💰 A market jolt

Plus: Limits of tighter money | Monday, January 24, 2022

Open in app View in browser   Presented By Circle   Axios Markets By Emily Peck and Matt Phillips ·Jan 24, 2022 🛌 Wake up, we need to talk. Today's newsletter is 1,197 words, 5 minutes. 🚨Situational awareness: Last week was godawful, the worst week for the market since the pandemic hit. But it could be worse. You could be a Bills fan.     1 big thing: Why the Fed might want to jolt the markets Photo: Brendan Smialowski-Pool/Getty Images   So far, financial markets are cooperating nicely with the Federal Reserve's efforts to restrain inflation. They're doing the Fed's work for it by creating tighter financial conditions, Axios' Neil Irwin writes. But as the central bank's policymakers meet this week, an underlying question they face is whether the adjustment is happening too slowly. Why it matters: The Fed likes to move gradually to avoid spooking markets. But if its leaders conclude they are as behind the curve on resetting monetary policy as some believe, it could mean more abrupt moves with far-reaching consequences. By the numbers: Since the Fed's hawkish pivot began in mid-November, market moves have been consistent with its goals of achieving tighter financial conditions in an orderly way. Bond yields have risen substantially, but not because investors expect higher inflation. Rather, inflation-adjusted rates are rising. The real yield on 10-year Treasuries has risen 58 basis points since Nov. 9. Stocks and other risky assets have fallen but in an exceptionally orderly way. The S&P 500 is down nearly 8% from its early January high, but with no one-day drops of more than 2%. The frothiest corners of the market have sold off the most. So far so good. The risk for the Fed now is that its gradualism is still leaving market conditions too loose to do enough to rein in inflation. Even after a steep rise in the last couple of months, for example, the spread between BBB-rated corporate bond yields and Treasuries was only 1.1% last week, compared to an average of 1.59% throughout 2019. Financial conditions are still extremely loose by any historical standard. The implication: It might take a bit of a hawkish surprise at Fed chair Jerome Powell's Wednesday press conference to get the attention of markets, even if it makes for a volatile period on Wall Street. What would that mean? Powell could convey that the Fed might raise interest rates at consecutive meetings, unlike in the last tightening cycle. He could also indicate that the Fed is not constrained by the quarter-point-rate-hike-at-a-time norm of the last two decades, and could raise rates half a percent or more in one fell swoop. More dramatic steps would include announcing an immediate end to Fed bond purchases (instead of tapering those purchases through March) — or even raising rates this week, a possibility futures markets assign only 5% odds. Yes, but: Those more aggressive measures are more likely to achieve the goal of tighter financial conditions, but also stand a greater risk of breaking things in the markets and the real economy, potentially undermining the choppy recovery. Keep reading.     2. Catch up quick 🚲 Peloton, the one-time pandemic darling that's seen its stock shed 80% from the peak, is facing calls from an activist investor to fire its CEO and consider a sale. (WSJ) 💰Crypto exchange Binance allegedly withheld information from governments and maintained weak money-laundering checks, even as it publicly said it welcomed government oversight. (Reuters) 💝 More brands are giving their customers the chance to opt out of marketing emails ahead of holidays like Valentine's Day. (Axios)     3. But... maybe the Fed can't do it all Illustration: Brendan Lynch/Axios   Speaking of the pressure on the Federal Reserve to hike rates swiftly ... a debate is shaping up over whether tighter money will actually rein in inflation, Emily writes. Why it matters: Consumer prices are up 7% year over year, the highest rate of increase since 1982. It's causing major headaches for the White House. What they're saying: Until we diagnose what's really causing the inflation, we won't be able to treat it, economist Stephanie Kelton wrote in a Substack column last week. "It takes a certain hubris to assert that by nudging a single price — the federal funds rate — higher, the entire economy can be shifted back to a stable inflation path," she writes. Point is, it's a mistake to believe the fix for inflation that worked 40 years ago will work again. Other economists think the Fed needs to move quickly. "The Fed is seriously behind the curve and has to get serious about fighting inflation," Ethan Harris, the head of global economics research at Bank of America Merrill Lynch Global Research, wrote in a note last week. Larry Summers has been saying the same thing; he and others argue that too much U.S. stimulus is to blame for price increases. The pandemic is still making the economy weird. Kelton — and many others — cite the continuing supply chain snags as part of the story. "If supply-chain issues can be sorted out, the current inflation tizzy will probably subside early this summer," writes economist James K. Galbraith in a blog post last Friday. The White House was saying similar things this summer — but Biden also said last week that fighting inflation was the Fed's job.     A message from Circle It's time we debunk common myths about stablecoins     Stablecoins continue to grow in prominence as the world's digital currency space race moves forward. Looking ahead: It's important to understand common myths when it comes to stablecoins as they play a larger role in our economic growth. Learn more.     4. Tracking Omicron's impact Data: New York Federal Reserve Bank; Chart: Axios Visuals Emerging anecdotal evidence shows just how hard the recent rise in COVID-19 cases hit businesses in early January — but that hasn't hurt some business leaders' longer-term views on their companies' prospects, Axios' Kate Marino writes. Why it matters: Increasingly, the economic recovery has come in fits and starts that move in tandem with new peaks in cases. By the numbers: About 8.8 million people didn't work during the period of Dec. 29 to Jan. 10 because they had to care for someone or were sick themselves with COVID symptoms, according to Census Bureau survey estimates. That's nearly triple the number of people who said so during the first two weeks of December. What's happening: In a Goldman Sachs survey of small business leaders, released this morning, 71% of respondents said the rise in COVID-19 cases due to the Omicron variant has negatively impacted their revenue, and 37% said their business has been forced to temporarily close or scale back operations. Meanwhile, two closely watched surveys of current business conditions from the New York Fed showed the same. The Empire State Manufacturing Index plummeted to its first negative reading since June 2020. The Business Leaders Survey indexes, which track services firms in New York, New Jersey and Connecticut, also sunk precipitously. But, but, but: Despite the current headwinds, 73% of small business owners in the Goldman Sachs survey said they're optimistic about the financial trajectory of their business this year. The New York manufacturing future business conditions index barely dipped — while the services leaders survey showed significant growth in expectations that conditions will improve over the next six months.   Share Axios and earn rewards If you like this newsletter, your friends may, too! Refer your friends and get free Axios swag when they sign up. Be a good friend and share   5. What we're watching this week Illustration: Eniola Odetunde/Axios   The Employment Cost Index is out this Friday — and the Fed has been closely watching the recent surge in this somewhat under-the-radar quarterly number, Matt writes. It was this wage growth data that helped nudge Fed chair Jerome Powell toward a more hawkish — that is, inflation-focused — stance on interest rates. By the numbers: Civilian compensation costs grew 3.7% year over year as of the last report. Consensus estimates put the Q4 2021 figure at 4.1%, according to FactSet. Reality check: Most people would greet news of significant wage increases as a good thing. But among central bankers, too much wage growth can be a worrisome sign that a self-fulfilling inflationary cycle — where workers squeezed by rising prices demand raises from employers who then raise prices further — could be building momentum.     A message from Circle Stablecoins: a misunderstood cryptocurrency     Stablecoins are a powerful innovation in an always-on global economy. Okay, but: There are still some common misconceptions about stablecoins — made evident by recent public hearings on cryptocurrencies and stablecoins. Get the facts.   Like this email style and format? Bring the strength of Smart Brevity® to your team — more effective communications, powered by Axios HQ.   Axios thanks our partners for supporting our newsletters. If you're interested in advertising, learn more here. Sponsorship has no influence on editorial content. Axios, 3100 Clarendon B‌lvd, Suite 1300, Arlington VA 22201   You received this email because you signed up for newsletters from Axios. Change your preferences or unsubscribe here.   Was this email forwarded to you? Sign up now to get Axios in your inbox.   Follow Axios on social media: