Bracing for the Fed’s verdict on inflation

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Mar 20, 2024 View in browser   By Victoria Guida and 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 With Federal Reserve officials all but guaranteed to hold interest rates steady today, Wall Street’s attention will be laser-focused instead on whether Chair Jerome Powell and his colleagues are getting more pessimistic about the outlook for inflation. The central bank’s quarterly economic projections, which will be updated this afternoon, show Fed policymakers’ thinking about where rates should be at the end of the year — the dot plot — and how the economy would look as a result of that policy. In December, they penciled in three rate cuts for 2024, but inflation since then has proved stubborn, coming in hotter than expected, which could make Fed officials lean toward keeping borrowing costs higher for longer. “There are meaningful risks the dots drift higher and only show two cuts” for this year, said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities, though he added that markets wouldn’t be shocked by that. “The extent of the move in the underlying dots and how Powell messages the move will be key,” he said. “If it is a wholesale rethink of the monetary policy path and Powell leans into the move, suggesting they have reduced their confidence inflation is on the right track — there could well be a big market impact.” Investors have generally adjusted to the idea that there might be less of a drop in borrowing costs than they previously thought; JPMorgan economists initially projected five cuts for 2024 and are now only expecting three – one every other meeting starting in June. That’s relatively consistent with what others are pricing in, according to CME’s FedWatch tool. According to JPM, it’s even possible that the Fed’s projection of where rates settle over the longer run could move up noticeably from 2.5 percent, where it has sat for a long while. The Minneapolis Fed noted in a paper last month that some of the individual central bank policymakers’ projections for this longer-run rate skewed noticeably higher in December. “The dispersion in these projections suggests a great deal of uncertainty around the level of interest rates in the long run,” according to that paper. “After all, the United States and economies around the world are still recovering from the disruptions of the pandemic and the war. For instance, the implications of changes in working arrangements—such as a more common adoption of work-from-home practices—and reconfigurations of global value chains to increase production resilience have yet to fully play out.” All of this means that borrowers who are getting most squeezed by higher rates – from lower-income Americans with credit card debt to commercial real estate mortgage holders – could continue to feel the pinch for a while. Julia Pollak, chief economist at ZipRecruiter, said less vulnerable sectors should be fairly insulated because “so few have adjustable rate debt and so many locked in low rates early in the pandemic.” But Randall Kroszner, who served on the Fed board from 2006 to 2009, told MM that he still expects some pain from rates to hit the economy, with unemployment “moving up into the fours.” The U.S. might still avoid recession, he said, but argued that markets may be too optimistic in how they see this all playing out. “They seem to take a soft landing as awfully soft,” he said. It’s Wednesday — Send tips to zwarmbrodt@politico.com. A message from the American Bankers Association: Get the inside scoop on the banking policy debate by watching ABA’s Washington Summit starting at 8:30 AM ET. Top lawmakers including Rep. Josh Gottheimer (D-NJ) and Sen. Katie Britt (R-AL) will share their insights on key banking issues in Congress. Veteran political strategists Donna Brazile and Mike Murphy will offer their election outlook, and a separate session explores the latest industry efforts to get more veterans into the banking system. Watch the livestream.   Driving the day SBA Administrator Isabel Casillas Guzman testifies at House Small Business at 10 a.m. and Senate Small Business at 2:30 p.m. … House Financial Services holds an SEC oversight hearing at 10 a.m. … The FOMC’s interest rate decision is out at 2 p.m., followed by Fed Chair Jerome Powell’s press conference at 2:30 p.m. … House Financial Services has a hearing on homebuyers at 2 p.m. … Congress scrutinizes SBA fintech flap — Zach scoops that the head of the Small Business Administration is expected to face questions from lawmakers today about new drama around the agency’s controversial push to let fintech lenders offer government-backed loans. SBA Administrator Isabel Casillas Guzman is appearing at back-to-back House and Senate hearings. At issue is SBA’s decision late last year to grant the fintech firm Funding Circle a license to issue loans under the agency’s flagship 7(a) program. New questions are being raised about the move after the U.K.-owned company revealed earlier this month that it was considering selling its U.S. business as it dealt with losses. Funding Circle CEO Lisa Jacobs said in a March 7 earnings press release that Funding Circle’s U.S. arm “requires a significant amount of cash and capital to grow the SBA proposition and we don’t believe that this is the best course of action for the group.” It’s a notable development because the SBA was already facing pushback from a bipartisan group of lawmakers and the banking industry about its drive to let fintech firms offer its loans. The Biden administration has argued that increasing the participation of nontraditional lenders would help underserved entrepreneurs. But critics have questioned whether the agency is equipped to regulate fintech firms and whether embracing them, in addition to a simultaneous revamp of underwriting standards, could increase financial strain on the 7(a) lending program. Fintech firms distinguish themselves by offering more automated lending processes than old-school banks. With Funding Circle’s U.S. operation facing losses and potentially changing hands, it’s raising questions about how the SBA vetted the firm and what it will do if there’s a shift in ownership. House Small Business Chair Roger Williams told MM in a statement that the prospect of Funding Circle selling off its U.S. business is “extremely troubling.” A spokesperson for ranking member Nydia Velázquez said she too has concerns and expects questions to be raised today at Guzman’s hearings. Sen. Joni Ernst, the top Republican on Senate Small Business, told MM that she has “zero confidence in Biden’s SBA to do proper due diligence and protect our taxpayer dollars” and that she’ll be pushing for accountability. “There are a lot of questions that have been left unanswered as to how the SBA conducted the license review process and why they decided to give a license to a foreign-owned entity that was openly losing money,” Williams said. (It would not be the only foreign-owned SBA lender.) Funding Circle is signaling that it’s prepared to move forward as an SBA lender. The company told MM that it has received “expressions of interest” in its U.S. business but that the “early stage” conversations are not impacting the ability of its SBA arm to maintain minimum capital requirements or its preparations to begin offering 7(a) loans as early as April. “We remain excited about the opportunity to continue expanding access to capital to underserved communities across the U.S.,” Funding Circle said. The SBA is defending its decision, arguing that it’s not unusual for a lender in its portfolio to go through a parent company change and that it’s common for non-depository lenders to run operating losses as they pursue growth. “The SBA is proud of the historic action we’ve taken to address long-standing capital access gaps to level the playing field for small business owners, and will continue to pursue novel lending approaches to meet the needs of small businesses,” an SBA spokesperson said.   A message from the American Bankers Association:   Crypto Adeyemo on the Hill — Eleanor Mueller scoops that Senate Banking is inviting Treasury Deputy Secretary Wally Adeyemo to testify as part of a hearing on illicit finance next month. Senate staffers expect the hearing to build on one the panel held in October that focused on how terrorist groups use crypto. Adeyemo has been lobbying lawmakers to expand Treasury’s ability to police digital assets. Stablecoin vibes — Financial Services Chair Patrick McHenry is bullish on passing his stablecoin bill, if he can just find an opening. "We're at an inflection point where we can land this plane this year — and I am confident we can land the plane this year — but we need the broader context of Congress to give us that opening. We need a legislative vehicle," McHenry said Tuesday at a Punchbowl event. "The nuances here are real, but things that we would know how to resolve if given a deadline and a way to get through the process."   JOIN US ON 3/21 FOR A TALK ON FINANCIAL LITERACY: Americans from all communities should be able to save, build wealth, and escape generational poverty, but doing so requires financial literacy. How can government and industry ensure access to digital financial tools to help all Americans achieve this? Join POLITICO on March 21 as we explore how Congress, regulators, financial institutions and nonprofits are working to improve financial literacy education for all. REGISTER HERE.     CAMPAIGN 2024 Moreno v. Brown — Jasper Goodman reports that the Republican primary for Ohio’s U.S. Senate seat may have produced an unexpected winner: Democrat Sherrod Brown. Business owner and noted crypto booster Bernie Moreno won the primary Tuesday, setting the stage for a closely watched matchup with Brown that could determine control of the Senate. But the bitter turn the Republican contest took in its final days may come as a major political boon to Brown, who Democrats expect to pick up where Moreno’s GOP opponents left off with their attacks. “You couldn’t have invented a better scenario for a Republican primary than what we’re seeing,” said Jerry Austin, a longtime Ohio-based Democratic political strategist. “They’re beating each other up, giving us ammunition that comes right from their mouth.” Another factor hanging over the Ohio race, as MM has chronicled, is the millions of dollars in crypto industry campaign cash that may soon be heading toward the Buckeye State. A network of pro-crypto super PACs that entered the year with more than $80 million in the bank has said it plans to spend in Ohio — but not who it will back. The matchup seems to set up a clear contrast on the issue: As chair of the Banking Committee, Brown has been a leading crypto critic. Moreno is a digital asset enthusiast who has said he plans to campaign on the issue in the general election. But the crypto group isn’t yet saying how it will spend its money in the state. It's a carrot-and-stick approach that threatens to hurt Brown if he doesn’t adopt the industry’s agenda — but offers to help him in a close race if he changes his tune. Climate Disclosure in California — California's top climate regulator says the state plans to implement its first-in-the-nation corporate emissions reporting law despite legal and funding obstacles, our Blanca Begert reports. It will force large corporations to disclose their greenhouse gas emissions starting in 2026. A message from the American Bankers Association: Join bank leaders from across the country at 8:30 AM ET today for ABA’s Washington Summit — the nation’s premier conversation on banking issues. Hear from key lawmakers shaping the banking policy debate including Sen. Katie Britt (R-AL), a member of the Senate Banking Committee and Rep. Josh Gottheimer (D-NJ), a member of the House Financial Services Committee. Political strategists Donna Brazile and Mike Murphy will also offer their perspectives on the 2024 election. Watch live.   On the Hill The post-McHenry cash race — Contenders to replace McHenry as the top Republican on House Financial Services are squeezing in more fundraising before they leave town for two weeks, Eleanor reports. Rep. Andy Barr will headline a dinner for committee member Rep. William Timmons at Del Mar at the Wharf on Thursday night. He'll also host another dinner tonight with representatives of global systemically important banks. Rep. Bill Huizenga will hold the latest installment in his "Beers with Bill" series tonight with an event at Capitol Hill's Sazerac House benefiting Rep. Bryan Steil, who serves on Financial Services and the steering committee. Fly-in roundup — The Mortgage Bankers Association is hosting its annual National Advocacy Conference this week and will have more than 500 real estate finance professionals in town … The American Financial Services Association has senior industry leaders on the Hill today and Thursday, and they plan to focus on CFPB small-dollar rules.   Easily connect with the right N.Y. State influencers and foster the right relationships to champion your policy priorities. POLITICO Pro. Inside New York. 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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