News : Powell’s real Trump challenge

Thursday, February 22, 2024

Powell’s real Trump challenge

Feb 22, 2024

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QUICK FIX

Election-year politics are making the Federal Reserve’s job harder as Chair Jerome Powell tries to nail the timing of interest rate cuts. But after America votes, the central bank may have even bigger problems.

The reelection of former President Donald Trump could upend the path of monetary policy if new tariffs and immigration restrictions stoke inflation and build pressure to keep interest rates higher for longer, according to economists and analysts. Even if President Joe Biden is reelected, next year is still fraught with potential fiscal policy challenges, with the expiration of Trump-era tax cuts and another fight over the debt limit. What happens to the tax cuts — whether they’re extended, scrapped, pared back or expanded — could have significant impacts on the outlook for economic growth.

It all threatens to reset expectations around the Fed as soon as the dust settles after election day.

“I don’t think the FOMC is all that concerned about the optics of cutting rates in May or June in an election year,” Wells Fargo senior economist Mike Pugliese said. “But what I do think matters quite a lot is the outcome of the election itself.”

Wells Fargo released a new analysis this week that backs up the idea that election considerations don’t play a major role in Fed monetary policy decisions. The bank’s economists found that the Fed has adjusted its policy rate nearly the same number of times in presidential years as non-election years.

But post-election fallout can have an immediate impact on the Fed’s deliberations. After the 2016 election, when a red wave set up expectations for tax cuts, the transcript of the December FOMC meeting showed the word “fiscal” was mentioned 212 times, up from 17 in November, according to Wells Fargo.

“It was not just markets that began to recalibrate the outlook to include more expansionary fiscal policy,” Pugliese wrote in a report with Wells Fargo’s Sarah House and Aubrey George. “The Federal Reserve's staff economists incorporated fiscal policy accommodation into its baseline outlook, and about half of FOMC participants assumed more fiscal stimulus in their submitted forecasts for the Summary of Economic Projections.”

What does the 2024 scenario look like? The biggest swing for the Fed would likely be the return of Trump. Even before he’d get a chance to reshape the central bank with new leadership, the Fed would have to brace for the economic effects of sweeping tariffs and more restrictive immigration policy, as well as potential tax reforms.

“What they’re left holding the bag with is a systematic disruption of the global economy that could risk capital flows into the United States,” said RSM US principal and chief economist Joseph Brusuelas. “And then the Fed has to make policy around further disruption of the status quo.”

It’s a scenario that some analysts believe could fan inflation and swing the pendulum to a tighter stance of monetary policy over time.

“It would be ironic for a lot of people to think of it in that context,” said State Street senior macro strategist Noel Dixon. “But it could be more inflationary for a Republican Trump administration versus a Biden administration because of the uniqueness of his policies.”

Trump campaign national press secretary Karoline Leavitt said in a statement that Trump’s border and deportation plan is “America’s only hope for economic survival." She added that “his return to maximizing domestic oil and gas production will create an economic boom and bring inflation to zero.”

For now, Powell and his Fed colleagues are in the driver’s seat. Dixon doesn’t expect markets will start to pay attention until around the presidential nominating conventions.

“For the moment, these are problems for another day for the Fed,” Pugliese said. “But once we get to another day in the third and fourth quarter, it’s going to be something that starts to factor into their calculus.”

It’s Thursday — Which of Biden and Trump’s second-term policies should we look at next? Send tips to zwarmbrodt@politico.com.

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Driving the day

Kathy Hochul, Brian Kemp, Jared Polis and Kevin Stitt will be among the speakers at POLITICO’s 2024 Governors Summit in Washington … Fed Vice Chair Philip Jefferson discusses the economy and monetary policy at the Peterson Institute at 10 a.m. … NAR releases existing home sales data for January at 10 a.m. … House Financial Services has a New York field hearing on housing policy at 10 a.m. … Fed Governor Lisa Cook talks about “sources of uncertainty” at Princeton University at 5 p.m. … Fed Governor Christopher Waller gives a speech on the economy at the University of St. Thomas at 7:35 p.m.

Capital One pile-on — Our Jasper Goodman reports that Rep. Maxine Waters, the top Democrat on House Financial Services, wants regulators to block Capital One's acquisition of Discover. She's poised to chair the committee if Republicans lose the House in November.

“[W]e know that consumers and entrepreneurs can be harmed when the biggest financial institutions get even bigger,” she said.

Sen. Josh Hawley is the first Republican lawmaker to come out against the deal. He says it amounts to "the credit card companies finding another way to screw the American people."

Fed intel — Victoria Guida reports that Fed officials are wary of cutting interest rates too soon, according to minutes from their last meeting. FOMC members discussed the possibility that demand for goods and services is stronger than they think. They’re also concerned that lower rates in financial markets might cause stall progress against inflation.

What private equity is reading — Acting Comptroller of the Currency Michael Hsu singled out concerns about PE’s growing role as a credit provider in a speech Wednesday, Victoria reports. His remarks were broadly about financial stability risks triggered by the blurring of banking and commerce. He also pointed to concerns about the payments sector.

Hsu, a former Fed official, said regulators should develop specific “trip wires” for determining when certain activities could pose risks to the financial system, to give firms transparency when they might face more scrutiny.

MFA president and CEO Bryan Corbett, whose group represents alternative asset managers, said in response that “undermining the important role of private credit is short-sighted and harmful to the economy.”

Steven Kelly, associate director of research at the Yale Program on Financial Stability, wrote to MM with some thoughts on Hsu’s speech.

“Private credit itself lacks a serious financial instability problem because there's no liability channel,” he said. “That is, there's no runnable funding in private credit, the outgrowth of which regulators must recognize as the result of their pushing capital risk out of the banks post-financial crisis.

“Hsu is right to focus on the banks' involvement with these structures. And we see something similar in the recent Fed stress test exploratory scenario focused on hedge fund defaults. As of now, it looks like the growth in these shadow banking entities really IS a result of risk transfer from banks. Hsu's right to call for more analysis of that, though, as regulators will want to make sure banks are actually safer, unlike in 2007, when all that risk came back onto the banks' balance sheets.”

On the Hill

Wyden eyes insurance crackdown — Senate Finance Chair Ron Wyden is planning to introduce legislation to curb the use of private placement life insurance in tax avoidance strategies, our Benjamin Guggenheim reports. According to a report from Wyden, the policies store at least $40 billion for just over 3,000 millionaires and billionaires and are used to skirt taxes on fortunes passed to heirs. The policies allow individuals to invest in assets including private equity funds, real estate and businesses through the life insurance tax structure.

Ukraine

IMF nears Ukraine payout — Bloomberg reports that Ukraine is close to an agreement with the IMF on receiving $900 million as part of a loan, as U.S. aid stalls.

Regulatory Corner

Chopra talks in Brussels — CFPB Director Rohit Chopra outlined his 2024 priorities in an interview with our Kathryn Carlson on the sidelines of a European Commission conference.

“I'm going to be paying a lot of attention this year on abuse and misuse of data,” Chopra said. “I'm certainly going to be looking at the very pernicious harms related to medical debt in America. And of course, we'll continue our emphasis on junk fees and the ways in which they can drain billions of dollars from Americans’ pockets.”

In conversations with European regulators, Chopra said they’ve been comparing notes about how to approach the use of AI in loan underwriting. He said the biggest item of trans-Atlantic discussion “has been thinking about the future of open finance.”

“We have proposed rules in the U.S. to jumpstart competition, promote switching,” he said. “Much of that we are learning from the experiences all over the world, including here in Europe.”

SEC pressed on workforce disclosures — Investor advocates, labor groups and the Illinois state treasurer are out with a new letter today urging SEC Chair Gary Gensler to require companies to disclose details on their human capital management. The groups behind the letter include Americans for Financial Reform Education Fund, AFL-CIO, Better Markets and the United Food and Commercial Workers International Union.

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Fly Around

People moves — Dedrick Asante-Muhammed, previously of the National Community Reinvestment Coalition, will be the next president of the Joint Center for Political and Economic Studies … Zack Condry and Erik Hotmire are launching a corporate affairs consulting firm called Watermark Strategies. Condry previously founded and operated the digital firm Echo. Hotmire spent 13 years at Brunswick Group, Teneo and FGS Global and was a spokesperson at the SEC.