News: A Powell-style pep talk

Thursday, May 2, 2024

A Powell-style pep talk

May 02, 2024

Presented by the Financial Services Forum

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QUICK FIX

Federal Reserve Chair Jerome Powell, a low-key PR master, is keeping a bit of hope alive on Wall Street even as he delivers tough medicine on the economy.

First, the bad news for markets: The Fed confirmed Wednesday that inflation in the first quarter was too stubborn for the central bank to begin lowering borrowing costs anytime soon. In the wake of the FOMC’s decision to hold interest rates steady, traders’ expectations for an initial cut lurched out to November before settling back at September.

In less bad news: In his post-FOMC presser, Powell took a rate hike off the table, which sparked a market rally before major indices closed in mixed fashion. The Dow was up while the S&P 500 and Nasdaq were down.

More than usual, traders and analysts appeared to be on the edge of their seats as Powell fielded live questions from reporters.

“The basic message was that cuts have been delayed not derailed,” Evercore ISI’s Krishna Guha and Marco Casiraghi said in a mid-press conference note to clients.

Amid the jitters, Powell on Wednesday wrapped his reality checks in muted optimism. He attempted to give the public a rough roadmap of what may come as the Fed guides the economy through uncharted territory.

“There are paths that the economy can take that would involve cuts, and there are paths that wouldn’t,” he said. “I don’t have great confidence in which of those paths. My personal forecast is that we will begin to see further progress on inflation this year.”

Powell outlined three roads ahead. Persistent inflation with a strong labor market would likely deprive the Fed of the confidence it needs to cut. But the central bank may feel compelled to begin easing if it appears inflation is moving sustainably toward 2 percent or if there’s an unexpected weakening in the labor market.

A message from the Financial Services Forum:

Basel III Endgame will make it harder for small businesses to meet payroll, hire, and invest in growth. Learn more.

Powell’s exercise, according to EY-Parthenon’s Gregory Daco was “a much-needed forward-looking perspective.”

Powell attempted to dissect what’s keeping inflation elevated, after it came down last year with interest rates cranked up to a two-decade high. He pointed to prices for non-housing services, and also suggested that goods prices have provided less help than expected.

While he believes inflation will move back down in the coming months, he said “my confidence in that is lower than it was because of the data that we’ve seen.”

Powell rejected the notion that the economy may sputter in a dreaded “stagflation” scenario, noting strong growth and a strong labor market.

“I don’t see the ‘stag’ or the ‘flation,’” he said.

And if the Fed sees the need to cut close to the election? So be it.

“There’s a significant difference between an institution that takes into account all sorts of political events and one that doesn’t,” he said in response to a question from our Victoria Guida. “We just don’t do that.”

It’s Thursday — Send tips to zwarmbrodt@politico.com.

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Driving the day

Senate Banking holds a shrinkflation hearing at 10 a.m. … The CFTC’s Technology Advisory Committee hosts an “AI Day” starting at 1 p.m.

What Rahm is reading — Per Bloomberg, President Joe Biden on Wednesday suggested that Japan's economy is suffering from not being more open to immigration, comparing the U.S. ally to some of America's biggest global rivals.

“You know, one of the reasons our economy is growing is because of you and many others. Why? Because we welcome immigrants,” Biden told Asian American and Pacific Islander donors at a fundraising event. “The reason — think about it — why is China stalling so bad economically? Why is Japan having trouble? Why is Russia, why is anyone? Because they’re xenophobic, they don’t want immigrants.”

Democrats press Biden on Trump tariffs — Midwestern Democrats including Sens. Sherrod Brown, Tammy Baldwin and Bob Casey are urging the president to raise tariffs on China, Gavin Bade scoops.

In a letter to Biden, the lawmakers argue that any reduction in Trump-era duties would let China “gain a competitive advantage over hardworking Americans.”

In related news, MM has a preview of what Brown will say to kick off a Senate Banking hearing this morning on “shrinkflation.” He’ll knock Wall Street for pushing up prices.

“With online retailers, the price can change every day or even every hour, sometimes dramatically," he said in prepared remarks. "And they’re spreading the technique to brick and mortar stores, adding electronic menu boards to restaurants and digital price labels to shelves so that corporations can raise the price at a moment’s notice. It’s frustrating, and it makes [it] impossible for people to compare prices and shop around – key ingredients in any fair, open market.”

Prosecutors dig into Block — NBC News reports that federal investigators are looking into internal practices at the fintech payments giant Block. An ex-employee is alleging widespread compliance lapses at subsidiaries Square and Cash App. Block said it has a “responsible and extensive compliance program.”

Stablecoin update — Rep. Maxine Waters, the top Democrat on House Financial Services, acknowledged that attaching stablecoin legislation to the FAA bill has become a lost cause, but she previewed next steps.

Per Jasper Goodman, Waters told reporters that she planned to meet Wednesday with Financial Services Chair Patrick McHenry, who has been trying to negotiate a compromise with her. She said they also need to catch up with Senate Majority Leader Chuck Schumer, who emerged this week as a key backer of a potential stablecoin deal.

In related news, former Atlanta Mayor Keisha Lance Bottoms is joining Coinbase's global advisory council, per the Atlanta Journal-Constitution. Coinbase also announced this week that it recruited former Los Angeles Mayor Antonio Villaraigosa.

First in MM: Barr, Hill to appear at Johnson event — Reps. Andy Barr and French Hill, who are vying to succeed McHenry as the top Republican on Financial Services, are scheduled to appear at Speaker Mike Johnson's Washington retreat, Eleanor Mueller reports.

Hill is set to deliver remarks on regulatory reform alongside Palantir co-founder Joe Lonsdale on Sunday, according to a copy of the schedule shared with MM. Barr will introduce former Secretary of State Mike Pompeo for a panel on foreign policy Monday.

Banga warns: Don’t ignore Africa — In an interview with the FT, World Bank President Ajay Banga said Africa is at risk of losing out on development funds as budgets are squeezed by conflicts in Ukraine and Gaza.

“Ignoring Africa is like ignoring the future of where the world’s going,” he said.

Regulatory Corner

A message from the Financial Services Forum:

A new AI czar — The CFTC named Ted Kaouk as the agency’s first chief artificial intelligence officer. The CFTC said Kaouk will be responsible for developing an enterprise data and AI strategy to “further integrate CFTC’s ongoing efforts to advance its data-driven capabilities.”

Appraisal rethink — Per Katy O’Donnell, housing regulators are revamping policies intended to combat bias in home appraisals. As part of the move, Fannie Mae, Freddie Mac and the FHA are updating requirements for how lenders respond to customers who suspect an unfair appraisal.

FTC intervenes in major oil deal — The WSJ reports that ExxonMobil is poised to close its $60 billion merger with Pioneer Natural Resources after agreeing to not to add Pioneer’s former CEO to its board. The FTC is expected to allege that the executive engaged in collusive activity that could have impacted oil prices, including barraging OPEC representatives with messages on market dynamics.

Economy

A message from the Financial Services Forum:

Basel III Endgame will increase the cost and reduce the availability of credit for small businesses, making it harder and more expensive for these crucial engines of the U.S. economy to get a loan. This is especially true for historically underserved groups, like female or minority business owners.

Protect small businesses from policies that would make it harder for them to grow, hire, and thrive. Scrap Basel III Endgame and start over.

Banks under pressure — CNBC, citing Klaros Group analysis, reports that around 282 banks “face the dual threat of commercial real estate loans and potential losses tied to higher interest rates.”

What’s driving productivity — Aspen Economic Strategy Group policy director Luke Pardue writes in the Washington Post that the U.S. productivity boom has little to do with AI and is probably more about a surge in new businesses.

Trump and the dollar — Mark Sobel, a former Treasury Department veteran and one-time U.S. rep to the IMF, has a new post looking at the challenges Trump would face if he embraced his advisers’ push to devalue the dollar.

“Fiscal expansion at a time of whopping deficits, challenging Fed independence, tariffs, possible threats to the dollar’s reserve currency status and confused foreign exchange policy thinking are the antithesis of enhancing America’s competitiveness and openness,” he writes. “Are America’s business leaders tongue-tied?”

People moves — Former Bank of England deputy governor Jon Cunliffe has joined Rock Creek Global Advisors as a senior policy adviser based in London … David Talbot, formerly of the Milken Institute, has joined the Indo-Pacific Partnership for Prosperity as its first executive director.

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