News : Janet Yellen v. the pessimists

Wednesday, April 12, 2023

Janet Yellen v. the pessimists

Apr 12, 2023

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The opening days of the IMF-World Bank meetings have revealed a glaring disparity between the U.S. government and top economists when it comes to how they’re assessing the health of the global economy.

The IMF on Tuesday morning painted a bleak picture of what’s to come. The institution warned of an “anemic” world economic outlook and said a hard landing is becoming more likely amid a host of challenges, including rising interest rates, banking turmoil, the war in Ukraine and geoeconomic fragmentation.

IMF research director Pierre-Olivier Gourinchas put it in stark terms: “Below the surface ... turbulence is building, and the situation is quite fragile, as the recent bout of banking instability reminded us.”

Cut to just a few hours later in the Treasury Department’s Cash Room. Treasury Secretary Janet Yellen, in her kickoff press conference for the week, tried to project the message that the global economy is doing better than many predicted last fall.

So, your MM host asked Yellen, what are you seeing that the IMF isn’t?

Yellen tried to dismiss the pessimism and countered that “the outlook is reasonably bright,” given diminished inflation projections, easing commodity prices, improving supply chains and financial system resilience.

The U.S., she said, is doing “extremely well economically.” The former Fed chair hasn’t seen evidence of a credit contraction — another big risk the IMF warned about Tuesday in its global financial stability report.

“I wouldn’t overdo the negativism about the global economy,” she said.

It all underlines why Yellen is expected to stand out as an economic cheerleader at the IMF-World Bank meetings this week, despite the pervasive feeling that the world is on the verge of falling apart. The U.S. economy is expected to grow by 1.6 percent this year, according to the IMF — not great but better than other countries in its peer group.

“There’s a fundamental challenge for the U.S.,” Josh Lipsky, senior director at the Atlantic Council’s GeoEconomics Center, told MM last week. “[F]irst and foremost it’s coming there speaking about growth in its economy, how it’s doing relatively well compared to the other advanced economies.”

As Yellen said Tuesday: “We should be more positive.”

Happy Wednesday — What else interesting is happening around the IMF-World Bank meetings? Let us know: Zach Warmbrodt, Sam Sutton.

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Driving the day

G20 finance ministers meet … Yellen speaks at the Multilateral Development Bank Evolution Roundtable at 8:15 a.m. … March inflation data is out at 8:30 a.m. … SF Fed President Mary Daly speaks at noon at an event with the Salt Lake Chamber … NEC Director Lael Brainard speaks at a Semafor event at 1 p.m. … FOMC minutes from March are released at 2 p.m. … Bank of England Governor Andrew Bailey talks about the U.K. economy at the IMF at 3:15 p.m.

Fed officials begin to signal caution on post-SVB rate hikes — The FT reports that Chicago Fed President Austan Goolsbee is calling for “prudence and patience” in setting monetary policy, saying it's unclear to what extent regional banks might pull back lending after the SVB meltdown.

Sen. Tim Scott takes next step in possible White House run — Charleston’s Post and Courier reports that the South Carolina Republican will launch a presidential exploratory committee today, when he also plans to be in Iowa.

Scott, the top Republican on the Senate Banking Committee, separately on Tuesday released a framework for revamping U.S. housing policy, in a bid to boost affordability.

Part of the plan would “review how overregulation contributes to excessive costs and delays in the supply of affordable housing.”

Mark your calendars — Senate Banking will hold a hearing April 18 on Jared Bernstein’s nomination to lead the Council of Economic Advisers. In the House, the Financial Services Committee formally scheduled a hearing with SEC Chair Gary Gensler for the same day.

Swiss lawmakers rebuff Credit Suisse bailout — Reuters reports that Switzerland’s parliament failed to approve $120.5 billion in financial guarantees used to rescue Credit Suisse last month. The votes were largely symbolic because the government had already committed the emergency funds. But Switzerland’s lower house still retroactively rejected the rescue late Tuesday, after the upper house approved it earlier in the day.

Economy

Californians feel recession-y — The NYT has a look at the growing headwinds facing one of the world’s largest economies, including tech layoffs, soaring costs of living and a looming budget deficit. One recent survey found a majority of respondents felt California was already in a recession.

Regulatory Corner

CFPB director open to more deposit insurance — “Personally, I think that there may be a place where we can give higher limits — that banks would pay for insurance premiums — for these types of payroll accounts,” Rohit Chopra said at a WaPo event, Katy O’Donnell reports.

Public Citizen noted that Chopra also floated compensation deferral requirements for bank executives as a possible response to the SVB episode. Such a policy “effectively makes all bankers police one another because their own pay is on the line in case of bank failure or misconduct" that results in fines, said Public Citizen Financial Policy Advocate Bart Naylor.

More pushback on the SEC’s private funds rule — Sam reports that the Committee on Capital Markets Regulation has a new report dinging SEC Chair Gary Gensler for failing to provide support for rule changes that would force private equity firms and hedge funds to give investors more information on fees and expenses.

Fly Around

Ernst & Young halts breakup — WSJ: “Ernst & Young has axed its plan for a split of its auditing and consulting arms, marking a dramatic and costly retreat from a proposal that was meant to reshape the accounting profession but ended amid bitter infighting at the firm.”

Banks that backed First Republic will boost their reserves — Bloomberg: “Some of the banks that contributed the largest chunk of the $30 billion in deposits [to First Republic] are planning to set aside about $100 million each, according to people with knowledge of the matter. ... [T]he reserves are an acknowledgment that the decision to park their money with First Republic for at least 120 days wasn’t entirely risk free."

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