News : Skip to a soft landing? Or a recession?

Thursday, June 15, 2023

Skip to a soft landing? Or a recession?

Jun 15, 2023

Presented by the Consumer Credit Card Protection Coalition

Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.

Programming Note: We’ll be off this Monday for Juneteenth but will be back in your inboxes on Tuesday.

Federal Reserve Chair Jerome Powell had a rare gaffe shortly after announcing that the central bank would hold rates steady for the first time in more than a year.

The Fed’s decision to stand pat at its meeting this week provides “the economy a little more time to adapt as we make our decisions moving forward,” Powell said. “We’re trying to get this right.”

“The skip — I shouldn’t call it a skip — the decision makes sense,” he added.

“Skip” could wind up being the more accurate description.

Markets had anticipated a “hawkish pause,” but the Fed’s warning that as many as two more rate hikes could be in store for 2023 — and that cuts certainly aren’t imminent — caught many flat-footed. Despite signs of cooling inflation and some softening in the labor market, prices are much, much higher than Powell & Co. would like. Stocks briefly cratered shortly after the Fed officials forecasted that overall PCE inflation (including food and energy) wouldn’t drop to the central bank’s 2 percent target until 2025.

“There is a path to getting inflation back down to 2 percent without having to see the kind of sharp downturn and large losses of employment that we’ve seen in so many past instances. It’s possible. In a way, a strong labor market that gradually cools could aid that along,” he said, according to our Victoria Guida.

Still: “The committee is completely unified in the need to get inflation down to 2 percent and will do whatever it takes to get it down to 2 percent over time.”

In other words, even if higher borrowing costs push the economy into a recession, those dangers are much less severe than what would occur if inflation became entrenched.

“History teaches you that, often, it's hard to kill inflation on that first pass,” said Darrell Cronk, the chief investment officer of Wells Fargo's wealth and investment management division, told reporters shortly before Powell’s press conference.

While Cronk’s team doesn’t expect inflation to rebound anytime soon, they’re watching the energy and housing sectors for signs it could come back. If that happens, it’s “likely a 2024, 2025 story,” he added.

To state the obvious, if inflation does rebound in 2024, it wouldn’t bode well for President Joe Biden’s reelection. Democrats are starting to buy the hype that the president’s stewardship of the economy could be a winning message in next year’s election, Punchbowl’s Brendan Pedersen wrote on Wednesday.

That’s been a tough sell even with a solid labor market and cooling inflation. It gets a lot harder if the Fed doesn’t pull off a soft landing.

Economic trackers around manufacturing have been slowing for months, Cronk said, and “you could argue – in many facets — that the U.S. economy is already in recession.”

And if that’s the case, another two rate hikes would really sting.

IT’S THURSDAY — Send tips, gossip and suggestions to Sam at ssutton@politico.com and Zach at zwarmbrodt@politico.com.

A message from the Consumer Credit Card Protection Coalition:

Defunding data security for credit cards and ripping away hard-earned rewards from working families would be a disaster for consumers, but that’s exactly what the Durbin-Marshall credit card bill would do. Thousands of Americans are mobilizing to demand Washington stay out of their wallets by stopping the Durbin-Marshall credit card bill. Learn more by clicking here.

Driving the day

Philadelphia and Empire State manufacturing surveys are out at 8:30 a.m. … Retail sales data is out at 8:30 a.m. … The SEC has a closed meeting at 9:15 a.m.

Sherrod Brown and Tim Scott are ‘close’ on a post-SVB bill — Senate Banking Chair Sherrod Brown told our Eleanor Mueller Wednesday that he's "close" to reaching a deal with Sen. Tim Scott on a bill that would ratchet up accountability for executives at failed banks.

Brown said he and Scott are negotiating executive compensation clawbacks, industry bans and other penalties. Asked if Sen. Elizabeth Warren 's bipartisan executive clawback bill would be in the package — a proposal that has 10 other co-sponsors on the Banking Committee — Brown said: “Warren's bill is narrow. There's several others — and we're taking nothing.”

Warren responds: “Our legislation represents the toughest proposal in Congress to ensure failed executives who blow up their banks don’t walk off with huge bonuses, which is why it enjoys broad bipartisan support from both Democrats and Republicans. Any legislation responding to the recent crisis must build on that consensus and actually deter future wrongdoing by big bank executives by hitting them where it hurts — their wallets.“

Data breach — Our Katy O’Donnell: “Republican lawmakers hammered CFPB Director Rohit Chopra this week over the way his agency handled an internal data breach, saying the bureau can't be trusted with sensitive information … The CFPB has been a target of Republican wrath since it was formed more than a decade ago. But the handling of the breach has opened it up to a new line of attack by GOP lawmakers, who dislike the bureau because of what they see as its overly aggressive enforcement and sometimes adversarial relationship with Congress.”

More on Powell — The WSJ’S Justin Lahart — “Investors are facing an unexpected new reality: The sooner the Federal Reserve feels it can stop raising interest rates, the less likely that it will need to cut rates in the future.”

SUBSCRIBE TO POWER SWITCH: The energy landscape is profoundly transforming. Power Switch is a daily newsletter that unlocks the most important stories driving the energy sector and the political forces shaping critical decisions about your energy future, from production to storage, distribution to consumption. Don’t miss out on Power Switch, your guide to the politics of energy transformation in America and around the world. SUBSCRIBE TODAY.

Talking Points

Sen. Mike Rounds (R-S.D.) will reintroduce his bill today targeting an SEC proposal to require companies to disclose information about their greenhouse gas emissions, Eleanor reports.

“I mean, give me a break — this is not something that an investor needs in order to make a decision about whether or not they think they can invest in a profitable company or not,” Rounds said in an interview. “Besides that, if you're a chemical company and you're selling chemicals to a farmer — they expect you to go downstream from there and try to figure out the greenhouse gasses of farmers and ranchers?”

Congressional Republicans in both chambers have sought to crack down on how environmental and social issues factor into investment decisions. Rounds’ bill would constrain the SEC to mandating disclosures that the companies have decided are “important with respect to a voting or investment decision regarding such issuer.”

Rep. Bill Huizenga (R-Mich.), who helms House Republicans' anti-ESG working group, sponsors the bill in the lower chamber. Rounds says he’s trying to find other co-sponsors as well and will “look at where we can actually perhaps get a markup on it,” potentially “attached with some other items that may very well be moving.”

A message from the Consumer Credit Card Protection Coalition:

Regulatory Corner

Stress test — Also from Victoria: “Acting Comptroller of the Currency Michael Hsu on Wednesday said banks with significant exposure to commercial real estate have options in managing the risk that some of those loans could default …”

“‘Where there are problems tends to be a lack of identification or a lack of imagination on what the scenario is,’ he said. ‘Running those through the various scenarios can help to identify what mitigating actions can be taken. And there’s a whole range of those.’”

Showing your cards — In an opinion column, Bloomberg M&A reporter Ed Hammond argues that the FTC’s pugnacious approach to antitrust enforcement has actually given industry more certainty – potentially to the detriment of its mission. “Like a brawler who steps into a boxing ring and starts swinging, [Lina] Khan’s FTC has landed some punches but revealed its one-note tactics. Companies know what they are up against and it’s a fight they can often win,” he writes.

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

In the markets

Remember the regional banking crisis? — The NYT’s Rob Copeland explores its aftermath: “Three months after Silicon Valley Bank’s collapse, the banking industry is engaged in collective soul-searching … Left in the lurch are roughly 4,100 other banks, from big-city regional institutions like Western Alliance to tiny, rural community banks that operate out of a single branch.”

What would it do to the labor market? — Bloomberg’s Silla Brush: “BlackRock Inc. Chief Executive Officer Larry Fink said artificial intelligence has tremendous potential to boost productivity and may ultimately be the technology that can tamp down inflation. The collapse of productivity has been … a major ‘reason why we have such sticky inflation,’ he said Wednesday at the BlackRock Investor Day. Fink said AI ‘may be the technology that can bring down the inflation.’”

— Bloomberg’s Alexandre Tanzi: “The worldwide boom in generative artificial intelligence will usher in an age of accelerated productivity and greater prosperity for some — and profound disruption for others, primarily knowledge workers, according to a new report by consultants McKinsey & Co.”

The return of Kalshi — Our Declan Harty: “One month after the Wall Street startup withdrew a stalled proposal to open up political betting on congressional elections, Kalshi has notified the CFTC that it plans to launch an amended version of the products featuring changes based in part on feedback from the agency.”

A message from the Consumer Credit Card Protection Coalition:

Millions of Americans rely on their credit card points and cash back rewards to pay for gas, groceries, travel and more. But the Durbin-Marshall credit card bill would steal the rewards that millions of Americans have earned, all to pay for a bailout for multibillion dollar retailer special interests. Worse yet, the Durbin-Marshall credit card bill would defund data security for credit cards, making it easier for cyber criminals to steal the personal and financial data of millions of Americans. Congress should protect American families, not find new ways to put Washington into the wallets of millions of consumers. Learn more about the disastrous Durbin-Marshall bill by clicking here.