Jay Powell's wartime Fed

From: POLITICO's Morning Money - Thursday Mar 03,2022 01:01 pm
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By Kate Davidson and Aubree Eliza Weaver

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Quick Fix

Just a couple of weeks ago, the prospect of the Federal Reserve chair testifying for two days on Capitol Hill was seen as a major news event before the central bank’s pivotal March meeting.

We’re in a different world now. Powell on Wednesday confirmed, in unusually blunt terms, what people widely expected: The Fed is likely to raise interest rates by a quarter percentage point at its March 15-16 meeting.

But he spent most of the hearing peppered with questions about what the Russian invasion of Ukraine meansfor inflation, economic growth and the Fed’s policy path in 2022, as well as for financial stability. In short, Powell said, it’s much too soon to know.

Some key quotes from the hearing:

—“We develop working plans for making adjustments to monetary policy over the coming months, and then we are flexible as plans meet the real world.”

Our Victoria Guida writes: Powell is saying that the Fed can’t reliably tell people what the central bank will do for the rest of the year because the outlook is too uncertain. All it can tell them is how it might react to different scenarios.

But he said the Fed is likely to raise rates steadily this year, and faster than it did in the previous rate-hiking cycle.

—“The price of oil depends on events that haven’t occurred yet. ... The effects are going to be passed through into gas prices, into lower economic activity and into inflation.”

Higher gas prices might only be a temporary shock to the economy that will fade as more U.S. production comes online. But since inflation is already at a four-decade high, the issue is whether oil prices could mix dangerously with other rising prices.

Powell suggested that higher oil prices might not end up changing the long-term inflation outlook, or the Fed’s policy plans, but policymakers will be watching to see if it does.

“The United States, our financial institutions and our economy do not have large interactions with the Russian economy. It’s a relatively small thing, and it’s gotten smaller and smaller in recent years, so there wouldn’t be direct effects from these kind of things on the U.S. economy.”

Powell emphasized that the U.S.’s ties to Russia, through trade and investment, are not significant and are unlikely to cause problems on their own. Instead, the U.S. might see more of an indirect effect through higher prices since Russia is a major exporter of commodities like wheat and metals like steel, Victoria writes.

Powell made similar comments about U.S. financial institutions, saying their exposure to Russian firms was relatively minor and unlikely to trigger any systemic financial issues.

—“Everything that we can do to protect ourselves against cyber, we’re doing it. We’re doing it — the private, large financial institutions are doing it. … We’re certainly on high alert and will continue to be.”

Powell has warned before about the risks of a potential cyber attack on the U.S. economy or financial system and market infrastructure. Those dangers are much more elevated now given that the U.S. and its European allies have imposed tough economic sanctions on Russia in response to Ukraine. He said there haven’t been troubling incidents yet, but it’s clear that this is top of mind for the central bank.

STAY TUNED — Powell is set to appear before the Senate Banking Committee this morning for the second day of testimony.

Expect Senate Democrats, and especially Chair Sherrod Brown of Ohio, to use the opportunity to pressure their GOP colleagues to allow a vote on all five of President Joe Biden’s Fed nominees. Republicans continue to insist that Sarah Bloom Raskin, Biden’s pick to be Fed vice chair for supervision, hasn’t adequately answered questions from the committee.

But don’t expect Powell to get drawn into it — When one Democratic lawmaker asked him Wednesday about the importance of having a full seven-member board of governors, he politely demurred. "I wouldn't want to comment directly or indirectly on the Senate. I'm a nominee and I await the Senate's judgment. I prefer not to get into that process."

Speaking of process — We’ve seen some questions about whether Brown could simply call a vote during this morning’s hearing, when at least some of the committee’s Republicans will be present and providing a quorum. But it doesn’t work that way — Brown is required to provide several days’ advance public notice of any vote. We’ll be listening for clues from him about when he may reschedule.

IT’S THURSDAY — Does it feel like the first Friday of the month just keeps coming at us faster and faster? We’ll get the February employment report tomorrow, showing jobs and wage gains last month as Omicron fizzled.

Send us your non-farm payroll guesses, plus story ideas, tips and feedback, to kdavidson@politico.com and aweaver@politico.com, or on Twitter @katedavidson and @aubreeeweaver.

 

SUBSCRIBE TO NATIONAL SECURITY DAILY : Keep up with the latest critical developments from Ukraine and across Europe in our daily newsletter, National Security Daily. The Russian invasion of Ukraine could disrupt the established world order and result in a refugee crisis, increased cyberattacks, rising energy costs and additional disruption to global supply chains. Go inside the top national security and foreign-policymaking shops for insight on the global threats faced by the U.S. and its allies and what actions world leaders are taking to address them. Subscribe today.

 
 
Driving the Day

Fourth-quarter productivity data and unit labor costs released at 8:30 a.m. … Fed’s Powell testifies at Senate Banking at 10 a.m. … New York Fed President John Williams speaks at 6 p.m.

MANCHIN LAYS OUT A DEM BILL HE CAN BACK — Our Burgess Everett and Nicholas Wu sat down yesterday with Sen. Joe Manchin (D-W.Va.), who offered a blueprint for what he’d be willing to salvage from the president’s Build Back Better agenda.

From Burgess and Nick: “Manchin said that if Democrats want to cut a deal on a party-line bill using the budget process to circumvent a Republican filibuster, they need to start with prescription drug savings and tax reform. He envisions whatever revenue they can wring out of that as split evenly between reducing the federal deficit and inflation, on the one hand, and enacting new climate and social programs, on the other -- ‘to the point where it’s sustainable.’”

MM sidebar : Manchin’s inflation argument here is a bit puzzling. Keeping inflation in check is a responsibility Congress assigned to the Fed more than 100 years ago. The central bank uses its tools, primarily interest rates, to influence prices and employment.

Yes, inflation is elevated right now, but the Fed has signaled it is planning to take aggressive steps this year to tamp down price pressures. Using tax revenue to reduce federal deficits would help improve the government’s bottom line. But would it work as a tool to fight inflation?

We asked Marc Goldwein, head of policy at the Committee for a Responsible Federal Budget, who said yes, though it depends on how tax increases are structured. Fiscal policymakers aren’t the chief inflation fighters, but they can be helpers, he said.

“If fiscal policy is rowing in the right direction, if it’s reducing deficits in the near term, especially in ways that tamp down on demand or reduce prices … I think that can help to anchor [inflation] expectations, and makes the Fed’s job easier,” he said.

YELLEN PUSHES FOR REPACKAGED BIDEN PLAN TO BOOST ECONOMY — Bloomberg’s Christopher Condon and Eric Martin: “U.S. Treasury Secretary Janet Yellen said Congress can boost long-term growth in the economy if it finds a way to pass the remainder of the Biden administration’s economic policy proposals.”

Crypto

SENATE DEMOCRATS WARN OF SANCTIONS EVASIONS THROUGH CRYPTO — Our Sam Sutton: Top Senate Democrats are raising alarms that Russian oligarchs and state-backed institutions might be relying on cryptocurrency markets to duck sanctions that have decimated the ruble and hammered Russia’s economy. “With ruble-denominated trades spiking on international crypto exchanges, the lawmakers on Wednesday demanded that Treasury clarify how the Office of Foreign Assets Control is ensuring that digital asset exchanges and decentralized finance platforms are complying with sanctions against Russia.”

Also from Sam: New York Gov. Kathy Hochul on Wednesday said she would expedite procurement processes to make it easier for the state’s top financial regulator to hire blockchain analytics firms, saying it was a necessary step to block Russian access to crypto markets in the aftermath of wide-ranging sanctions against the country’s top institutions and oligarchs.

CFTC NOMINEES CALL FOR MORE POWERS TO POLICE CRYPTO —The four nominees to join the Commodity Futures Trading Commission told lawmakers that the main U.S. derivatives overseer should take on new responsibilities regulating cryptocurrencies, Bloomberg’s Benjamin Bain reported.

More from our Meredith Lee: As Russia’s invasion of Ukraine roils grain and other commodity markets, Senate Agriculture Chair Debbie Stabenow (D-Mich.) called for quick confirmation of the four CFTC nominees during a hearing on Wednesday.

“The invasion of Ukraine has led to price volatility in wheat and other agricultural markets. And there are reports that U.S. efforts to limit Russia’s access to capital may be undermined by the use of unregulated crypto markets,” Stabenow said.

IRS PUTS CRYPTO ON NOTICE — Our Aaron Lorenzo: “The IRS is considering more John Doe summonses on cryptocurrency exchanges as it expands scrutiny of digital assets, a top agency official said Wednesday.”

Fed File

BIDEN’S FED NOMINEES FROZEN AS ONE FACES REPUBLICAN QUESTIONS — NYT’s Jeanna Smialek: “President Biden’s nominee for the top banking cop at the Federal Reserve was expected to face Republican backlash over her views on how finance should guard against climate change and her preference for tough regulation. She has. But it is Sarah Bloom Raskin’s tenure on the board of a financial technology company that has given Republicans a cudgel that they are trying to use to quash her nomination.”

Ukraine

TREASURY TO BANKS: ENERGY PAYMENTS ARE STILL OK — Treasury issued new public guidance on sanctions last night and stressed that it is committed to allowing energy payments to continue, even to specified sanctioned Russian banks

“To help protect Americans, partners, and allies from higher energy prices that would drive more resources to Russia, Treasury swiftly issued and updated Russia-related guidance to allow U.S. financial institutions to continue processing these transactions and underscore that such activity is not prohibited by sanctions,” the agency said. “While current circumstances and the dangers from Russia’s war in Ukraine may lead entities and individuals to make their own risk assessments and business decisions, Treasury is making clear that sanctions will not block energy payments.”

EU BARS 7 RUSSIAN BANKS FROM SWIFT, SPARES THOSE IN ENERGY — Reuters’ Philip Blenkinsop: “The European Union said on Wednesday it was excluding seven Russian banks from the SWIFT messaging system, but stopped short of including those handling energy payments, in the latest sanctions imposed on Russia over its invasion of Ukraine.”

Restrictions on technology sales that the U.S. and its allies are clamping on Russia are adding to the uncertain climate for businesses, WSJ’s Kate O’Keefe reports, though how hard the export controls hit the Russian economy, trade specialists said, will depend on enforcement.

ECONOMIC DANGERS FROM RUSSIA’S INVASION RIPPLE ACROSS GLOBE — AP’s Paul Wiseman and David McHugh: “For now at least, the damage to the overall global economy appears to be relatively slight, if only because Russia and Ukraine are not economic powerhouses.”

Jobs Report

John Hemling is joining the Investment Company Institute as chief government affairs officer. Emling served most recently as head of government affairs for Broadcom Inc., and was managing director for federal government affairs for Citi.

 

STEP INSIDE THE WEST WING: What's really happening in West Wing offices? Find out who's up, who's down, and who really has the president’s ear in our West Wing Playbook newsletter, the insider's guide to the Biden White House and Cabinet. For buzzy nuggets and details that you won't find anywhere else, subscribe today.

 
 
Fly Around

Jon Stewart takes on the stock market — ’The Problem With Jon Stewart,’ in its first episode of 2022 airing tonight on Apple TV+, looks at the Robinhood and GameStop trading saga to explore whether the markets truly work for the average person. (Spoiler: Stewart isn’t convinced.) We’ve got an exclusive clip for you here, where Stewart takes suggestions from retail investors about how to make markets function better.

Also: the first of a two-part HBO Max documentary, “Gaming Wall Street,” premieres tonight. (Look for some familiar faces in the trailer here.)

Wells Fargo & Co. is replacing Barri Rafferty, its point person for remaking the bank’s image, after less than two years on the job. — WSJ’s Ben Eisen

At least five superyachts owned by Russian billionaires were anchored or cruising on Wednesday in Maldives, an Indian Ocean island nation that does not have an extradition treaty with the United States, ship tracking data showed. —Reuters’ Alastair Pal

The U.S. economy grew at a modest to moderate pace from mid-January through early February as the Omicron variant of Covid-19 disrupted businesses and held back consumer spending, the Federal Reserve said Wednesday. — WSJ’s Bryan Mena

 

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