News: Inflation is slowing and pessimism abounds

Thursday, April 13, 2023

Inflation is slowing and pessimism abounds

Apr 13, 2023

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President Joe Biden got to enjoy decent inflation news for about six hours before Federal Reserve economists rained on his parade. With big bank CEOs like JPMorgan Chase’s Jamie Dimon and Citi’s Jane Fraser scheduled to give their takes on the economy in Friday morning earnings calls, the forecast calls for more tortured weather metaphors.

Banks “are starting to see signs of deterioration,” International Association of Credit Portfolio Managers Executive Director Som-lok Leung told MM on Wednesday.

The IACPM’s latest member survey — which captures the perspective of major lenders like Goldman Sachs, Bank of America and the Dutch pension PGGM, among others — reflected a growing belief that a recession will arrive in the coming months as banks offer fewer loans and credit quality begins to crumble, according to an advance copy shared with MM.

“Inflation, interest rates, geopolitical instability — those have been on the table for the last several years,” Leong said. More banks are preserving their capital in the aftermath of the Silicon Valley Bank failure and “one of the things that will impact most is their ability to lend,” he added.

That’s one reason why Fed economists now expect a recession before the end of the year, according to the minutes of the central bank’s March 21-22 meeting. While those projections don’t reflect the views of Federal Open Market Committee members, Chair Jerome Powell and other Fed leaders aren’t sounding optimistic.

Monetary policymakers now expect the economy to grow at “a rate so slow that it could easily dip negative,” Victoria Guida reports. They also expect unemployment to climb by a full percentage point, which would be a sharp reversal for a rock-solid labor market that’s been a point of pride for the White House.

What’s more, even with a recession more likely, Wednesday’s consumer price index report did not do much to convince the Fed to pause plans for another rate hike. Inflation is still accelerating in core services sectors of the economy. Wall Street has the odds of the Fed raising the target rate by another quarter-point in May at two-to-one.

That won’t make credit conditions any easier.

“The credit spigot is closing,” Moody’s Analytics Chief Economist Mark Zandi told MM. “That will have a macroeconomic consequence.”

IT’S THURSDAY — Have you survived the spring meetings? Send tips, suggestions and gossip to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

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Driving the Day

World Bank President David Malpass and IMF Managing Director Kristalina Georgieva will hold back-to-back press conferences starting at 7:45 a.m. … Assistant Treasury Secretary for Investment Security Paul Rosen speaks at an American Conference Institute event at 8:45 a.m. … The Chamber of Commerce will host a U.S.-Ukraine Partnership Forum starting at 9:15 a.m. … Treasury Secretary Janet Yellen will give remarks with Ukraine Prime Minister Denys Shmyhal at 1:45 p.m. … CFTC Chair Rostin Behnam will participate in a fireside chat at an IIF event at 3 p.m.

FIRST IN MM: Eleanor Mueller reports that Rep. Andy Barr (R-Ky.) plans to introduce a bill today that would exempt more private funds from SEC oversight. Regulation currently exempts private funds with $150 million or less from having to register with the SEC. Barr's bill — Eleanor got her hands on a discussion draft — would index that cap to inflation going back 10 years to the original measure's enactment, a GOP aide said, as well as annually moving forward.

The legislation is part of a broader raft of capital formation legislation that the Capital Markets Subcommittee has been working to piece together last and this week, the aide said. The House Financial Services Committee plans to mark it up at 10 a.m. on April 26, two other GOP aides said. Chair Patrick McHenry (R-N.C.)'s staff did not respond to a request for comment.

— More from Eleanor: San Francisco Fed President Mary Daly on Wednesday said persistent inflation suggests there is still “more work to do,” even if Fed officials no longer expect “to continue to raise rates up every meeting.”

Daly declined to answer a question about the San Francisco Fed’s supervision of Silicon Valley Bank, telling an audience member at a Salt Lake Chamber event that it "wouldn't be appropriate" for her to "offer my opinion" until the Fed completes its internal review May 1.

From one regulator to another — Our Declan Harty: The DOJ’s top antitrust official really likes SEC Chair Gary Gensler’s planned overhaul of U.S. stock trading. But Jonathan Kanter also has some thoughts. In a letter, Kanter and five of his DOJ colleagues urged Gensler & Co. to reconsider how the four proposals issued in December might interfere with each other — echoing one of the chief complaints the SEC has received from Ken Griffin’s Citadel Securities, BlackRock and SIFMA.

Regulatory Corner

Big blow to the banks — Zach reports that the Small Business Administration has finalized a plan to allow fintechs to offer government-backed loans under the agency's flagship lending program.

— The American Bankers Association's Rob Nichols pushed back: “We urge Congress to closely examine SBA’s decision, particularly in light of recent reports that found limited SBA oversight of nondepository lenders in the agency’s existing programs and significant fraud linked to loans originated by fintech firms during the SBA’s Paycheck Protection Program.”

FDIC Vice Chair weighs in — From Victoria: “FDIC Vice Chair Travis Hill on Wednesday said a critical lesson from Silicon Valley Bank’s collapse is that insolvent regional lenders should be sold as quickly as possible, an apparent nod to the fact that SVB wasn’t purchased until two weeks after it failed.”

Hill also warned “that raising the government's deposit insurance cap in the wake of last month's bank failures would likely trigger more regulations on lenders,” per Sam.

Lessons all around — From Hannah Brenton: “The Financial Stability Board today pledged to learn lessons from the March banking crisis as it warns the outlook for financial stability has become ‘more challenging’ following the turmoil.’

— Also from Hannah: “Pablo Hernández de Cos, chair of the Basel Committee on Banking Supervision, said in a speech in Washington the crisis showed regulators shouldn’t be swayed by ‘siren calls’ to weaken regulation.”

Private funds rule fight — Andrew Park, a senior policy analyst at Americans for Financial Reform, weighs in on the Committee on Capital Markets Regulation’s push to defang the private funds rule: “The SEC wants to boost disclosure by private equity funds for their own investors of information that already exists, so you have to wonder what Wall Street is hiding here. Disclosure makes for more competition, not less.”

Fly Around

COOLDOWN — Reuters: “U.S. stocks ended lower on Wednesday after minutes from the Federal Reserve's March policy meeting revealed concern among several members of the Federal Open Markets Committee (FOMC) regarding the regional bank liquidity crisis.”

END OF AN ERA — Bloomberg’s Ziad Daoud and Courtney McBride: “An empowered OPEC+ led by Saudi Arabia and Moscow is calling the shots on oil prices, boosting inflation and raising recession risks.”

Jobs Report

Rob Engstrom has joined Bullpen Strategy Group as a senior adviser. He was previously the chief political strategist at the American Bankers Association. Bullpen has also hired two America Rising alums. Carter Reese is now a vice president at the firm and Jared Beard is director in its research practice.

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