shoulda — Our Victoria Guida: “The Federal Deposit Insurance Corp. in a new report found agency staff should have done more to look at ways failed bank First Republic was exposed to risks facing the banking industry as interest rates rose.”   A message from BPI: Instead of playing politics, the banking agencies should engage in a robust and thorough economic analysis of the proposal's effect. Federal agencies need to go back to the drawing board and ensure that future policy allows working families and small businesses to thrive. To learn more, visit StopBaselEndgame.com.     Follow us on Twitter Mark McQuillan @mcqdc Zachary Warmbrodt @Zachary Victoria Guida @vtg2 Declan Harty @ @declanharty Eleanor Mueller @eleanor_mueller Katy O'Donnell @katyodonnell_ Sam Sutton @samjsutton   Follow us

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