Just when you thought you had Fed policy figured out, virus resurges

From: POLITICO's Morning Money - Monday Nov 29,2021 01:02 pm

Nov 29, 2021

By Kate Davidson and Aubree Eliza Weaver

Presented by NAFCU

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Quick Fix

We hope you’ve slept off the turkey hangover because it’s a big week for economic news, including two days of congressional testimony from Federal Reserve Chair Jerome Powell on Tuesday and Wednesday and another monthly jobs report on Friday.

Fed officials will have their last opportunity this week to signal where they stand before their Dec. 14-15 policy meeting, including whether the central bank ought to speed up its withdrawal of support for the U.S. economy by further shrinking its monthly bond purchases.

The Fed at its last meeting announced it would begin reducing asset purchases by $15 billion a month but could accelerate or slow the pace of tapering as necessary. It was less than a month ago, but consider what we’ve learned since then: October consumer prices rose 6.2 percent from a year earlier, the most in three decades and much higher than economists expected. Consumer sentiment readings have plunged. Employers added more than half a million jobs last month, and the number of workers quitting their jobs hit a record, the latest sign of a tightening labor market.

“While the November meeting statement made clear that the pace of tapering will be reviewed at each meeting, recent commentary from officials across the hawk-dove spectrum point to an increasing likelihood of an adjustment being made at the December meeting,” Deutsche Bank economists Brett Ryan, Justin Weidner and Matthew Luzzetti said in a note to clients Friday.

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All eyes will be on Powell, who is set to testify alongside Treasury Secretary Janet Yellen before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday about the Fed and Treasury’s pandemic relief programs (part of their regular quarterly appearances required under the March 2020 Cares Act).

Lawmakers will use the opportunity to question Powell about inflation and the Fed’s near-term policy outlook. But this time could be especially tricky as the hearing follows President Joe Biden’s decision to tap Powell for another term as Fed chair, essentially giving the Senate an extra chance to press him before his confirmation hearing.

Minutes from the Fed’s latest meeting released last week showed some officials would have preferred a faster pace of asset-purchase reductions. But Morgan Stanley economists said the criteria for raising interest rates has not changed. “Discussion in the minutes suggest the committee is just as uncertain about how to read labor market improvement but can broadly agree that maximum employment is a ways off, and remains a necessary condition for liftoff,” they said last week.

Another potentially confounding question: What could the new Omicron variant mean for the economic outlook?

Powell and other Fed officials have repeatedly emphasized that the path of the recovery depends on the path of the virus. News of the new Covid-19 variant fueled a stock market selloff on Friday amid worries that its spread could prompt new restrictions on travel or businesses, add to supply-chain disruptions and weigh on economic growth.

“It may take weeks to get authoritative data on the new variant ... in terms of whether it is more transmissible, more severe, and less vulnerable to vaccines and treatments than Delta,” Amherst Pierpont’s Stephen Stanley said Friday.

Will Fed officials want to wait and see how the Omicron threat plays out before tweaking their tapering schedule? That’s a question for Powell and his colleagues, who will also see another report on November consumer prices (Dec. 10) and retail sales (Dec. 15) before their next meeting.

This week, officials will be looking to Friday’s employment report to gauge whether labor-force participation, which has remained stubbornly stuck near 61.6 percent for months, has shown any signs of budging.

IT’S MONDAY — Welcome back! What do you think lawmakers should ask Powell at this week’s hearings? Let us know, and send us your tips or suggestions for MM at kdavidson@politico.com, aweaver@politico.com or on Twitter @katedavidson.

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DRIVING THE WEEK

October pending home sales data released Monday … Powell delivers introductory remarks at a New York Fed innovation event Monday ... November consumer confidence data released Tuesday … Bank Policy Institute and Institute of International Finance virtual bank regulation forum Tuesday ... Yellen and Powell testify before the Senate Banking Committee Tuesday and House Financial Services Committee Wednesday.

SEC Chair Gary Gensler speaks at the agency’s summit on digital asset compliance and market integrity Wednesday … Fed Beige Book released Wednesday … Aspen Institute hosts virtual discussion Wednesday on rebuilding the post-pandemic economy, featuring Deputy Treasury Secretary Wally Adeyemo … Jobs report released Friday.

FED SPEAK THIS WEEK — In addition to Powell, Vice Chair Richard Clarida is scheduled to speak Tuesday at 1 p.m. about Fed independence, and Gov. Michelle Bowman is set to speak Tuesday around 5 p.m. at a conference hosted by the Bank of Canada.

On Thursday, Atlanta Fed President Raphael Bostic speaks at 8:30 a.m. on housing and Governor Randal Quarles delivers his parting thoughts at 11 a.m. at a discussion hosted by the American Enterprise Institute. San Francisco Fed President Mary Daly and Richmond Fed President Tom Barkin speak at 11:30 a.m. Thursday about the economy, at an event hosted by the Peterson Institute for International Economics.

RENTERS STRIKE BACK AS CITIES CAP PRICE HIKES BY LANDLORDS — Our Katy O’Donnell and Lisa Kashinsky: “As the cost of housing soars, one old idea is starting to get traction with voters: rent control.

“Voters in Minneapolis and St. Paul this month approved ballot initiatives to enable the Twin Cities to cap rent increases. Santa Ana, Calif., did so in October. And Michelle Wu, Boston’s new mayor, campaigned earlier this year on restoring rent control — an idea that Massachusetts' Republican governor has repeatedly objected to but says he’d be willing to discuss to help tackle housing woes.”

VACCINE SQUABBLE TESTS GLOBAL TRADE TIES — Our Doug Palmer and Ashleigh Furlong: “The World Trade Organization’s new director is fighting for relevance in an era of discordance for the global economy.

“That job just got harder: The Omicron variant of Covid-19 is adding a new complication to Ngozi Okonjo-Iweala’s efforts to broker an agreement among rich and poor nations for a waiver of patents for vaccines, drugs and other tools to help fight the disease, but talks remain at a standstill.”

—Also: NIH Director Francis Collins said Sunday that it is likely to be two to three weeks before there will be key answers about the new Omicron variant of the Covid-19 virus.

—And: Dr. Anthony Fauci said the variant, which has found its way into a number of European countries in recent days, will “inevitably” get to the United States.

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POLL SHOWS NEARLY HALF OF VOTERS WANT LESS TRADE WITH CHINA — Our Gavin Bade: “A significant plurality of voters — 48 percent — think China is a ‘threat to the well-being of the U.S. economy,’ according to a POLITICO/Morning Consult survey of nearly 2,000 registered voters conducted this week. Only 12 percent of respondents said they consider China to be a beneficial economic partner, while 26 percent viewed it as a competitor that neither benefits nor threatens the U.S.”

U.S. SETTLES DIGITAL TAX DISPUTE WITH INDIA — Our Steven Overly: “The agreement announced Wednesday comes as U.S. Trade Representative Katherine Tai concludes her first official visit to India, during which the longtime trading partners agreed to boost commerce across sectors from health care and pharmaceuticals to agriculture.”

BIDEN PICKS CAPITOL HILL FAVORITE TO RUN HIS BUDGET OFFICE — Our Laura Barron-Lopez and Caitlin Emma: “President Joe Biden announced on Wednesday that he will nominate Shalanda Young to be director of the Office of Management and Budget, along with Nani Coloretti as deputy director.

“If confirmed, Young would be the first Black woman to serve in the post, and Coloretti would be one of the highest-ranking Asian Americans and Native Hawaiians to lead in the federal government, positioning two women of color to head the White House budget office.”

MARKETS FACE WEEKS OF UNCERTAINTY IN WAIT FOR OMICRON ANSWERS — Bloomberg’s Joanna Ossinger and Lu Wang: “The fate of global markets now depends at least in part on laboratories around the world probing the omicron Covid-19 strain, potentially leaving investors with weeks of uncertainty in the wait for answers.

“The variant detected in Africa is described as highly concerning, and has already led to international travel bans. Scientists are analyzing whether it can evade vaccines and how its symptoms differ from current strains. Vaccine maker BioNTech SE expects the first data within two weeks, initial findings that will help to determine if a passing scare or bigger hit to global economic reopening looms.”

And they tumbled last week, too — NYT’s Eshe Nelson: “Stocks around the world fell on Friday and oil prices plunged, after evidence of a new coronavirus variant in South Africa prompted another round of travel restrictions and reignited concerns about the economic toll imposed by the pandemic. The S&P 500 logged its worst day since February as a growing list of nations, including the United States, moved to prohibit travel from half a dozen or so African countries.”

COVID VARIANT SPARKS RATE RETHINK IN MARKETS — Reuters’ Dhara Ranasinghe and Yoruk Bahceli: “Risks of a new COVID hit to economic activity are clobbering expectations for rate hikes next year from the world's major central banks, a potential setback for the dollar and other currencies where wagers had been most aggressive. Money markets no longer fully price a 25-basis-point interest rate rise by the Federal Reserve by June 2022, nor are they positioned for a full 10-bps hike from the European Central Bank by the end of 2022, as they were just a few days ago. And the chances of the Bank of England raising rates next month are seen around 53 percent, from 75 percent on Thursday.”

BOSTIC REMAINS OPEN TO FASTER TAPER, RATE HIKES IN 2022 — Reuters’ Jonnelle Marte: “Atlanta Federal Reserve President Raphael Bostic said on Friday he is hopeful that the momentum of the U.S. economy will carry it through the next wave of the coronavirus pandemic, and said he remains open to accelerating the pace of the central bank's bond taper. Earlier on Friday, the World Health Organization said it was designating the new Omicron variant, first identified in South Africa, as being ‘of concern.’ If the new Omicron coronavirus variant follows the pattern seen with previous variants, it should cause less of an economic slowdown than the Delta variant, Bostic said.”

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Fly Around

BIDEN’S ECONOMIC PLANS COLLIDE WITH INFLATION REALITY — WSJ’s Amara Omeokwe and Andrew Restuccia: “President Biden took office with a raft of economic plans to better position the U.S. to compete on the world stage and jump-start a labor market ravaged by the pandemic. Ten months into his term, Mr. Biden is facing a new set of economic challenges.

“The number of Americans seeking unemployment benefits fell to a 52-year low last week, available jobs are trending near record highs and consumer spending is rising. But those positive economic developments have been complicated by supply-chain bottlenecks and the highest inflation in three decades.”

BRAINARD’S NOMINATION PROMOTES CLOSE POWELL ALLY ON RECENT FED INNOVATIONS — WSJ’s Nick Timiraos: “President Biden’s decision to nominate Lael Brainard to become Federal Reserve vice chairwoman elevates a veteran policy maker and economist who has been a strong ally of Chair Jerome Powell on the central bank’s boldest policy decisions during the pandemic.

“Ms. Brainard was a key adviser to Mr. Powell as the Fed scaled up emergency-lending backstops last year, and she provided influential intellectual support for his effort last year to revamp the Fed’s policy-setting framework. Under the new framework, the Fed set aside its practice of raising rates to pre-empt inflationary pressures and pledged to keep interest rates low to foster a faster and broader labor-market recovery. Ms. Brainard has been especially outspoken about avoiding the mistakes of raising interest rates prematurely after a downturn when interest rates are near zero.”

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