| | | | | |  | | By Victoria Guida and Aubree Eliza Weaver | 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 6 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. | | | Let's talk about inflation — Your guest MM host has a new piece about the Biden administration's calculated bet to not worry too much about the prospect of runaway inflation amid its multitrillion-dollar spending plans. For one, the world has changed a lot since the punishing inflation of the 1970s in ways that make it less likely to show up now. But even if they're wrong about that, history suggests it'll be some time before price levels really start to rise unsustainably — and Biden probably won't be in the White House anymore. "It's called the Great Inflation because it's really like a 15, 16-year process. It's a prolonged, gradual buildup," said David Beckworth, a senior research fellow at the Mercatus Center at George Mason University. That raging inflation back then didn't just come from aggressive government spending . There were spiking oil prices, an ill-fated White House effort to cap wages and prices and a shift in U.S. dollar policy. And then there were the demographics — young, big-spending Baby Boomers with newly bought homes and double-income households as women entered the workforce in droves. Now, if anything, the structure of the global economy is pushing prices down in advanced economies like the U.S., with low inflation often attributed to the rapid growth of international trade, automation and the internet. That's made the Federal Reserve more worried about not enough inflation rather than too much. "One thing that's so interesting about the economy is that it's ever-changing," Fed Chair Jerome Powell said on CBS's "60 Minutes" in an interview that aired on Sunday. "You know, it's not like water that always boils at 212° Fahrenheit." Still, signs of more inflation are starting to appear . U.S. producer prices surged in March, the largest annual gain in nearly a decade, and other inflation gauges in coming months are expected to be similarly strong. Sen. Pat Toomey of Pennsylvania, the top Republican on the Banking Committee and a longtime critic of ultra-low interest rates, called that data "the latest troubling indication that inflation is starting to pick up," urging the Fed to consider that maybe what's coming isn't so benign. It's not so much that the Fed is downplaying the chances of more inflation, but more that the central bank wants slightly higher price levels to balance out the fact that inflation has run below its 2 percent target for so many years. One of the key things that the central bank is trying to convince markets of right now is that it won't blink at the first sign of trouble (i.e. actual inflation) and will let price levels rise slightly higher (how much higher, we don't know, but definitely above 2 percent). Without that change in mindset, the Fed fears being stuck in a world where inflation runs below its target and rates are low forever. Closely tied to this is the Fed's prediction that inflation later this year won't be long-lasting. If it is in fact temporary, hiking rates would be counter to that goal of changing mindsets, as well as the Fed's promise to ensure that as many Americans are employed as possible. In other words, this is their chance to prove they really mean what they've been saying. Another key point — The Fed's conditions for "liftoff" — e.g. the first rate hike — are that inflation not just exceeds 2 percent but is set to stay there for a while, and that the economy reaches "full employment," which means not just a low topline jobless rate but also more people actively participating in the labor force. You could take this less as being sanguine about inflation but instead as humility about forecasts; they're saying: we're not going to believe we've truly made progress on our maximum employment mandate until it starts showing up in wages. HAPPY MONDAY — Ben White is off this week. Please send any MM pitches to us at vguida@politico.com and aweaver@politico.com, as well as the rest of the crew: kodonnell@politico.com and zwarmbrodt@politico.com. | | | | SUBSCRIBE TO "THE RECAST" TO JOIN AN IMPORTANT CONVERSATION: Power is changing, in Washington and across the country. 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Thank you to our sponsor, Intel. | | | | | | | | DRIVING THE WEEK — The House Financial Services Committee holds hearings on housing, financial institution charters and Libor … The Senate Banking Committee holds hearings on racial discrimination in housing, student debt and infrastructure … On Tuesday, Consumer Price Index data for March released at 8:30 a.m. … On Wednesday, Powell speaks at the Economic Club of Washington at noon … The Consumer Bankers Association has a conference featuring Acting Comptroller of the Currency Blake Paulson, FDIC Chairman Jelena McWilliams and lawmakers such as Toomey, starting at noon … Fed Vice Chair Richard Clarida speaks at a Manhattan Institute event at 3:45 p.m. BIDEN'S PLANS TO FACE SENATE GAUNTLET — Our Megan Cassella: "President Joe Biden says he views his $2 trillion-plus infrastructure plan as simply a starting point for negotiations with Congress, a draft document of ideals where 'compromise is inevitable.' "But even as the White House maintains it is looking for bipartisan engagement, the focus on Capitol Hill is already shifting from winning over Republicans to gaming out what will need to get cut if Democrats end up passing the sprawling package through the budget maneuver known as reconciliation — a move that would require keeping the caucus united in support." HOUSING PROVISIONS GOING TO BE THORNY — Our Katy O'Donnell: "President Joe Biden is proposing a historic infusion of federal money into housing as part of his $2 trillion infrastructure package, but the plan is already running into doubts about whether it's enough and resistance from the very people he needs to make it a reality. "A key element of Biden's $213 billion proposal is offering cities federal dollars to encourage them to ease zoning rules that drive up housing costs, impede the construction of affordable homes and often prevent people of color from moving in. But housing advocates and economists say Biden's decision to rely solely on financial incentives without including more punitive actions to force changes could dampen the plan's effect on one of the major drivers of the affordable housing crisis in the U.S., particularly in the largest metro areas." DIGGING INTO BIDEN'S FIRST BUDGET REQUEST — Our Caitlin Emma: "President Joe Biden's first budget calls for massive boosts to low-income schools, public health programs and fighting climate change, plus a slight Pentagon funding bump that is unlikely to fly with many in Congress. "The request unveiled by the White House on Friday asks Congress to provide non-defense programs with a total of $769 billion for the upcoming fiscal year, in addition to $753 billion for national defense programs, including cash for overseas activities." INFLATION LURKS, WITH ECONOMY POSED FOR BEST GROWTH SINCE 1983 — WSJ's Gwynn Guilford and Anthony DeBarros: "Ronald Reagan was in the White House, 'Return of the Jedi' was in theaters, and economic growth hit an astonishing 7.9 percent. The U.S. has produced many more Star Wars films since 1983, but growth has never approached that level — until this year, if economists are right. Those surveyed by The Wall Street Journal boosted their average forecast for 2021 economic growth to 6.4 percent, measured as the change in inflation-adjusted gross domestic product in the fourth quarter from a year earlier. If realized, that would be one of the few times in 70 years that the economy has grown so fast." POWELL: ARCHEGOS-LINKED BANK LOSSES A RISK MANAGEMENT FAILURE — From your MM host: "Federal Reserve Chair Jerome Powell said the losses borne by large banks, including Credit Suisse, in connection with the meltdown of over-leveraged investment fund Archegos Capital Management was a risk-management failure that the central bank is investigating. "'This is an event that we're monitoring very carefully and working with regulators here and around the world to understand carefully,' Powell said on CBS' "60 Minutes" on Sunday. "What we try to do is make sure that the banks understand the risks that they're running and have systems in place to manage them. This would appear to be a significant shortfall — a failure on that front.'" | | | | YOUR GUIDE TO THE BIDEN ADMINISTRATION: As the Biden administration closes in on three months in office, what are the big takeaways? Will polls that show support for infrastructure initiatives and other agenda items translate into Republican votes or are they a mirage? What's the plan to deal with Sen. Joe Manchin? Add Transition Playbook to your daily reads for details you won't find anywhere else that reveal what's really happening inside the West Wing and across the executive branch. Track the people, policies and power centers of the Biden administration. Subscribe today. | | | | | | | | SIZZLING STOCK MARKET SETS HIGH BAR FOR EARNINGS SEASON — WSJ's Karen Langley: "The stock market is running hot entering first-quarter earnings season. A formidable rally has propelled the S&P 500 up 9.9 percent this year to 20 record closes, keeping stock valuations at historic highs. Some investors, though, say shares may have more room to run as the rollout of Covid-19 vaccines and bountiful government spending strengthen the outlook for corporate profits. "Earnings season kicks off in earnest this week, with results from America's big banks — including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. — and companies ranging from Delta Air Lines Inc. to PepsiCo Inc. and UnitedHealth Group Inc." STOCK BULLS BET IT ALL ON EARNINGS GUESSES WITH TROUBLED RECORD — Bloomberg's Lu Wang: "You're never sure what earnings seasons will bring. Hence their volatility. But one thing is certain about the first-quarter results about to be disclosed. They couldn't matter less to the market's current valuations. And while it's a Wall Street cliche that 'the guidance is what matters,' that view is being taken to absurd extents right now, when the S&P 500 is pricing in profits that virtually cannot materialize in two years. That's a level of faith in the future that history gives little basis for justifying. "Here's the math. Based on existing analyst forecasts for earnings in all of 2021, the S&P 500 trades at almost 24 times estimates, among its highest valuations ever. To bring the multiple down to its long-term average of 16 times annual profits, companies in the gauge will have to make about 15 percent more than the equity researchers currently expect them to earn — in 2023." BUSINESS FACES TRICKY PATH NAVIGATING POST-TRUMP POLITICS — AP's Brian Slodysko and Josh Boak: "For more than a half-century, the voice emerging from the U.S. Chamber of Commerce's monolithic, Beaux Arts-styled building near the White House was predictable: It was the embodiment of American business and, more specifically, a shared set of interests with the Republican Party. The party's bond with corporate America, however, is fraying. "Fissures have burst open over the GOP's embrace of conspiracy theories and rejection of mainstream climate science, as well as its dismissal of the 2020 election outcome. The most recent flashpoint was in Georgia, where a new Republican-backed law restricting voting rights drew harsh criticism from Delta Air Lines and Coca Cola, whose headquarters are in the state, and resulted in Major League Baseball pulling the 2021 All-Star Game from Atlanta." CEOs PLAN NEW PUSH ON VOTING LEGISLATION — WSJ's Emily Glazer, Chip Cutter and Te-Ping Chen: "Dozens of chief executives and other senior leaders gathered on Zoom this weekend to plot what several said big businesses should do next about new voting laws under way in Texas and other states." PIVOTAL WEEK CONFRONTS EMERGING MARKETS AT MERCY OF YIELDS — Bloomberg's Farah Elbahrawy, Livia Yap and Sydney Maki: "That the immediate fate of emerging markets is likely to be determined by the path of the dollar and Treasury yields is barely in dispute. But what is less clear is which direction the U.S. currency and bond market will take, as investors weigh the competing forces of Covid-19 infections and the prospects of a global economic rebound. Another uncertainty is which developing economies are best-placed to ride the recovery." | | | | Follow us on Twitter | | | | Follow us | | | | |
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