| | | | |  | | By Sam Sutton | | Presented by |  | | | 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.
| | Federal Reserve Chair Jerome Powell is widely expected to reduce borrowing costs this afternoon, finally putting an end to the “higher for longer” era now that inflation has fallen closer to the central bank’s 2 percent target. The question now is how the economy will respond to a rate reduction cycle that’s occurring without the impetus of an imminent recession or global catastrophe. “We have become conditioned to really aggressive easing cycles because they've been in response to more crisis developments,” Chip Hughey, a managing director of fixed income at Truist, told MM. The labor market has cooled — a clear sign the economy is slowing down — but other gauges we use to assess economic health are “showing a fair amount of resilience,” Hughey said. Take the August retail sales data that was released on Tuesday. Fewer job openings and an elevated unemployment rate did not lead to a slowdown in consumer spending in retail last month — defying the expectations of Wall Street economists. Manufacturing also bounced back in August. Those are not traditional hallmarks of an economy that’s in desperate need of central bank stimulus. But markets are pricing in a 63 percent probability that Powell will slash rates by half a percentage point this afternoon — a hefty reduction. “If you're driving a car 90 miles-per-hour and you slow down to 60, it feels slow. I think that's basically what we've seen in the economy,” Ron Temple, the chief market strategist for Lazard's financial advisory and asset management businesses, told MM. Extending Temple’s metaphor, the Fed’s challenge is assuring that the economy keeps moving close to the speed limit. Keeping rates too high would risk a stall and no one, least of all Powell, wants to see hazard lights blinking from the shoulder. To be sure, there are plenty of signs the economy could use a boost. From your host: “The unemployment rate is meaningfully higher than where it was last year. High prices and elevated interest rates have made it financially impossible for many Americans to buy homes. A growing number of Americans now expect to miss credit card or auto loan payments, and the effects of high rates have also slowed the pace of corporate mergers and acquisitions. Your MM host has more on how those areas of the economy could respond in a story published this morning. But the effects may vary. “Very sharp and significant Fed rate hikes didn't have the same effect on the economy that you would have expected,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy. “The fact that we didn't have a recession, that the unemployment rate didn't rise very much, makes you wonder: Is somehow the economy less sensitive to interest rates than it once was?” We’re about to find out. IT’S WEDNESDAY — We’ll be monitoring the market’s reaction (and the political reaction) this afternoon. If you have thoughts, email Sam at ssutton@politico.com.
| | | | A message from Synchrony: Your refrigerator is on the brink. Your child needs braces. Your car could use new tires. Credit plays an important role in our everyday lives. Access to credit is critical for Americans to get the things that matter, while helping build healthy credit history necessary for reaching long-term financial goals. Learn more about how access to credit can transform lives. | | | | | | Housing starts and building permits data for August will be out at 8:30 a.m. … House Financial Services holds a hearing on the SEC’s approach to digital assets at 10 a.m. … SBA Administrator Isabella Casillas Guzman will testify at the House Committee on Small Business at 10 a.m. … HUD Inspector General Rae Oliver Davis, Transportation Inspector General Eric Soskin and National Railroad Passenger Corp. Inspector General Kevin Winters will testify at a House Appropriations subcommittee meeting at 10 a.m. … The SEC will vote on whether to finalize market structure reforms at 2 p.m. … Senate Banking will hold a hearing at 2 p.m. on the macroeconomic impact of tax reforms in 2025 … The Federal Open Market Committee will announce its interest rate decision at 2 p.m. … Powell will hold a press conference at 2:30 p.m. … Big deal — The FDIC, Justice Department and the Office of the Comptroller of the Currency — finalized rules on Tuesday to take a sharper look at bank mergers, Michael Stratford reports. The changes have been long in the works, and follow through on Biden administration's plans to take a tougher approach to consolidation in the financial services industry. The new rules were cheered by progressive groups like Accountable.US and the National Community Reinvestment Coalition who said the changes would halt harmful mergers. Banking groups argued that they would be detrimental to the industry. Overdraft — CFPB Director Rohit Chopra, who also sits on the FDIC’s board, issued guidance for federal and consumer protection authorities to crack down on banks that charge overdraft fees without obtaining a customer’s consent, Katy O’Donnell reports. Bank, fintech partnerships under the microscope — The FDIC also unanimously proposed new rules that would force banks to keep closer tabs on financial technology firms that place deposits at their institutions, Michael reports. It’s the first major regulatory action since the fintech firm Synapse collapsed earlier this year, leaving thousands of customers without access to their money. Brown hopes to hold vote on FDIC nominee next week — Senate Banking Chair Sherrod Brown said Tuesday he hopes to hold a committee vote next week on Christy Goldsmith Romero’s nomination to replace Martin Gruenberg as chair of the FDIC. Her nomination, which is expected to be taken up alongside other financial regulation nominees, has been in limbo with no scheduled markup in the Banking Committee. “Scheduling is hard in this last couple of weeks, but I’ve wanted to do it for several weeks and we’re still trying to get the schedule and get it done,” Brown told Jasper Goodman. Guzman on the Hill — SBA Administrator Isabella Casillas Guzman will face questions about the agency’s memorandum of understanding with Michigan to promote civic engagement and voter registration when she heads to the Hill later this morning. “Not only is this far outside the scope of what the Small Business Administration should be engaged in, but federal agencies shouldn’t be using taxpayer resources to insert themselves into our elections process,” Chair Roger Williams (R-Texas) said in an opening statement shared with MM. Williams will also drill down on changes to prudent lending standards within the SBA’s flagship 7(a) Loan Program, noting that early default rates have climbed.
| | | | A message from Synchrony:   | | | | | Putting it bluntly — The WSJ’s Nick Timiraos on why the size of the rate cut matters: “Fed officials aren’t likely to regret a larger rate cut this week if the economy chugs along between now and their next meeting, in early November, because rates will still be at a relatively high level, he said. But if the Fed makes a smaller move and the labor market deteriorates more rapidly, officials will feel greater regret.” Putting it bluntly, pt. II — It’s “not going to be earth-shattering, it doesn’t mean that much,” JPMorgan Chase CEO Jamie Dimon said Tuesday at an event hosted by Georgetown’s Psaros Center for Financial Markets and Policy, Katy O’Donnell reports. “It’s a minor thing, when the Fed raises rates, lowers rates, because underneath that there’s the real economy.” McHenry on Fed independence — Outgoing House Financial Services Chair Patrick McHenry (R-N.C.) dismissed Donald Trump’s assertion that presidents should have a say in setting monetary policy. “All presidents think they should give an input,” he said during a fireside chat at Georgetown’s Psaros Center, per Jasper. He added that he trusts Powell’s repeated pledge to keep politics out of Fed decision-making. ICYMI — Victoria Guida's latest column explores why it will be hard for the Fed to chart a course for rates without taking into consideration how a Harris or Trump administration’s policies might influence the trajectory of the economy.
| | First in MM — A new bill to ban senators and their spouses from buying individual stocks that Sen. Tammy Baldwin (D-Wis.) touts in a new ad wouldn’t apply to Baldwin’s partner because the couple is not married, Daniel Lippman reports. Her opponent Eric Hovde has called on Baldwin to disclose her partner’s assets. And after a super PAC ad attacked her for not reporting jointly held assets with partner Maria Brisbane, a wealth adviser at Morgan Stanley, Baldwin responded with her own ad saying that she was “leading the fight to ban senators from purchasing any individual stocks.” But if the Ban Congressional Stock Trading Act passed, the law would not apply to relationships like Baldwin and Brisbane, even though in 2021 the couple bought a $1.3 million home together in Washington, splitting the cost of the property. As written, the law would prohibit senators, their spouses and their dependent children from trading stocks but not apply to less official relationships. The Baldwin campaign noted that the bill uses the same standard for spousal and child reporting that has been in place since the passage of the Ethics in Government Act in the 1970s. “Tammy Baldwin follows all ethics guidelines when it comes to her financial disclosure reports,” Baldwin campaign spokesperson Andrew Mamo said in a statement. “Eric Hovde’s repeated attempts to attack the woman Tammy Baldwin is dating are sad and desperate. No matter how low Eric Hovde goes, voters will not forget about the massive conflict of interest presented by his continued ownership of his $3 billion California bank that receives deposits from unnamed foreign banks and governments.” Pass the SALT — Trump on Tuesday suggested that he would lift a cap on deductions for state and local taxes that he signed into law as part of his 2017 tax package, Benjamin Guggenheim reports. “I will turn it around, get SALT back, lower your Taxes, and so much more,” Trump said in a Truth Social post previewing a campaign rally he is set to hold Wednesday on Long Island. Trump’s pivot could help New York Republicans hold on to seats that could determine control of the House. But the Committee for a Responsible Federal Budget estimates that letting SALT cap expire, while extending the other 2017 tax cuts, would add another $1.2 trillion to the deficit over the next decade. To that end — National Economic Council Director Lael Brainard said Trump's economic agenda could cause prices to spike just as the economy starts to turn the corner on inflation. Plans to extend all of Trump’s 2017 tax cuts, coupled with his intention to impose large tariffs on imports and potentially disrupt the independence of the Federal Reserve, “really do pose inflationary risks,” Brainard said at the POLITICO AI & Tech Summit on Tuesday.
| | Eden Hoffman, former head of communications at the fintech bank Cross River, has joined the media firm Bamberger & Vlasto.
| | | | A message from Synchrony: Your refrigerator is on the brink. Your child needs braces. Your car could use new tires. Credit plays an important role in our everyday lives. Access to credit is critical for Americans to get the things that matter, while helping build healthy credit history necessary for reaching long-term financial goals. Research shows that nearly 50 million Americans do not have access to credit. By looking at data beyond credit scores, Synchrony can make smart decisions about how much credit to extend and to whom. Responsible access to credit helps Americans build a pathway to financial mobility. Learn more about the importance of providing access to credit. | | | | | | | Follow us on Twitter | | | | Follow us | | | | |
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