Feeling the pain from both the disease and the cure

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Jun 12, 2024 View in browser   By Victoria Guida and 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 The Federal Reserve is set to hold interest rates steady this afternoon, with a persistent drumbeat of data showing the U.S. economy is still chugging along. But while the economy might be holding up just fine overall even with elevated borrowing costs, things are getting noticeably worse for those with lower incomes. That’s a troubling trend at any time, but particularly in an election year. People who max out their credit cards are increasingly having difficulty paying off their debt, according to a New York Fed report in the first quarter of the year. “About a third of balances associated with maxed-out borrowers have gone delinquent in the last year, compared to less than a quarter of balances per year before the pandemic,” researchers said in a recent blog post. No relief in sight. The latest Consumer Price Index data, which will be released this morning, is expected to show a further softening in inflation, but it’s unlikely to translate to imminent rate reductions. That will keep borrowing costs high for low-income consumers this year and into next, especially since it’s now very possible we could see only one cut this year — or none at all. “Lower-income households felt the pain from the disease, which was higher inflation. And now they feel the pain from the cure, which is higher borrowing costs,” said Beth Ann Bovino, chief economist at U.S. Bank. Bovino said households on average spend about 10 percent of their income on debt payments, whereas, for lower-income people, it’s over 20 percent. “So they're feeling the pain, much more so than other income brackets,” she said. Wealthier households, in contrast, are doing well, boosted by a buoyant stock market and higher yields on savings. And they’ve been fueling the economy. The wealthy are continuing to spend on services like travel and leisure, which has masked underlying weaknesses in other parts of the economy. Meanwhile, lower-income households are starting to tighten their belts. Wells Fargo Investment Institute President Darrell Cronk on Tuesday told reporters on a call that this kind of bifurcation in consumer spending across income levels is what often occurs late in an economic cycle. “It’s like in ‘Rocky.’ Those high rates are body blows,” Wells Fargo Investment Institute Senior Global Market Strategist Sameer Samana said during the call. “They don’t show up as visibly as face shots,” but they’re just as damaging. A message from U.S. Bank: At U.S. Bank, we believe everyone deserves financial freedom. That’s why we provided 1.5 million people with financial education in 2023. Through partnerships like our program with the University of St. Thomas, we’re empowering young people with tools to lay the foundation for long-term financial wellness. Because U.S. Bank is small enough to care, and big enough to make a difference. Learn more.   That spills over into how consumers view the political economy. Despite nearly three years of low unemployment and steady wage growth — which dulls some of the pain of high debt costs — Americans have given President Joe Biden low marks on his performance when it comes to the economy. Inflation and the economy’s general health remain top priorities for many voters, and Biden’s approval rating among those with household incomes of less than $75,000 stood at just 31 percent as of last month, according to Reuters. The contrasting effects that high rates have had on different income groups is clearly influencing how members of both parties have been tailoring their messaging. So far, neither one seems to have broken through. Certain Democrats like Sen. Elizabeth Warren — ignoring the White House’s piety when it comes to the Fed’s independence — are amplifying calls on Fed Chair Jerome Powell to cut rates in order to preserve the labor market and boost investment in new housing. The Fed hasn’t budged. Meanwhile, former President Donald Trump in Las Vegas floated a plan to eliminate taxes on tipped income for service employees, making a direct play for a working-class voter bloc that serves as the backbone of Nevada’s Democratic Party. The powerful local culinary union was nonplussed. “Some staffer somewhere did a good job suggesting to him that this would be a good way to split organized labor,” said Jim Manley, a Democratic strategist and a top aide to former Majority Leader Harry Reid of Nevada, adding: “If past is prologue, the rank and file is never gonna go for it.” IT’S WEDNESDAY — Victoria’s headed to Powell’s press conference this afternoon. What should she ask? Send your suggestions to vguida@politico.com. And Sam’s always looking to find something to write about, so send tips and suggestions about Wall Street and the 2024 election to ssutton@politico.com.   THE GOLD STANDARD OF FINANCIAL SERVICES POLICY REPORTING & INTELLIGENCE: POLITICO has more than 500 journalists delivering unrivaled reporting and illuminating the policy and regulatory landscape for those who need to know what’s next. Throughout the election and the legislative and regulatory pushes that will follow, POLITICO Pro is indispensable to those who need to make informed decisions fast. The Pro platform dives deeper into critical and quickly evolving sectors and industries, like financial services, equipping policymakers and those who shape legislation and regulation with essential news and intelligence from the world’s best politics and policy journalists. Our newsroom is deeper, more experienced, and better sourced than any other. Our financial services reporting team—including Zach Warmbrodt, Victoria Guida and Declan Harty—is embedded with the market-moving legislative committees and agencies in Washington and across states, delivering unparalleled coverage of financial policy and the financial services industry. We bring subscribers inside the conversations that determine policy outcomes and the future of industries, providing insight that cannot be found anywhere else. Get the premier news and policy intelligence service, SUBSCRIBE TO POLITICO PRO TODAY.     Driving The Day The Consumer Price Index for May will be released at 8:30 a.m. … CFPB Director Rohit Chopra will testify at Senate Banking at 9:45 a.m. … Acting Comptroller of the Currency Michael Hsu, FDIC Director Jonathan McKernan, and Cleary Gottlieb partners Joon Kim and Abena Mainoo testify at a House Financial Services hearing on workplace misconduct at the FDIC … Senate Budget will hold a hearing on how Wall Street firms are taxed at 10 a.m. … House Judiciary has a hearing on ESG at 10:30 a.m. … The Federal Open Market Committee announces its monetary policy decision at 2 p.m. … Fed Chair Jerome Powell will hold a press conference at 2:30 p.m. … What the market’s watching — The Federal Reserve is almost certain to leave rates unchanged at its meeting later today. Investors will be watching the dot plots and Powell’s statement for any guidance on whether they should expect one or two rate cuts later this year, The Wall Street Journal’s Nick Timiraos reports. First Look: White House tax push — The White House will kick off a new wave of attacks on Republican tax policies in the coming days, MM has learned. The effort is part of a broader push by Democrats to frame Trump-era tax cuts – many of which are set to expire next year — as a GOP giveaway for large corporations and the wealthy. (If you want an example of what’s coming, the title of Senate Budget’s hearing today is: “Making Wall Street Pay Its Fair Share: Raising Revenue, Strengthening Our Economy”) — Lael Brainard, the director of the National Economic Council, will put out a memo on Thursday to contrast GOP plans to extend the Trump tax cuts and lower corporate taxes against the Democratic agenda. She’ll also hold a virtual meeting with around 100 progressive organizations to discuss the 2025 tax debate. — Treasury Secretary Janet Yellen’s remarks at the New York Economic Club this week will emphasize the administration’s thinking on policy. (Michael Stratford has more on Yellen below). — The Washington Center for Equitable Growth will host an event Monday with Warren and NEC Deputy Director Daniel Hornung on pro-growth tax reform. “The previous administration’s tax cuts failed on their own terms and didn’t trickle down,” Hornung told MM. "The President has been consistent from day one that the wealthy and the largest corporations should be paying more in taxes, and that we should be lowering the burden on middle-class families — and lowering costs for middle-class families.” Along those lines — The Center for American Progress Action Fund did some back-of-the-envelope math on Trump’s reported plan to lower the corporate tax rate to 15 percent. The result? A $48 billion tax cut for the 100 largest companies in the U.S. Yellen’s New York outreach — The Treasury secretary will pitch business leaders on the administration’s economic record this week and meet with CEOs in New York in a bid to rebut Wall Street titans who are embracing former President Donald Trump as good for business, Michael reports. Yellen will argue against cutting taxes for the wealthy and rolling back regulation as a strategy for economic growth — and instead tout the administration’s effort to lure private investment in critical industries through new major public investments. Treasury today is unveiling a new analysis arguing that U.S. business investment is outpacing historical patterns. Expect this to come up in the Chopra hearings — The Biden administration and the CFPB rolled out a plan to keep medical debt from appearing on credit reports. Democrats have contended that the inclusion of medical debt is a poor predictor of creditworthiness and that it disproportionately harms low-income communities and Black and Latino families. The move was immediately derided by House Financial Services Chair Patrick McHenry (R-N.C.) as “badly misguided.” Another likely topic to come up in today’s CFPB hearing? Credit card late fees. Michael reports that PNC Bank appears to have voluntarily followed the Biden administration’s new $8 cap on credit card late fees that the banking industry and Congressional Republicans are fighting to stop. Credit cards by PNC, which is among the largest banks in the U.S., now carry late fees of up to $8, according to disclosures posted on the company’s website. That’s down from the up to $38 fees on the products that were in place several months ago, according to archived versions of the page. The lowered fees are a victory for the Biden administration, which has made the new CFPB restrictions curtailing late fees a centerpiece of its fight against “junk fees” that’s been ramping up this election year. The CFPB rule has been on pause since May when a federal judge sided with industry groups in blocking the policy. A company spokesperson did not respond to a request for comment on the changes. Biden has his work cut out for him at the G7 — European Union leaders are poised to reject key elements of a U.S. plan that would call on European governments to serve as guarantors of a $50 billion loan to Ukraine that would be paid down with proceeds from seized Russian assets, Gregorio Sorgi and Jakob Hanke Vela report. “What Washington is proposing is, ‘We [the U.S.] take a loan, Europe takes all the risk, you [Europe] pay the interest, and we [the U.S.] use the money for a U.S.-Ukraine fund,’” said one senior European diplomat. “We might be stupid but we’re not that stupid.” — BlackRock CEO Larry Fink and Microsoft’s Satya Nadella will join G7 leaders to support Italian Prime Minister Giorgia Meloni’s push to invest in developing countries, report Bloomberg’s Annmarie Hordern, Donato Paolo Mancini and Chiara Albanese. The last gasp of SBF’s political empire — FTX founder and erstwhile crypto billionaire Sam Bankman-Fried is serving a 25-year sentence in federal prison. But a ballot initiative he bankrolled that would tax the wealthy to fund a pandemic prevention program will still be on California ballots this November, Jeremy White reports.   A message from U.S. Bank:   Congress Fireworks — Expect Democrats led by Rep. Maxine Waters (D-Calif.) to hammer at possible flaws with a Cleary Gottlieb report that detailed misconduct at the banking agency, Eleanor Mueller reports. A memo to members cited the role of GOP FDIC Chair Jelena McWilliams and the “appearance of a conflict of interest” from Cleary Gottlieb’s work with FDIC-regulated clients. House Judiciary — In advance of today’s hearing, Republicans on the House Judiciary Committee will release a report claiming that major firms on Wall Street colluded with advocacy groups to pressure companies into reducing their emissions, Isla Binnie reports for Reuters. Our Allison Prang and Jordan Wollman previewed the hearing — and the lengthy investigation that produced the report — in The Long Game. The Economy World Bank — The World Bank boosted its growth projections for the global economy this year but warned that protectionist trade policies could hamper its expansion. More tariffs, you say? — Bloomberg’s Mackenzie Hawkins and Ian King report that Biden is considering additional restrictions that would limit China’s access to AI chip technology. Shares of chipmakers fell on the news. A second mini-banking crisis? — PIMCO’s Head of Global Private Commercial Real Estate John Murray warns that more U.S. regional banks could fail as they work through their exposure to distressed commercial real estate. “The real wave of distress is just starting,” he told Bloomberg’s Laura Benitez.   JOIN US ON 6/13 FOR A TALK ON THE FUTURE OF HEALTH CARE: As Congress and the White House work to strengthen health care affordability and access, innovative technologies and treatments are increasingly important for patient health and lower costs. What barriers are appearing as new tech emerges? Is the Medicare payment process keeping up with new technologies and procedures? Join us on June 13 as POLITICO convenes a panel of lawmakers, officials and experts to discuss what policy solutions could expand access to innovative therapies and tech. REGISTER HERE.     Regulatory Corner Glacial pace on Basel III — With rulemaking in the U.S. moving slowly, European Union banking regulators are poised to delay implementation of Basel III rules by a year, Bloomberg’s Laura Noonan, Sonia Sirletti, and Steven Arons report. Back at it again — Declan Harty reports that the SEC appointed Public Company Accounting Oversight Board Chair Erica Williams to a second term, the agency said Tuesday. A message from U.S. Bank: At U.S. Bank, we see the value in community. That’s why we invest in programs around the country that make our communities stronger. In 2023, we provided 1.5 million people with financial education and committed $555 million to Community Development Financial Institutions in support of small business and home ownership. We’re also proud to invest in veterans housing nationwide. Since 2013, U.S. Bancorp Impact Finance has supported housing for veterans – totaling over 3,600 units, $575 million in equity and $588 million in debt commitments in investments. We believe everyone deserves a place to call home, and by investing in nonprofits like St. Michael’s Veterans Center, we’re creating communities for those who’ve served. U.S. Bank. Small enough to care, and big enough to make a difference.     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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