For Powell, fighting inflation might mean sinking the world

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Sep 30, 2022 View in browser   By Sam Sutton and Kate Davidson 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. Federal Reserve Chair Jerome Powell has learned to accept that fighting inflation comes with collateral damage. At this point, it also means unleashing hell on the global economy. The Fed's aggressive push to bring down prices and cool overheated U.S. markets is wreaking havoc on similar efforts under way at central banks across Europe, Asia and the developing world, write our Victoria Guida and Johanna Treeck. From Victoria and Johanna: "Powell's actions have caused a flood of money to flee the shores of other countries for safer American investments that offer a much more attractive payoff because the U.S. now has its highest interest rates since 2008. A stronger dollar means the cost for Europeans of heating their homes and powering their cities, already driven sky high by Russia's invasion of Ukraine, is getting even greater. And smaller developing countries could begin to drown in ever-more-burdensome debt payments… "Most central bankers, too, are locked in their own fights with inflation, so they understand the Fed's resolve; indeed, price stability in the U.S. also benefits the rest of the world. But with the heightened threat of global recession, one of the largest risks looming from the Fed's actions is that other central banks might soon feel pressure to cut rates as their economies contract. They'll have a harder time doing so, however, because that would drive even more precious capital to American markets. 'We might enter a phase in which we run the risk, just because of the fear of financial volatility, of going against the Fed," said Alejandro Werner, a former official of the Mexican government and of the International Monetary Fund. "Central banks in Latin America and other emerging markets could be much more cautious in loosening their monetary policy stance and inject some additional recessionary forces." The Fed is certainly paying attention to all of this , but it likely won't have much bearing on what it does next. "Will that stay the Fed's hand? Probably not," Steven Kamin, who led the Fed board's international finance division until 2020, told Victoria. "They're pretty single-mindedly focused on inflation." It's not as though Powell & Co's work is about to get any easier. The Commerce Department will release its monthly report on consumer prices this morning and the consensus is that inflation is still white hot. Economists estimate core inflation — which excludes energy and food prices — jumped by 0.5 percent in August, a big spike compared to the 0.1 percent increase notched in July. Year-over-year core inflation is expected to have risen 4.7 percent last month, up from 4.6 percent for the 12 months ending in July. The Fed signaled last week that it's on track to push the federal funds rate well above 4 percent by the end of the year. If Commerce's personal consumption expenditures data reflects those estimates — it's the Fed's preferred metric for measuring inflation — there will be even less incentive for Powell to soften his stance. That doesn't bode well for the rest of the world, according to EY Parthenon Chief Economist Gregory Daco. "Elevated global financial market volatility, plunging currencies and surging bond yields are important considerations for policymakers to weigh in the context of this historic tightening cycle as it could lead to a much sharper global economic slowdown than currently priced in," Daco wrote in a note on Thursday. "Lest we forget, the US economy is not immune to global waves of uncertainty, as these often wash up on US shores." IT'S FRIDAY — And Barry Bonds is still the one true home run king. What else should we be writing about? Send us your tips, story ideas, questions or feedback at kdavidson@politico.com and ssutton@politico.com.   A message from the Psaros Center for Financial Markets and Policy at Georgetown University: Decrypt crypto regulation, ESG and climate disclosure, market structure, and more at the Psaros Center's Financial Markets Quality Conference (FMQ) 2022 on October 14 at Georgetown University. Register for FMQ 2022 today.   Driving The Day Personal income, spending and inflation data released at 8:30 a.m. … Fed Vice Chair Lael Brainard speaks at 9 a.m. … Fed Governor Michelle Bowman speaks at 11 a.m. … New York Fed President John Williams speaks at 4:15 p.m. HURRICANE IAN — Our Myah Ward, Andrew Atterbury and Kelly Hooper: "President Joe Biden on Thursday said there are early reports that Tropical Storm Ian caused substantial loss of life in Florida, as state and federal officials continued to help thousands of people affected by the catastrophic storm. 'This could be the deadliest hurricane in Florida history,' Biden said during a Federal Emergency Management Agency briefing. He added that he'll be visiting Florida soon." — The economic consequences will be severe as well. Our Thomas Frank and Daniel Cusick: "Hurricane Ian's path of destruction cut through some of the fastest-growing counties in the nation, pulverizing communities whose populations have doubled and tripled in recent decades during a period of deceptive atmospheric calm … The storm will expose a wide range of vulnerabilities in the nation's most hurricane-prone state including a failing property insurance market, a widespread lack of flood insurance and breakneck development." THE GOVERNMENT IS STILL FUNDED — Our Caitlin Emma and Marianne Levine: "The Senate approved a stopgap spending bill on Thursday afternoon that funds the government through mid-December, sending it to the House and likely averting a government shutdown that would hit in less than 48 hours." STOCK BAN — Our Declan Harty: "A vote on legislation to ban members of Congress, Supreme Court justices and Federal Reserve governors from stock trading is not expected to happen before the midterms, Majority Leader Steny Hoyer told reporters Thursday."   STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president's ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.     Regulatory Corner FED UP WITH CLIMATE CHANGE — Also from Victoria Guida: "The Federal Reserve on Thursday announced that six large banks will participate in a pilot program designed to test their exposure to theoretical consequences from climate change, the Fed's first big step toward analyzing the financial fallout of a warming planet." Environmental advocates are generally supportive, with The Sierra Club's Adele Shraiman calling the pilot a "promising first step in the urgent effort to rein in Wall Street's dangerous and reckless behavior and protect our financial system from a climate-driven economic crash." Republicans are less enthused: "The Fed's new 'pilot' program is the first step toward pressuring banks into limiting loans to and investments in traditional energy companies and other disfavored carbon-emitting sectors," Sen. Pat Toomey (R-Pa.) said in a statement. SPEAKING OF TOOMEY — From Sam: "Top Republicans led by Sen. Pat Toomey of Pennsylvania introduced a bill on Thursday that would allow sponsors of 401(k) plans to let their workers put retirement savings in alternative assets like private equity, real estate and crypto." — Hours later, the Senate confirmed Lisa Gomez to head the Labor Department's Employee Benefits Security Administration (EBSA), which our Nick Niedzwiadek reports has "at times drawn fire from conservatives and financial firms for its actions . More recently it has tangled with Fidelity and other businesses over offering cryptocurrency investment options." GRADE YOUR OWN WORK — Declan Harty again: "Deloitte's Chinese affiliate has agreed to pay $20 million to settle charges by the SEC that it failed to comply with fundamental U.S. audit requirements, an action that officials say underscores the need for American authorities to have more oversight of audits conducted overseas." SHELL GAMES — And more from Victoria: "The Treasury Department on Thursday finalized rules that require businesses to disclose ownership information to the government, a move years in the making that's aimed at cracking down on money laundering through anonymous shell companies." Fed File THE FED RATE ELEVATOR — Bloomberg's Catarina Saraiva and Jonnelle Marte: "Federal Reserve officials reiterated Thursday that they will keep raising interest rates to restrain high inflation , and that markets are now understanding the message. 'If you look at the dots, it does look like the committee is expecting a fair amount of additional moves this year,' St. Louis Fed President James Bullard told a virtual emerging-market forum, referring to the bank's so-called dot plot of projections." NOTHING TO SEE HERE — Bloomberg's Craig Torres: "Federal Reserve Chair Jerome Powell has deflected requests from a top critic, Senator Elizabeth Warren, for details of financial transactions by central bank officials, risking an escalation of tensions with lawmakers over disclosure issues."   A message from the Psaros Center for Financial Markets and Policy at Georgetown University:   Economy HOUSING ON ICE — WSJ's Charley Grant: "Mortgage rates rose to their highest level in more than 15 years, a new high since the 2008-09 financial crisis that adds pressure to the already cooling U.S. housing market. The average rate on a 30-year fixed mortgage climbed to 6.7%, according to a survey of lenders released Thursday by Freddie Mac." D'OH! — POLITICO's Michael Stratford: "The Biden administration is curtailing its sweeping student debt relief program for several million Americans … The Education Department will no longer allow borrowers with privately held federal student loans to receive loan forgiveness under the administration's plan, according to guidance updated on the agency's website Thursday." BANKING — The Committee for Better Banks has published new interactive research indicating that the physical expansion plans of the 14 largest retail banks have largely avoided low-to-moderate income and minority communities. Crypto COIN OF THE REALM — Protocol's Benjamin Pimental asked Binance CEO and co-founder Changpeng "CZ" Zhao about the crypto exchange's decision to convert their customers' Circle's USDC stablecoin holdings to a different dollar-pegged token that's issued by Paxos – called Binance USD. "We were in communication with Circle. We notified them ahead of time. They were okay with it. It was just the messaging. Many people misunderstood the messaging," Zhang said. Pimental then checked in with Circle: "In an interview with Protocol, Circle CEO Jeremy Allaire confirmed that Binance 'did disclose to us their intentions.' But he also said, 'They unilaterally took customers' funds and then moved them into something else. And I think that's really problematic.'"   SUBSCRIBE TO POWER SWITCH: The energy landscape is profoundly transforming. Power Switch is a daily newsletter that unlocks the most important stories driving the energy sector and the political forces shaping critical decisions about your energy future, from production to storage, distribution to consumption. Don't miss out on Power Switch, your guide to the politics of energy transformation in America and around the world. SUBSCRIBE TODAY.     Fly Around A persistent economic puzzle is why labor is still so tight amid slowing growth, high inflation and growing fears of recession. — WSJ's Sarah Chaney Cambon The dollar's relentless rise threatens to wipe $60 billion in sales from the biggest US firms. Two weeks from earnings season, investors are sticking around to find out what that means for corporate America's bottom lines. — Bloomberg's Emily Graffeo US authorities have charged Russian metals tycoon Oleg Deripaska and his associates for violating sanctions imposed by Washington . — FT's Stefania Palma   A message from the Psaros Center for Financial Markets and Policy at Georgetown University: As markets change, so does the debate about how to regulate them. The Psaros Center's annual Financial Markets Quality Conference (FMQ) at Georgetown University's McDonough School of Business brings together the most important voices on the most pressing financial policy questions of the day. This year's speakers—including CFTC Chair Rostin Behnam, SEC Chair Gary Gensler, U.S. Senator Kirsten Gillibrand (D-NY), and U.S. Senator Cynthia Lummis (R-WY), among many others—will convene on October 14 to discuss crypto policy, ESG and climate disclosure, market structure, and more. Register for FMQ 2022 today.     Follow us on Twitter Mark McQuillian @mcqdc Kate Davidson @KateDAvidson Aubree Eliza Weaver @aubreeeweaver Ben White @morningmoneyben Victoria Guida @vtg2 Katy O'Donnell @katyodonnell_ Zachary Warmbrodt @Zachary Sam Sutton @samjsutton   Follow us

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