News : Powell on deck — The market that threatens the recovery

Monday, July 12, 2021

Powell on deck — The market that threatens the recovery — Yellen pushes climate change efforts

Jul 12, 2021

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Quick fix

Powell on tap — Fed Chair Jay Powell has a couple of high profile appearances on the Hill this week, testifying before House Financial Services at noon on Wednesday and Senate Banking at 9:30 a.m. on Thursday. He's likely to face sharp questioning from Republicans on the pace of inflation and from Democrats on the need to keep monetary policy easy to keep boosting employment and fight economic inequality.

These hearings are critical for markets of course, with Wall Street expecting more dovish talk and no hints about tapering asset purchases in the near future. Any talk about tapering is likely to wait for the Jackson Hole summit in late August, which will actually be in person (mostly) this year. But they are also job interviews of sorts, as the Biden White House must decide whether to re-nominate Powell later this year.

There still isn't much heavy opposition to a Powell renomination outside heavily progressive circles. Hard core financial reformers tag Powell with presiding over a central bank that tilted away from some of the more stringent regulatory policies under vice chair for supervision Randy Quarles. But the White House can attempt to mollify those critics by dumping Quarles and keeping Powell.

Still, the central bank chair's performances on the Hill will get very close scrutiny from a West Wing eager to hear more talk about the transitory nature of inflation and a commitment to easy money policies deep into next year as well as strong support for further fiscal stimulus like the bipartisan infrastructure plan and the much larger American Families Plan.

Compass Point's Isaac Boltansky : "Democrats will focus on economic inequality. Republicans will focus on the national debt and inflation fears. … Powell will stick to the script and avoid any fiscal baiting. … Powell will almost certainly face a number of questions relating to bank M&A given the White House's recent executive order …

"Lawmakers will almost certainly ask about the Fed's central bank digital currency (CBDC) work and the forthcoming release updating their progress to date. Although we are still in the early innings, we continue to believe that there is reticence within the Fed regarding the CBDC effort."

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DRIVING THE WEEK

Powell's appearances before House Financial Services on Wednesday and Senate Banking on Thursday will highlight the week on the Hill … Congress must also wrestle with infrastructure and the need to boost the debt limit in the short time before the August summer recess …

Treasury Secretary Janey Yellen on Monday "will address the Eurogroup on ways to strengthen the transatlantic economic relationship between the U.S. and EU counterparts and on respective efforts to support the economic recovery and address policy priorities in areas including climate change and global tax policy" …

President Biden on Wednesday "will meet with a bipartisan group of Governors and Mayors to discuss the importance of the critical investments in the Bipartisan Infrastructure Framework to States and cities across the country" … Biden meets with German Chancellor Angela Merkel on Thursday …

THE SOARING MARKET THAT THREATENS THE ECONOMIC RECOVERY — Our Victoria Guida and Katy O'Donnell: "Wall Street investors have bought into the Federal Reserve's assurances that higher inflation won't last, but a looming trend will test their composure over the coming months: soaring home and rental costs.

"With home prices already up about 15 percent from last year and rents soaring at nearly triple their normal rate in just the first six months of 2021, there's growing concern that housing costs could soon begin to nudge inflation higher. Since shelter makes up about one-third of a key inflation measure, that could undermine the Fed's message that recent price spikes, which have showed up in everything from airline tickets to ride shares, will slow."

YELLEN PUSHES CLIMATE CHANGE MESSAGE — Reuters' David Lawder in Venice: "U.S. Treasury Secretary Janet Yellen on Sunday signaled she will push multilateral development banks further away from fossil fuel projects, saying she would ask them to 'increase their climate ambition' to support the Paris Agreement on carbon emissions reductions.

"Yellen told a news conference that development lenders including the World Bank needed to boost efforts to encourage more private-sector climate-friendly investment. 'I plan to shortly convene the heads of the MDBs to articulate our expectations that the MDBs align their portfolios with the Paris Agreement and net-zero goals as urgently as possible,' Yellen said in remarks to a G20 climate forum."

Fly Around

EARNINGS KICK OFF WITH SKY-HIGH FORECASTS, RECORD STOCK MARKET — WSJ's Karen Langley: "Wall Street is heading into earnings season this week with high expectations after strong profits fueled a stock market rally in the first half of the year. Money managers will be watching whether companies will again trounce Wall Street's forecasts for earnings.

"The S&P 500 has gained 16 percent this year and notched 38 record closes, most recently on Friday. With stock valuations sitting above long-term norms, investors will also be looking to executives for clues on what the future holds for company profits."

CHINA VOWS RETALIATION AFTER U.S. BLACKLISTS COMPANIES — AP: "China on Sunday said it will take "necessary measures" to respond to the U.S. blacklisting of Chinese companies over their alleged role in abuses of Uyghur people and other Muslim ethnic minorities.

"The Commerce Ministry said the U.S. move constituted an 'unreasonable suppression of Chinese enterprises and a serious breach of international economic and trade rules.' China will 'take necessary measures to firmly safeguard Chinese companies' legitimate rights and interests,' the ministry's statement said."

GLOBAL BOOM IN HOUSE PRICES CREATES DILEMMA FOR CENTRAL BANKS — Bloomberg's Enda Curran: "Surging house prices across much of the globe are emerging as a key test for central banks' ability to rein in their crisis support. Withdrawing stimulus too slowly risks inflating real estate further and worsening financial stability concerns in the longer term. Pulling back too hard means unsettling markets and sending property prices lower, threatening the economic recovery from the Covid-19 pandemic."

BIDEN STAKES OUT POSITION IN DEBATE OVER POWER OF BIG COMPANIES — WSJ's Jon Hilsenrath: "Behind President Biden's executive order seeking to curb the power of companies that dominate their markets is a body of academic research that finds the U.S. economy has become less competitive in the past two decades as power swells in large firms.

"The decline in competition has had big implications for the broader economy, this research finds, including fewer thriving startup companies, a less-dynamic job market, stagnant worker wages and restrained economywide productivity."

YELLEN: COMPETE ON ECONOMIC STRENGTHS, NOT LOW TAX RATES — AP's David McHugh: "U.S. Treasury Secretary Janet Yellen said Sunday that deterring the use of tax havens will let countries compete on economic fundamentals — instead of by offering ever-lower tax rates that deprive governments of money for infrastructure and education.

"Yellen spoke after finance ministers from the Group of 20 major economies endorsed a global minimum corporate tax of at least 15 percent, a measure aimed at putting a floor under tax rates and discouraging companies from using low-rate countries as tax havens. 'This deal will end the race to the bottom,' she said at a news conference after the end of the meeting in Venice."

Yellen also plans to push development banks to step up climate financing efforts — Reuters' David Lawder: "U.S. Treasury Secretary Janet Yellen on Sunday signaled she will push multilateral development banks further away from fossil fuel projects, saying she would ask them to 'increase their climate ambition' to support the Paris Agreement on carbon emissions reductions.

BANKS ARE IN THE ECONOMY'S WAITING ROOM — WSJ's Telis Demos: "Banks have done a lot to put themselves in a position to benefit from higher rates. Now investors just have to wait. Second-quarter earnings by the biggest banks in the country will start coming out Tuesday with reports from JPMorgan Chase and Goldman Sachs, followed by more over the course of the week.

"The flow of news overall was good for banks in the second quarter. The results of the Federal Reserve's stress test paved the way for big capital returns. Credit metrics continue to look very strong, as the slowing of stimulus hasn't so far led to a surge in defaults. The Fed's tweak to its overnight reverse repo rate helped relieve some pressure on banks' bulging balance sheets."

TRANSITIONS — Sarah Gadsden is now a senior consultant at Booz Allen Hamilton. She most recently was a senior associate at Eagle Hill Consulting and is also an NBC News alum.

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