News : The good news about the worst CPI since Volcker

Wednesday, April 13, 2022

The good news about the worst CPI since Volcker

Apr 13, 2022

By Victoria Guida and Aubree Eliza Weaver

Presented by Sallie Mae®

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Quick Fix

How about the bad news first? — The Consumer Price Index hit its highest annual rate since 1981 and its biggest monthly increase since September 2005. And yet bond yields fell, signaling that investors weren't alarmed. Why? There was some (potential) good news hidden in the inflation numbers, if you filter out food and energy. So-called core CPI grew at a slower pace than the past few months, a welcome indication that upward pressures on prices could be easing.

Our Ben White writes: "Consumer prices have soared to their highest level in four decades, but if some of the world's largest banks are calling it right, the inflation fever that has gripped the country could be breaking. In recent days, economic forecasters at Deutsche Bank, UBS and Bank of America, among others, have said that the March inflation number — an 8.5 percent surge over last year — may be the worst of it. …

"Among the banks' reasons for optimism: Used car prices, which propelled much of the inflation last year, have begun to fall. Supply chain snags should finally fade as the post-Covid economy develops, they say. And the Federal Reserve is poised to aggressively tackle the issue by jacking up interest rates in the coming months."

Federal Reserve Governor Lael Brainard (who later this month should become Vice Chair Lael Brainard) also called the slowdown "notable."

"Core inflation is the component of inflation that most closely reflects the strength of domestic demand and I'm most focused on for purposes of assessing the appropriate path of monetary policy," Brainard said at the Wall Street Journal's Jobs Summit.

"I wouldn't take a lot of signal from any one month of data. But I will be watching carefully for a continuation of this kind of pattern," she added. "As we've said, inflation is too high, and getting inflation down is going to be our most important task."

In a forecast released Tuesday, Peterson Institute economists said they're expecting the Fed to have to move aggressively to tame inflation. " While it is difficult to know how these forces will add up over the rest of 2022 and 2023, the lack of a material moderation in incoming inflation data so far suggests that high inflation will persist without significant Federal Reserve action," nonresident senior fellow Karen Dynan wrote in a blog post.

"In the absence of a material tightening of financial conditions from exogenous forces, the Fed will need to raise interest rates aggressively to subdue inflation in the next couple of years," added Dynan, who has previously worked at Treasury, the Fed and the White House. "Accordingly, the federal funds rate is likely to rise to more than 4 percent by 2023."

Partisanship in economic polling — Turns out feelings about President Joe Biden's handling of the economy might not just be about the economy.

A new POLITICO/Morning Consult poll asked one set of respondents who should be credited for the current labor market. In response, 41 percent said Biden, 14 percent said Donald Trump, 9 percent said Congress, 6 percent said their governor and 15 percent said "other."

The same question was then asked to another set of respondents who were told that 431,000 jobs were added in March 2022 and the unemployment rate had reached a new low. This time, only 33 percent of respondents pointed to Biden as a reason for the booming labor market, because fewer Republicans credited him.

On the other hand, Biden was blamed for the cost of goods and services at about the same rate with more detail vs. less (41 percent vs. 42 percent).

Rick Scott definitely sees the opening. The Florida senator, who as chair of the National Republican Senatorial Committee is leading the charge to flip the upper chamber, told POLITICO in an interview that the Biden administration should be doing more to curb inflation — in particular, oil prices. Scott's remedies: fewer regulations to deal with the supply chain crisis and more permits for oil drilling. And reducing congressional spending.

"It's an unbelievable tax on the poorest families," he said of inflation. "This has got to get under control, and the way you get under control is to live within your means."

Scott acknowledged that Russia's invasion of Ukraine had made the problem worse, but put the "lion's share" of the blame on the Biden administration. For Florida, he said he worried about increasing mortgage rates that would make it more expensive to buy a home and inflation that might mean "tourists will not have discretionary dollars."

IT'S ONLY WEDNESDAY? — I mean, ahem, happy Wednesday! Keep sending tips to me at vguida@politico.com or @vtg2, and to Aubree Eliza Weaver at aweaver@politico.com or @AubreeEWeaver.

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Driving The Day

HOW DO YOU SOLVE A PROBLEM LIKE ELON? — By yours truly and Katy O'Donnell: "The Securities and Exchange Commission is once again grappling with its least-favorite question: what to do about Elon Musk?

"Tesla's billionaire CEO was late in filing notice of his purchase of a sizable share of Twitter's stock and initially submitted the wrong form, according to experts. Those potential securities law violations may seem technical, but they've set up yet another clash between the Wall Street regulator and the world's wealthiest man. They also raise questions about how the SEC might hold Musk accountable."

CIRCLE CEO HAS NOTHING TO HIDE — Our Sam Sutton sat down with Jeremy Allaire for a Q&A: "As members of Congress and regulatory agencies race to develop new policies for stablecoins — digital tokens backed by traditional assets like the U.S. dollar — the co-founder of the crypto market's second-largest issuer says he'd like nothing more than to see himself and his competitors held to tighter reserve standards set by regulators.

"'We are providing a financial market infrastructure that thousands of companies are building on top of, that developers are building on top of, that people are building other financial products and services on top of,' Allaire said in the interview from the top floor of the Nautilus Miami Beach hotel. Stablecoin issuers 'need to be held to a higher standard.'"

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NO HOLDS BARRED — As you might imagine, MM got quite a bit of incoming on our scoop that Michael Barr is the leading contender to be Fed vice chair for supervision. A few of the responses:

Better Markets' Dennis Kelleher: "Quarles didn't just 'pare down the post-crisis rulebook for big banks' — he gutted supervision of big banks as proved by the explosion of Archegos and the unprecedented letter the Fed released last December. … When Barr says 'he disagreed with "a number of policies" that were pursued by President Donald Trump's Fed vice chair for supervision, Randal Quarles…' — anyone who wants to be the Fed's VCS needs to spell out exactly what Quarles' 'policies' they agree and disagree with."

Hogan Lovells' Aaron Cutler: "I know Michael Barr well since he was my Law Professor in 2003-2004, and we've stayed in touch since. Even though we are on different sides of the political spectrum, he would be an excellent choice for the Fed. I think he will garner Republican support in the Senate should he be nominated because he has a history of meeting with and working with both sides and taking all points of view into consideration as part of his process."

National Community Reinvestment Coalition's Jesse Van Tol: "Michael Barr would be an outstanding choice for Vice Chair of Supervision at the Fed. He knows the players, knows the fault lines, and will bring a wealth of experience to the job. He may not be the regulator all progressives want, but he is the one we need. He can get confirmed."

Revolving Door Project's Jeff Hauser: "Under Barr's disastrous leadership, the Obama-era HAMP program went from freeing homeowners from unaffordable mortgages to freeing banks from any consequences for their own bad actions, with homeowners sacrificed to preserve Wall Street. While Barr was a true ally in the fight for creating the Consumer Financial Protection Bureau, when it came to shifting the economic structure of Wall Street itself, he was a proud supporter of the 'Too Big To Fail' bailout-heavy status quo."

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Fly Around

BUZZSAW — More from Sam Sutton: "There's a big money boogeyman in the Democratic primary for Oregon's new 6th Congressional District. Democrats vying to represent Salem and its surrounding communities are lobbing attacks claiming that FTX founder Sam Bankman-Fried, a 30 year-old crypto billionaire, is buying the race for first-time candidate Carrick Flynn.

"One of the Super PACs that's been seeded by Bankman-Fried this election cycle, Protect Our Future, has already spent roughly $5 million on direct mail and advertisements supporting Flynn. This week, the House Majority PAC – which is aligned with congressional Democratic leaders – agreed to pay $1 million for television ads backing the former Georgetown University faculty member's candidacy.

"Five of the candidates facing Flynn — state Rep. Andrea Salinas, Kathleen Harder, Loretta Smith, Cody Reynolds, and Matt West — held a short press conference on Tuesday to air their grievances. Another candidate who couldn't attend, State Rep. Teresa Alonso Leon, issued a separate statement supporting her competitors' efforts.

"'If we're not a party that stands up to billionaires, who are we?' said West's campaign manager Robin Logsdon in an interview. 'We've run our campaign on delivering for people, working people, I haven't seen that same kind of campaign from Carrick Flynn, and I think this is a slap in the face to every Democratic voter, every Democratic volunteer, everyone who's endorsed in this race, but above all to the voters.' Bankman-Fried declined to comment through an FTX spokesperson."

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"'Carrick has not met Sam before, nor has he or the campaign had any conversations with HMP,' Flynn campaign spokesman Avital Balwit said in an email. 'Carrick is honored to have the support of House Majority PAC. HMP is charged with preserving Democratic control of congress. They are a strong voice for working families and have delivered for Oregon in the past.'"

"In an email, House Majority Communications Director C.J. Warnke told POLITICO that the PAC is 'dedicated to doing whatever it takes to secure a Democratic House Majority in 2022, and we believe supporting Carrick Flynn is a step towards accomplishing that goal.'"

OP-ED: FED SHOULD BE READY TO BACKSTOP COMMODITIES MARKET — Yale's Steven Kelly in Bloomberg Opinion: "Justified as they are, the sanctions imposed on Russia — one of the world's largest exporters of metals and hydrocarbons — are wreaking havoc on already strained commodities markets, with potentially dire consequences for the global economy. To avoid unnecessary damage, officials should be prepared to meet this extraordinary challenge with a no less extraordinary response: Emergency support from the U.S. Federal Reserve."

INFLATION REPORT KEEPS FED ON TRACK FOR HALF-POINT MAY RATE INCREASE — WSJ's Nick Timiraos: "Tuesday's report showing inflation accelerating to its highest annual rate in four decades is likely to maintain Federal Reserve officials' ambition to rapidly raise interest rates to a neutral level that doesn't stimulate the economy. Central bank officials have braced for a continued run of high inflation this spring due to renewed Covid-19 lockdowns in major Chinese cities and as energy and commodity prices are expected to stay high due to Russia's invasion of Ukraine and the West's financial sanctions against Moscow."

AMERICANS FACE HIGHER INFLATION THAN ELSEWHERE IN THE G7 — Bloomberg's Katia Dmitrieva: "Prices in the U.S. are surging the fastest among the Group of Seven advanced economies, propelled by higher costs of energy, food and a raft of other goods and services. U.S. consumer prices soared 8.5 percent in March, the most since 1981. Russian President Vladimir Putin's invasion of Ukraine has disrupted energy and commodity supply chains, driving up the cost of items from gasoline to agricultural products. That's added to an inflationary impulse that had already sparked a sharp political debate."

TOOMEY BLASTS MINNEAPOLIS FED, CALLS FOR OVERHAUL — Bloomberg's Steven T. Dennis: "Senator Pat Toomey, the top Republican on the Banking Committee, criticized Minneapolis Fed President Neel Kashkari's advocacy on a state education issue, citing it as an example of why Congress should overhaul or even eliminate the Federal Reserve's regional banks."

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