Fed weighs plans to taper, but with a caveat — Treasury moves to block IMF aid to Taliban — ... As U.S. struggles to punish bank-averse group

From: POLITICO's Morning Money - Thursday Aug 19,2021 12:03 pm

Aug 19, 2021

By Katy O'Donnell and Aubree Eliza Weaver

Presented by The Consumer Data Industry Association

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Quick Fix

Fed weighs plans to taper — but with a caveat — The Federal Reserve is increasingly signaling to financial markets that it will start pulling back its support for the economy this year, something most Fed officials said “could be appropriate” (i.e. it’s what they currently expect to do), according to the minutes from their July meeting released Wednesday. This was an appetizer to Fed Chair Jerome Powell’s much-anticipated speech at the annual Jackson Hole conference next week, and the question is how strongly he will lean into the idea of slowing the central bank’s massive monthly bond buys soon – setting up a more definitive announcement in September.

Powell might take a softer line, given that the Fed is still waiting for clearer signals from the labor market. Early this year he said he wanted to see a “string of months” with very strong job growth, and we’ve only seen a couple in a row. Still, it’s clear that we’re getting closer to a tapering decision, absent some serious headwinds from the Delta variant.

Our Victoria Guida has the story.

“The Federal Reserve may begin pulling back some of its extraordinary support for the economy later this year but that timetable depends on what happens with the job market.

“Most Fed policymakers thought it ‘could be appropriate’ for the central bank to begin slowing its $120 billion monthly purchases of U.S. government debt and mortgage-backed securities this year, given the progress made toward achieving an average of 2 percent inflation over time and maximum employment.

“But others still believed the job market wouldn’t be strong enough to justify such a move until early next year. Since the pandemic began, the central bank has unleashed trillions of dollars to bolster markets, and investors are closely watching the Fed's moves. A key question is the extent to which people will return to the workforce in the coming months, as help wanted signs surge across the country; Fed officials noted that employment ‘had been constrained by labor supply shortages and hiring difficulties.’”

IT’S THURSDAY — Ben White is on vacation. I’ll be taking the helm again tomorrow, so send tips to kodonnell@politico.com or @KatyODonnell_, and to Aubree Eliza Weaver at aweaver@politico.com or @AubreeEWeaver.

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Driving the Day

TREASURY MOVES TO BLOCK IMF AID TO TALIBAN — Victoria again: “The International Monetary Fund said it will prevent Afghanistan from gaining access to some $450 million in aid in the wake of the Taliban's takeover the country, after the U.S. Treasury Department moved to block the funds.

The IMF, with U.S. backing, is issuing billions of dollars worth of new “special drawing rights,” a reserve asset that can be converted to government-backed money, to aid poorer countries. A portion of those assets was scheduled to be allocated to Afghanistan next week, an event that generated urgent pushback from Republican lawmakers.

“‘The potential of the SDR allocation to provide nearly half a billion dollars in unconditional liquidity to a regime with a history of supporting terrorist actions against the United States and her allies is extremely concerning,’ 17 House members said in a letter to Treasury Secretary Janet Yellen on Tuesday, calling on her to ensure the Taliban would not receive the aid.”’

An IMF spokesperson confirmed that, as of now, Afghanistan would not be able to receive the aid.

“As is always the case, the IMF is guided by the views of the international community,” the spokesperson said in an email. “There is currently a lack of clarity within the international community regarding recognition of a government in Afghanistan, as a consequence of which the country cannot access SDRs or other IMF resources.”

...AS U.S. STRUGGLES TO PUNISH BANK-AVERSE GROUP — Bloomberg’s Saleha Mohsin: “The U.S. is grappling with how to exert financial pressure on the Taliban to ensure Afghanistan doesn’t return to its role as a safe harbor for international terrorist groups, but a dearth of formal banking channels is complicating efforts. The Taliban have long craved international recognition, and now that it has regained control of Afghanistan, status on the world stage will become key to the nation’s economic survival. The U.S. could bring the Taliban to the negotiating table to offer relief from economic sanctions in exchange for protecting the rights of minorities and women, and blocking terrorist groups like al-Qaeda from rebuilding a base in Afghanistan or revamping terrorist financing efforts.

“But the U.S. Treasury Department’s key method of applying those restrictions is the global financial system, and Afghanistan remains mostly outside of that. Instead it relies on physical U.S. dollars and a trust-based system called hawala.”

HEADS UP ON EVICTION BAN — The D.C. Circuit Court of Appeals could rule as soon

as today on whether to spare the Biden administration’s new eviction moratorium as litigation continues. Two chapters of the National Association of Realtors on Saturday asked the court for “immediate” action to prevent enforcement of the ban.

FHFA EXPANDS AFFORDABILITY GOALS FOR FANNIE, FREDDIE — The regulator on Wednesday rolled out ambitious new affordable-housing goals for the two government-controlled mortgage giants, including a new initiative to boost homeownership in communities of color. The agency’s proposed rule would raise the targets for low-income mortgage loans purchased by the companies. The proposed single-family goals would boost the low-income benchmark from the current level of 24 percent of purchases to 28 percent from 2022 through 2024. The very low-income purchase level would increase from 6 percent to 7 percent of purchases.

EMPLOYMENT GROWTH THROUGH MARCH REVISED LOWER — Reuters: “The U.S. economy likely created 166,000 fewer jobs in the 12 months through March than previously estimated, the Labor Department’s Bureau of Labor Statistics said on Wednesday. The reading is a preliminary estimate of the BLS’ annual ‘benchmark’ revision to the closely watched payrolls data. The leisure and hospitality sector, which was hardest hit by the Covid-19 pandemic, accounted for the bulk of the revision, with employment growth revised down by 597,000 or 4.6 percent.”

FED’S BULLARD SAYS DELTA VARIANT WON’T THWART ECONOMY — MarketWatch’s Greg Robb: “The U.S. economy won’t be derailed by the spreading delta variant of the coronavirus that causes COVID-19 because businesses and households have adapted to the pandemic, St. Louis Fed President James Bullard said Wednesday in a Barron’s Live interview with MarketWatch. ‘The economy has clearly adapted to the pandemic situation. Businesses have found ways to produce their products and services and households have found ways’ to continue consumption,’ he said. ‘I don’t see the delta variant stopping that process,’ he said.”

FACEBOOK SAYS IT WANTS A ‘FAIR SHOT’ IN CRYPTO PAYMENTS SPHERE — NYT’s Ephrat Livni: “Facebook’s mission is to ‘bring the world closer together.’ Increasingly, that’s about not just connecting friends and family to share messages, but also serving as a platform for people’s financial lives. Some $100 billion in payments have been enabled by Facebook over the past year, said David Marcus, who runs the company’s financial services unit. But that’s just the start of the social network’s ambitions in the finance industry, Mr. Marcus writes in a new memo about the country’s ‘broken’ payments system, reported in the DealBook newsletter.”

Fly Around

TRANSITIONS – Sanjay Wadhwa will be the SEC’s new deputy director of the Division of Enforcement, the agency announced Wednesday. Wadhwa was most recently the senior associate director of the Division of Enforcement in the New York Regional Office. Kylie Patterson is now director of diversity and inclusion for the House Financial Services Committee. She most recently was a professional staff member for the Senate Committee on Small Business and Entrepreneurship.

WELLS FARGO ABANDONS PLAN TO SHUT DOWN PERSONAL CREDIT LINES — Bloomberg’s Hannah Levitt and Jennifer Surane: “Weeks after Wells Fargo & Co. set off a public outcry over its plan to discontinue personal lines of credit, the bank is reversing course. In recent days, the San Francisco-based lender began informing customers who have been using their personal credit lines that the financing channels will remain available. People who haven’t used their accounts since October also will be given the option of keeping them open, according to notifications seen by Bloomberg.”

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An exterior view of Wells Fargo Bank in San Francisco.

In this Oct. 15, 2008 file photo, an exterior view of Wells Fargo Bank in San Francisco, is shown. | (Paul Sakuma, file/AP Photo)

THE POLITICS OF REGULATION INTRUDE ON FED SUCCESSION — WSJ’s Greg Ip: “If the Federal Reserve’s management of the economy were all that mattered, Chairman Jerome Powell would probably be cruising toward reappointment. His response to the pandemic and focus on full employment have drawn bipartisan praise. But the Fed is also a financial regulator, an inherently more political role than monetary policy. Mr. Powell’s shot at another term when this one expires in February is now threatened by progressive Democrats whose priority is a more activist Fed on regulation and other non-monetary matters.”

SEC SUES FORMER NETFLIX EMPLOYEES FOR INSIDER TRADING — POLITICO's Zachary Warmbrodt: “The SEC on Wednesday revealed insider trading charges against three former Netflix software engineers and two associates who the agency said reaped $3 million in profits by sharing confidential information on the streaming service's growth.

“The SEC alleged that Sung Mo `Jay’ Jun, who worked at Netflix from 2013 to 2017, was at the center of a scheme that involved tipping off his brother Joon Mo Jun and his friend Junwoo Chon, who traded in advance of Netflix earnings announcements. Former Netflix engineers Ayden Lee and Jae Hyeon Bae also shared information, the agency said.

“The SEC, which filed the insider trading complaint in a Seattle federal court, said Sung Mo Jun, Joon Jun and Chon allegedly used encrypted messaging applications to discuss their activities. The agency said it uncovered the trading ring by using data analysis tools.”

RESPONSE TO REPORT ON FED’S EMERGENCY EFFORTS — Saqib Bhatti, co-executive director of the Action Center on Race and the Economy, pushed back on a report included in yesterday’s MM, which said the Fed’s emergency efforts last year might have helped states and cities more than critics think:

“To judge the impact of the [municipal liquidity facility] we need to look at the concrete impact on cities and communities. The truth is, neither cities nor mom and pop businesses were saved by the Fed's many programs, including the MLF. … The Fed could have offered all muni borrowers direct, long-term, zero-interest loans that would have let them focus taxpayer dollars on helping address the public health crisis that was ravaging Black and Brown communities across the country, but Powell did not want to cut Wall Street profit out of the picture.

“We need to hold the Fed accountable so that as the government's bank, it is actually supporting cities who are otherwise forced to rely on a predatory and racialized muni finance system,” he added. Further reading: A Brookings Institution report earlier this year examined the equity impact of the facility.

STOCKS TAKE A LATE TURN LOWER — AP’s Damian J. Troise and Alex Veiga: “Stocks took a late turn lower on Wall Street, ending with their second straight loss. The S&P 500 gave up 1.1 percent Wednesday, a day after breaking a five-day winning streak. Technology and health care companies had some of the biggest losses. Apple fell 2.6 percent. Markets didn’t react much to minutes released in the afternoon from the Federal Reserve’s latest policy meeting, which confirmed that Fed policymakers have made no firm decision about when to start unwinding their support measures for the economy. Lowe’s jumped 9.6 percent after the company reported sales that beat forecasts. The yield on the 10-year Treasury rose to 1.27 percent.”

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