Thursday, November 7, 2024

Trumping the Fed

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Nov 07, 2024 View in browser
 
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By Victoria Guida

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QUICK FIX

The election of Donald Trump just scrambled the future of the Federal Reserve.

The once and future president has suggested he won’t fire Fed Chair Jerome Powell, but that’s not exactly a bullish note for the central bank to be starting off on. Trump, who has made no secret of his preference for low interest rates, will likely restart his previous habit of tweeting barbs at the Fed chief if he thinks borrowing costs are too high.

Close advisers to Trump — who once questioned whether Powell was a “bigger enemy” to the U.S. than China’s Xi Jinping — have suggested the Fed chief should simply resign.

Central bank officials are expected to lower interest rates again Thursday afternoon, but after that, the timing for future cuts is less clear — in part because Trump’s policies could alter the economy’s trajectory. Bond investors pushed up yields on Wednesday as they weighed the possibility that higher tariffs and fewer immigrant workers could stoke inflation.

“Conceptually, Trump 2.0 could look like 1.0 in the sense of an incessant push for lower rates,” said Sarah Binder , a George Washington University professor who’s an expert on central bank politics. “What’s different is just the fiscal policy situation and the level of debt and the level of inflation that he inherits. It just looks quite different from the economy that he inherited in 2017.”

What’s facing the Fed is a more dangerous environment in Washington. The president-elect says he deserves a say in the decision-making of the technocratic institution, which jealously guards its freedom to make choices without consideration of short-term politics. That’s on top of already-growing pressure on the central bank to keep the economy humming and inflation under control while both parties pile on fiscal debt.

Trump’s reaction to the central bank could also serve as an early indicator of how extensively the president-elect plans to reshape traditional government bureaucracy.

His stance could empower lawmakers who are long interested in altering the central bank’s approach to policy, though it’s unclear what form such reforms might take. Key Republicans in Congress have expressed a desire to tie the Fed’s monetary policy decisions more closely to formulaic rules, which tend to lead to higher rates over time.

Rep. Bill Huizenga (R-Mich.) told our Eleanor Mueller that he worries the Fed is too “politically sensitive.” Some Republicans have questioned the central bank’s decision to ease off the economy, amid signs that the labor market is weakening, by cutting interest rates by half a percentage point in September, just weeks out from the election.

“I believe in Fed independence, but then they have to act like they're independent, right?” he said. “I have questioned the decisions of the Fed on interest rates, even recently, as to whether they are purely independent, data-driven.”

Fed officials have repeatedly said they make rate decisions solely based on their assessment of the economy.

It’s not just Powell who might be in trouble. Trump’s advisers have entertained the idea that the president could remove Michael Barr, the Fed’s top regulatory czar, according to people who've spoken with them.

The law isn’t clear on whether he would have the authority to do so, but Christina Skinner, an expert on financial policy at the Wharton School of the University of Pennsylvania, argued to MM earlier this year that the president has more latitude on this front than on monetary policy. Constitutionally, the power to regulate money resides with Congress, but bank regulation falls in a different category.

“I think the president could remove the vice chair for supervision and that would not be an affront to central bank independence,” she said.

More broadly, some of his allies are talking about reforms to the Fed.

“We ought to look at governance,” Stephen Bannon told my colleague Ben Schreckinger in the wee hours of Election Night, as Trump’s victory came into focus. “The whole structure of the Federal Reserve, as a start.” (Stay tuned for a larger interview from Schreckinger on the monetary system, among other topics.)

IT’S THURSDAY — This week has already felt like a year. Send predictions for what’s ahead for the Fed to your host at vguida@politico.com And as always, send tips and news to Sam at ssutton@politico.com.

 

A message from BPI:

Under the CFPB’s “open banking rule,” who do you contact if your financial data is exposed? Not even the CFPB knows — The CFPB’s Section 1033 rule fails to hold third parties accountable when things go wrong. When a customer authorizes their data to be shared, the recipient of that data should protect the data and provide essential customer services. The rule leaves consumers confused and banks unable to appropriately protect their customers. Learn more: KeepBankingSafe.com.

 
Driving the day

The FDIC Advisory Committee on Community Banking meets, starting at 9 a.m. … The FOMC announces its interest rate decision at 2 p.m., followed by Powell’s press conference.

Not-so-lame duck — Republican lawmakers are gaming out an ambitious agenda ahead, emboldened by the prospect of controlling the White House and both chambers of Congress, Eleanor and Jasper Goodman report. Discussions are heating up on how to handle priorities including a revamp of cryptocurrency rules and the enactment of new China investment restrictions in the upcoming lame duck session of Congress and beyond.

The view from markets — Stocks are happy about Trump’s win, but it’s not all good news on Wall Street, our Declan Harty reports: “Even as stock prices soared on Wednesday, U.S. government debt sold off following Trump’s stunning win over Kamala Harris, pushing the 10-year Treasury yield to its highest level since July. It’s an indication that investors in the world’s biggest bond market fear the incoming administration could trigger inflation and larger federal deficits. Higher yields suggest that bond buyers are demanding greater returns to protect their investments — making it more expensive for the government to finance its debt.”

Elsewhere, the dollar has surged in reaction to Trump’s win, but whether that holds up depends on whether Trump follows through on his desire for a weaker dollar or simply pursues policies that markets expect will boost its value, Bloomberg News reports.

Betting on betting markets — Trump is expected to usher in yet another age of deregulation in Washington, and that could entail a sharp pullback on the election betting crackdown, Declan reports.

ICYMI: What does Trump’s win mean for financial policy? The Pro Financial Services team has you covered with a detailed, inside look at what’s likely in store for banks, the SEC and the housing market, among other key areas.

 

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On the Hill

Lobbyists resign themselves to Warren getting Banking job — The financial services industry is coming to terms with the likelihood that progressive Sen. Elizabeth Warren takes over from Senate Banking Chair Sherrod Brown next year as the committee's top Democrat, Eleanor reports.

Sens. Jack Reed of Rhode Island and Mark Warner of Virginia are more senior than the Massachusetts Democrat, who has built her career cracking down on Wall Street. But three lobbyists said Wednesday that they expect Warner to hang on to his role as the top Democrat on Senate Intelligence, clearing the way for Warren to take a lead role on Banking. Sen. Tim Scott (R-S.C.) is poised to be the committee’s chair.

“There has already been an intense lobbying push to get Warner to step off Intel,” one of the lobbyists said. “But I don’t think he will do that, so we are going to be looking at a Warren-Scott panel.”

Previous assertions that Warren's leadership could be disastrous for banks are overblown, some of the lobbyists said. They point out she'll be serving in the minority and isn't much farther left than Brown.

“I don’t think we'll see a marked shift,” said America's Credit Unions Senior Vice President of Government Affairs Greg Mesack, a former GOP Hill staffer. “The tone and tenor will change a little bit, but the issues that we’ll see are similar.”

Warner and Warren declined requests for comment.

 

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Fly Around

— Senate Banking and House Financial Services are eyeing hearings with bank regulators later this month, Eleanor reports.

— Meanwhile, in Germany, Chancellor Olaf Scholz fired his finance minister, effectively ending his three-party ruling coalition, NYT reports.

— Bessent, a top fundraiser for Trump, is viewed as a leading candidate for Treasury secretary, FT reports.

 

A message from BPI:

Banks support a regulatory framework that fosters competition and safeguards consumer interests. The CFPB’s latest rulemaking, known as Section 1033, jeopardizes consumers’ privacy, financial data and account security.

Banks have raised several key concerns with the CFPB rule:
· It requires no oversight of third parties using bank customer data.
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· Screen scraping and other unsafe practices are allowed to persist.
· It fails to hold third parties accountable.
· It allows third parties to profit, at no cost, from systems built and maintained by banks.
· It imposes an unreasonable implementation timeline.

Learn more at KeepBankingSafe.com.

 
 

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