Why today’s inflation news matters

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Jan 11, 2024 View in browser   By Zachary Warmbrodt 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 The first U.S. inflation report of the year is landing later this morning. At stake is how much it will nudge the Federal Reserve to start cutting interest rates. Here’s what you need to know about today’s consumer price index reading for December. What economists are expecting and watching — The general forecast is a continuing story of moderation — one that a number of economists expect could lead to the Fed reaching its 2 percent inflation target (though it’s technically a different inflation measure, PCE) by the end of the year. Economists surveyed by the Wall Street Journal expect that December's headline CPI — overall consumer prices — rose by 3.2 percent from a year earlier, a slight uptick from the 3.1 percent growth seen in November. Excluding food and energy, core CPI is expected to show 3.8 percent growth from a year earlier, down from 4 percent in November. One metric that will be getting special attention in this report is the extent to which housing — as well as services in general — continues to drive inflation. “The thing still keeping CPI high is primarily those housing services,” said Jonathan Fisher, interim chief economist at the Washington Center for Equitable Growth. Why it matters — The report has the potential to shift expectations around how soon the Fed will cut rates. Hotter-than-expected inflation could push the Fed to take more time, whereas a surprise deceleration could draw the decision forward. The Fed has indicated it will begin lowering rates this year but hasn’t been specific about when. Inflation at the moment is the big factor opening the door for rate cuts, with jobs and wage growth in December turning out to be unexpectedly strong. The Fed has been trying to tamp down Wall Street’s unrelenting belief that cuts are coming soon. “There's a sense the Fed will be pivoting very rapidly and very aggressively, and that stands in contrast with the Fed’s messaging, which has been and continues to be it will not be easing monetary policy rapidly until there is ample evidence that inflation is moving sustainably — and sustainably is the important word here — toward 2 percent,” EY-Parthenon chief economist Gregory Daco said. Factors that could drive inflation this year include home and car insurance as well as health care, according to Daco. But he said he’s leaning optimistic. “Even though this print is likely to be on the more moderate and hotter side, I would anticipate that in early ‘24 we'll see some further softening in inflation and further disinflation,” he said. How voters and business leaders see it — Most voters continue to disapprove of President Joe Biden’s handling of inflation and prices, per the latest Economist/YouGov poll conducted this month. According to Conference Board survey results released Wednesday, U.S. CEOs rank inflation as their No. 2 external concern this year, after a potential recession. Most say their companies aren’t prepared to navigate high inflation. Happy Thursday – Ready to preview your Basel III Endgame comment letter? We’d love to cover in MM. Reach out to zwarmbrodt@politico.com.   A message from Electronic Payments Coalition: CREDIT UNIONS & COMMUNITY BANKS IN All 50 STATES OPPOSE THE DURBIN-MARSHALL CREDIT CARD BILL: Local credit unions and community banks serve an essential role in supporting Main Street. So, when 9,600+ credit unions and community banks throughout the country oppose the Durbin-Marshall credit card bill, Congress should pay attention. Durbin-Marshall lines the pockets of corporate mega-stores by shifting costs and risks to credit unions, community banks, and their 135 million customers. Click here to learn more.   Driving the day December CPI is out at 8:30 a.m. … House Financial Services has a HUD and FHA oversight hearing at 10 a.m. … Senate Banking has a hearing on legislation to address fentanyl trafficking at 10 a.m. … The U.S. Chamber of Commerce holds its 2024 State of American Business event at 11 a.m. First in MM: Treasury people moves — Laurie Schaffer will be acting assistant secretary for financial institutions after Graham Steele leaves on Jan. 19, a person familiar with the matter told Daniel Lippman. She is currently principal deputy general counsel at Treasury. Crypto wins, Gensler grimaces — The crypto world, with a big boost from some of the biggest players on Wall Street, scored a landmark victory Wednesday with SEC approval of investment funds that hold bitcoin. They’re expected to hit the market today. It’s a remarkable turn of events, and not just because of the dramatic SEC social media hack that preceded the decision earlier this week. It marks a rare win at an agency that’s taken a hard line with digital asset products going back to the Trump years. The clash has only escalated under SEC Chair Gary Gensler. But the SEC’s hand was forced by a federal court decision, underscoring how the crypto industry is finding ways to grind out progress in the Biden era despite political and regulatory resistance. “Today’s spot bitcoin ETF approvals mark a historic milestone for the future of the digital asset ecosystem in the United States,” House Financial Services Chair Patrick McHenry and Rep. French Hill said. Per reporting from Declan Harty, Gensler approved the bitcoin ETFs with support from the agency’s two Republican commissioners and opposition from his two fellow Democrats. Commissioner Caroline Crenshaw called the decision “unsound” and “ahistorical.” Gensler said it’s also not an endorsement of bitcoin itself. He said bitcoin is “primarily a speculative, volatile asset that’s also used for illicit activity including ransomware, money laundering, sanction evasion and terrorist financing.” (It’s hard to imagine Tuesday’s market-moving hack of the SEC’s X account helped, either.) “Investors should remain cautious about the myriad risks associated with bitcoin and products whose value is tied to crypto,” he said. Banks tap post-SVB backstop — The WSJ reports that borrowing from the Federal Reserve’s bank term funding program has increased to new highs in recent weeks, likely because of an arbitrage opportunity created by the shift in interest rate expectations.   A message from Electronic Payments Coalition:   On the Hill CFPB rule is here to stay — The Senate blocked a second attempt to undo the CFPB’s small business lending reporting rule for banks. The 54-45 vote failed to reach the two-thirds support needed to override Biden’s veto of a resolution that would have nullified the rule. Fentanyl hearing preview — Senate Banking Chair Sherrod Brown and ranking member Tim Scott will try to rally support for their bill to enact fentanyl trafficking sanctions with a hearing this morning that features country star Jelly Roll and former law enforcement officials. “The House needs to finish the job, and get this bill to the president’s desk,” Brown plans to say in his opening statement. China Rounds wants farmland bill to ride on funding deal — Sen. Mike Rounds is talking with fellow senators about using government funding legislation as a vehicle to pass his bill that would crack down on foreign ownership of farmland around military bases, Eleanor Mueller reports. In an interview, the South Dakota Republican said he had hoped to enact the policy via last year’s annual defense bill before the talks broke down amid a clash with the House over crypto legislation. "Last time around, we just had a problem over in the House,” he said. “But we think we've resolved that now and we can move forward.” Regulatory Corner TD faces scrutiny over deal disclosures — The Capitol Forum's Patrick Rucker reports that TD Bank executives knew of a DOJ anti-money laundering investigation more than six months before the company publicly disclosed the probe, which ended up scuttling a proposed acquisition of First Horizon Bank. TD Bank shareholders are suing the bank and accusing executives of making overly optimistic statements about the regulatory risks the First Horizon deal faced. New credit union regulator could boost exec comp push — Tanya Otsuka was sworn in this week as a board member of the National Credit Union Administration, giving Democrats a majority at the agency. Americans for Financial Reform flags that it now means all the banking agencies have majorities to move ahead with an unfinished rule from the 2010 Dodd-Frank law to address executives' incentive-based compensation.   A message from Electronic Payments Coalition: CREDIT UNIONS & COMMUNITY BANKS IN All 50 STATES OPPOSE THE DURBIN-MARSHALL CREDIT CARD BILL: The Durbin-Marshall credit card bill would create new government mandates on credit cards that would put consumer data and access to credit at risk. The bill would benefit corporate mega-stores, like Walmart and Target, at the expense of Main Street and the 135 million Americans who rely on credit unions and community banks. The threat of Durbin-Marshall to small financial institutions is so clear that 9,600+ credit unions and community banks in America are opposed to the bill. They also see through the so-called “carve out” for smaller banks which is a hoax to try and buy their support. Their message to Congress is simple: on behalf of credit unions and community banks in all 50 states, commit to actively opposing the Durbin-Marshall credit card bill. Click here to learn more.     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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