News: Fed’s next critical question: When to raise rates

Monday, November 1, 2021

Fed’s next critical question: When to raise rates

Nov 01, 2021

By Kate Davidson and Aubree Eliza Weaver

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Quick Fix

IT'S TAPER TIME — Central bank officials have been hinting at it for weeks, and the day has nearly arrived: The Fed is expected to announce plans Wednesday to start dialing back its massive, pandemic-era support for the U.S. economy.

But that's practically old news, right? The attention is now squarely on how long it might take officials to start raising interest rates. Markets have grown increasingly convinced the Fed will take the next step almost as soon as it's done tapering, likely in the middle of next year, amid worries over persistent price increases.

Officials are essentially walking a tightrope into 2022, as our Victoria Guida lays out:

"If the Fed moves too quickly to rein in consumer and business spending to cool inflation, it would be damaging to longer-term growth and job creation. If the central bank waits too long, it would have to act more aggressively to raise borrowing costs down the road, which could also trigger a recession.

"'It's a no-win situation the Fed has been put in,' said Douglas Holtz-Eakin, president of the American Action Forum and the former head of the Congressional Budget Office."

It also raises the stakes for the White House and its Fed personnel decisions — not only whether to renominate or replace Chair Jerome Powell, but also whom to nominate for other open board seats. A key question, from the left and right, for any central bank nominee will be when and how they would react to continued price pressures over the coming months, and how committed they are to the Fed's new framework, which argues for keeping rates low until the economy reaches maximum employment.

Progressive groups have urged the Fed to keep rates low until the economy reaches full employment, while Democrats in competitive congressional districts say their constituents are raising concerns about higher prices. If the Fed doesn't get it just right, and fast, it could end up becoming the scapegoat.

— Black-led groups urge diversity among nominees: Meanwhile, a coalition of Black-led organizations is urging the Biden administration to appoint more Black officials to leadership positions at the Fed.

"There is a pool of strong Black candidates who possess the necessary experience to serve as Chair, Vice Chair, Vice Chair for Supervision and Member of the Board of Governors," the groups, led by the Black Economic Alliance and Joint Center for Political and Economic Studies, wrote in a letter to the White House being sent today.

"Your administration has nominated candidates to lead every financial regulatory agency other than the FDIC and the Federal Reserve — but unfortunately, none of those nominees have been Black," they added.

All six of the current Fed board members are white, and only one of the 10 current heads of the Fed regional banks, Atlanta Fed President Raphael Bostic, is Black.

IT'S MONDAY — We don't know about you all but we're nursing a serious sugar hangover. So send us your spiciest (or saltiest?) takes and tips for the week: Email at kdavidson@politico.com, aweaver@politico.com, or DM on Twitter @katedavidson.

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Driving the Day

Commerce Secretary Gina Raimondo speaks at the Peterson Institute for International Economics 2021 Next STEP conference Monday … former CEA Chair Kevin Hassett discusses his new book with Washington Post Live Monday … Fed begins its two-day policy meeting Tuesday … House Financial Services subcommittee holds hearing on "buy now, pay later" products Tuesday … Senate Banking holds hearing on the LIBOR transition Tuesday ...

Brookings Institution hosts discussion on stablecoins with Circle CEO Jeremy Allaire Wednesday … Fed Chair Jerome Powell holds press conference Wednesday … SEC Chair Gary Gensler speaks at the agency's virtual Securities Enforcement Forum Thursday ... Labor Department releases October employment report Friday

STABLECOIN REPORT EXPECTED TODAY — The President's Working Group on Financial Markets is expected to issue its much-anticipated report on stablecoins at 3 p.m. today, an official involved in the report tells MM. Stablecoins, a type of virtual currency whose value is tied to another asset, most often the dollar, have been on the top of the list of cryptocurrencies drawing attention from regulators in recent months. One key question ahead of the report: Will regulators require private stablecoins to be backed by strong reserves?

—What else to expect? Nellie Liang, Treasury's undersecretary for domestic finance, said last month the report will devote particular attention to risks that could arise if stablecoins become a widely used payment method.

CFPB ANNOUNCES NEW ENFORCEMENT, SUPERVISION CHIEFS — From our Katy O'Donnell: "CFPB Director Rohit Chopra has tapped Obama-era Justice Department official Eric Halperin to lead the bureau's enforcement division and Lorelei Salas, the former commissioner of New York City's consumer protection agency, to lead supervision, the agency said Friday. 'Together, they will be effective watchdogs over the financial marketplace, especially when it comes to stopping repeat offenders,' Chopra said in a statement."

—Who's Halperin: Served in the Justice Department's Civil Rights division from 2010 to 2014, first as special counsel for fair lending and then as acting deputy assistant attorney general.

—Who's Salas: Commissioner of the New York City Department of Consumer and Worker Protection from 2016 to 2021. Before that, she was the legal director at the progressive organization Make the Road New York, where she supervised immigration, housing and employment legal services programs for immigrants and refugees.

WHITE HOUSE SEEKS TO EASE TRADE TENSIONS WITH TARIFF DEALS — From our colleague Steven Overly: "The Biden administration will ease tariffs on steel and aluminum imports from the European Union under an agreement reached Saturday, resolving a Trump-era tension that for years has tarnished trade relations between the longtime allies. The EU will be permitted to send a set amount of steel and aluminum each year into the United States duty free under the new deal."

— More from our Stuart Lau and David Herszenhorn: "Europe isn't thrilled about the ceasefire terms of Saturday's trade truce with the U.S. but EU officials finally conceded it was worth accepting Washington's conditions in order to shift focus to the common enemy: China."

— And that's not all: Our Doug Palmer reports: "The Biden administration on Sunday indicated that it was interested in working out a deal to remove former President Donald Trump's tariffs on steel and aluminum imports from the United Kingdom and Japan by teaming up against China. That would be similar to a deal announced on Saturday with the European Union."

G-20 LEADERS SIGN ONTO GLOBAL TAX DEAL — WSJ's Paul Hannon: "Leaders of the world's biggest economies endorsed a deal on corporate taxation that they hope will safeguard their future revenues and offer stability to businesses that operate internationally. The main beneficiaries are likely to be rich countries, including the U.S.

"In the opening session of their summit in Rome, leaders of the Group of 20 major economies gave their blessing to a global pact that has been more than a decade in the making, according to officials."

— What you need to know: Our Mark Scott has all the details on the agreement here.

TECH TO THE PRINCIPAL'S OFFICE — Tech firms that received letters from the Consumer Financial Protection Bureau are meeting individually this week with bureau officials to discuss the information requests, a source tells MM. The letters included more than 50 questions about how the firms, including Apple, Amazon and Google, use consumer data.

TREASURY CASH COULD LAST UNTIL FEBRUARY — The Bipartisan Policy Center said Friday the Treasury Department will likely run out of cash to keep paying all of the government's bills some time between mid-December and mid-February, unless Congress raises or suspends the federal borrowing limit. Congress raised the ceiling in September just enough to ensure the Treasury could keep meeting its obligations until Dec. 3, when lawmakers face another deadline to fund the government. Secretary Janet Yellen told Congress last month that Treasury has a "high degree of confidence " the measures will last through that date; BPC and other private forecasters suggest the actual X-date could be several weeks or months beyond it.

— Speaking of debt: Just because deficits are projected to decline over the coming year as pandemic relief spending fades doesn't mean Treasury borrowing will, economists at Oxford Economics said in a note Friday.

The Treasury was able to draw from a historically large stockpile of cash built up during the pandemic to finance spending in fiscal 2021, an option it doesn't have now. Oxford also expects Treasury debt issuance will increase by about $300 billion as the agency replenishes the cash balance, which was further depleted after the debt limit was reinstated in August. Treasury will release its quarterly borrowing estimates this afternoon, and detail its debt issuance plans in its quarterly refunding statement Wednesday morning.

WHERE ARE THE OLDER WORKERS? Ahead of Friday's jobs report, this story from WSJ's Amara Omeokwe raises a critical question for policymakers: "The Covid-19 pandemic has boosted retirements among baby boomers, further straining the tight labor supply and leaving a hole for employers to fill.

"Older workers who could least afford to retire early—those with lower incomes and less education—have been more likely to leave the workforce during the pandemic, researchers have found. The question is whether their retreat is temporary or permanent. Some retired because of Covid-19 fears, and others after failing to find suitable work."

Fly Around

'WARMER CONNECTIONS' BETWEEN TRUMP TEAM AND SAUDIS — The list of attendees at Saudi Arabia's annual investment conference last week included a number of former Trump administration officials and advisers, including former Treasury Secretary Steven Mnuchin. NYT's Kate Kelly reports: "Guests affiliated with the Biden administration, which has adopted a chillier posture toward the Saudis than did Mr. Trump, were in far shorter supply. Treasury Secretary Janet Yellen did not attend. Nor did officials from the White House or the State Department. The sole Biden official who spoke at the conference was Don Graves, deputy secretary of commerce."

INFLATION FIGHTERS LURE EMERGING-MARKET INVESTORS AS PRICES SOAR — Bloomberg's Netty Idayu Ismail, Sydney Maki and Srinivasan Sivabalan: "Investors are raising the stakes for emerging-market central banks, rewarding those doing the most to prevent inflation from becoming more than transitory. With inflation in developing nations now exceeding expectations by the most in more than a decade, assets backed by policy makers who are getting ahead of price pressures are enticing fund managers more than ever."

HOW ROBINHOOD CASHES IN ON THE OPTIONS BOOM — By WSJ's Alexander Osipovich and Gunjan Banerjee: "High-speed trading firms are paying brokers billions of dollars a year to execute options orders , leading them to promote the risky trades whose popularity has boomed among small investors. The practice, called payment for order flow, has made options a cash cow for brokerages such as Robinhood Markets Inc. and TD Ameritrade. They can make twice as much or more from selling customers' options orders as they do from selling order flow for stocks."

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