Fed's forecasts clouded by fog of war

From: POLITICO's Morning Money - Monday Mar 14,2022 12:01 pm
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POLITICO Morning Money

By Kate Davidson and Aubree Eliza Weaver

Presented by United We Succeed

Editor’s Note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our s 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.

QUICK FIX

It’s been about four months since Federal Reserve officials set about dramatically reshaping monetary policy expectations for 2022. That hard pivot feels like a lifetime ago.

Since the Fed’s December meeting, elevated inflation has broadened and accelerated. The labor market is even stronger than initially thought and has continued to rapidly improve. The Omicron wave came and went. And Russia invaded Ukraine, roiling financial markets and sending energy and commodity prices soaring.

The direction of policy hasn’t changed — Fed Chair Jay Powell made clear that the central bank will raise rates by a quarter percentage point this week for the first time since 2018. But there’s huge uncertainty around what happens next, as Powell told lawmakers this month.

“We will proceed, but we will proceed carefully, as we learn more about the implications of the Ukraine war for the economy,” he said at a March 2 House Financial Services hearing. “We’re going to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain moment.”

Some key questions for this week’s Federal Open Market Committee meeting:

What say the dots?

Policymakers will submit their economic forecasts this week for the first time since December. Those projections are likely to show big revisions for this year, including higher expected inflation, faster rate increases and weaker growth.

Though the outlook is murky, the magnitude of the changes included in the Fed’s Summary of Economic Projections and its dot plot will send important signals about how worried officials are about the effects of an oil price shock on inflation and growth, and how aggressively they’re prepared to move to tamp down price pressures.

In December, officials’ median projection for their benchmark federal funds rate was 0.9 percent, implying three rate increases this year. Futures markets now expect that forecast to double.

What happens after 2022? A key question is how high officials raise rates next year and beyond, and whether they expect to push the fed funds rate beyond what they see as a “neutral” policy stance — i.e. neither supporting or restricting economic growth.

A cautionary reminder from former Fed Governor Larry Meyer, in a Friday note: “The dots tell us what level the funds rate is projected to reach at the end of each year. That tells us something, but not everything, about the pace. In particular, it doesn’t tell us how many moves are expected, when in the year they are expected to be, and how big each of them is.”

Go big or go home?

Remember the frenzied speculation that officials could raise rates by a half percentage point in March, given the torrid pace of price increases? The invasion of Ukraine, and heightened geopolitical risks that came with it, scuttled any prospects of that move.

But Powell didn’t foreclose on the possibility when he testified earlier this month, suggesting officials could pursue a bigger move at a future “meeting or meetings.”

Fed Governor Lael Brainard, who is effectively acting now as Powell’s No. 2, has said she favors a handful of small increases as the central bank begins lifting rates.

“She's not alone in that view, but a handful of other voters have expressed more openness to delivering at least one 50bp increment, particularly in the first half of the year while inflation is at its highest levels,” Morgan Stanley economists said in a note. “We see the evolution of inflation and financial conditions as the main players in the Fed's meeting by meeting deliberations.”

We’ll be listening for any more hints from Powell about the potential for a super-sized rate increase in the coming months.

What happens with the Fed’s balance sheet?

Powell has said the Fed will continue deliberating about what to do with its nearly $9 trillion asset portfolio but won’t announce any final decisions at the March meeting.

Officials could announce some details around that normalization process, including where they may set the monthly caps for balance sheet runoff. Many economists now expect that process to begin in May or June, starting sooner and proceeding faster than the last time officials shrunk the balance sheet.

Either way, expect Powell to be quizzed about how officials see the balance sheet runoff helping to rein in inflation, and what size they see as optimal over the longer term.

IT’S MONDAY — We hope you took our advice on Friday. It’s going to be another big week on the economic data front. We want to know, what would you ask Powell at his press conference Wednesday?

Send your Powell questions, plus tips, story ideas and feedback, to kdavidson@politico.com, aweaver@politico.com, or find us on Twitter @katedavidson or @aubreeeweaver.

 

A message from United We Succeed:

Proposed new regulations on credit cards would cause millions of low-income and minority Americans to lose access to credit. Research shows that similar regulations on debit cards cost low-income consumers about $160 per year. Furthermore, all credit card users, including individuals and small businesses, would see their points and perks slashed if these regulations pass. Congress should leave credit cards alone! Learn more.

 
DRIVING THE WEEK

National Interagency Community Reinvestment Act conference Tuesday through Thursday … Federal Open Market Committee begins its two-day meeting Tuesday … Senate Banking Committee hearing on public transportation in the bipartisan infrastructure law Tuesday … February producer price index data Tuesday …

February retail sales data Wednesday … House Financial Services markup Wednesday … Senate Finance hearing on prescription drug inflation Wednesday … House Small Business hearing on the Paycheck Protection Program Wednesday … House Economic Disparity hearing on growing small businesses Wednesday … House Budget hearing on women in a post-pandemic recovery Wednesday … FOMC statement and Fed Chair Powell press conference on Wednesday …

February housing starts and industrial production data Thursday … IRS Commissioner Rettig testifies before House Ways and Means Thursday … Senate Banking hearing on the role of digital assets in illicit finance Thursday … February existing home sales data Friday.

SENATE MOVES TO CONFIRM TOP OMB NOMINEE — Our Jennifer Scholtes: “The Senate is on track to confirm President Joe Biden’s pick to lead the White House budget office, with a vote slated for Monday evening to move forward on the nomination. Shalanda Young is expected to receive overwhelming support to serve as director of the Office of Management and Budget, a position she's already filling in an acting capacity.”

PROGRESSIVES WARN BIDEN AGAINST DITCHING THE ‘CARE ECONOMY’ — Our Adam Cancryn and Eugene Daniels: “President Joe Biden’s vision for building a vast ‘care economy’ has collapsed — and Democrats fear their party’s political advantage with parents and caregivers could end up as collateral damage.

“More than a year into his term, Biden’s plan to invest hundreds of billions of dollars into child and eldercare programs is on the congressional backburner. An expanded tax credit that dramatically reduced child poverty expired and is unlikely to be revived. And the administration’s ambitions for guaranteeing free pre-kindergarten and paid family leave are struggling to gain widespread traction in Congress.”

CRYPTO AIMS TO BOOST INFLUENCE WITH WASHINGTON HIRES — WSJ’s Paul Kiernan and Dave Michaels: “The cryptocurrency industry has staked out a spot at Washington’s revolving door , hiring scores of former government officials and regulators as it seeks to shape policies to govern the largely unregulated market.

“Those working for or advising cryptocurrency firms or investment funds include three former chairs of the Securities and Exchange Commission, three former chairs of the Commodity Futures Trading Commission, three former U.S. senators, and at least one former White House chief of staff, former Treasury secretary and former chair of the Federal Deposit Insurance Corporation.”

 

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.

 
 

SUMMERS AND DALIO IN CONVERSATION — For POLITICO’S 15th anniversary, we’re hosting unfiltered one-on-one conversations about the next 15 years. In the first installment of our series, former Treasury Secretary Larry Summers sits down with billionaire hedge fund manager Ray Dalio.

“I think the chances of a soft landing over the next few years are maybe one in four,” Summers says of the Fed’s ability to rein in inflation without triggering a recession. “I think it’s odds off.”

Dalio says: “[W]hen you’re stuck with two trade-offs, too much inflation or you’re stuck with too much economic weakness, then you navigate through the middle, and that means something like stagflation. And so I think we are entering a period of stagflation.”

The pair also talked about the challenges of political polarization and global competition with China. Watch the video and read the full transcript.

FIRST IN MM: GOLDMAN SACHS AND BPC URGE SBA REAUTHORIZATION — Goldman Sachs’ 10,000 Small Businesses Voices and the Bipartisan Policy Center are releasing a new policy report today that highlights key challenges facing small business and offers policy recommendations in four key areas — workforce, childcare, access to capital and procurement. The report also calls on Congress to reauthorize and modernize the Small Business Administration and its programs. “Small businesses add to the economic vitality of our country, but outdated policies are holding them back,” said Goldman CEO David Solomon in a statement on the report’s release.

 

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Ukraine

RUSSIAN PROSECUTORS WARN WESTERN COMPANIES OF ARRESTS, ASSET SEIZURE — WSJ’s Jennifer Maloney, Emily Glazer and Heather Haddon: “Russian prosecutors have issued warnings to Western companies in Russia , threatening to arrest corporate leaders there who criticize the government or to seize assets of companies that withdraw from the country, according to people familiar with the matter.

“Prosecutors delivered the warnings in the past week to companies including McDonald’s Corp., International Business Machines Corp. and KFC owner Yum Brands Inc., the people said. The calls and visits included threats to sue the companies and seize assets including trademarks, the people said.”

IMF CHIEF ON RUSSIAN DEFAULT — ‘In terms of servicing debt obligations, I can say that no longer we think of Russian default as improbable event,’ Georgieva said on CBS’s ‘Face the Nation’ on Sunday. ‘Russia has the money to service its debt, but cannot access it.’”

TOO BIG TO SANCTION? — Former top State Department official Edward Fishman, on U.S. sanctions on Russia’s central bank , in WSJ: “This is by far the largest entity ever targeted by sanctions in history. Putin didn’t think the West was going to go this far. I think the prevailing wisdom in the Kremlin was that entities like that are ‘too big to sanction.’”

ICYMI: BIDEN MOVES TO REIMPOSE COLD WAR TRADE RESTRAINTS ON RUSSIA — Our Doug Palmer: “President Joe Biden said on Friday he is working with Congress and foreign leaders to revoke favorable trade treatment for Russia, a move that would allow countries to impose more punishment on Russia for its war in Ukraine by raising tariffs on Russian products.”

Also: Senate Finance Committee Chair Ron Wyden wants to strip tax credits from U.S. companies tied to Russia and Belarus as part of an expanding economic clampdown following the invasion of Ukraine, our Aaron Lorenzo reports. His plan would effectively raise U.S. taxes on companies that do business in those two countries and claim credits here for taxes paid there.

 

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.

 
 
Jobs Report

Adam Ozimek is joining the Economic Innovation Group today as its first chief economist. Ozimek worked most recently as chief economist at Upwork, a platform that connects businesses with freelancers, and was previously a senior economist at Moody’s Analytics. He will serve on EIG’s leadership team and lead new research initiatives.

Fly Around

Markets are starting a jampacked week that will test whether Russia plans to repay its international debt and will likely see the Federal Reserve raise interest rates for the first time since 2018. — Bloomberg’s Payne Lubbers and Michael G. Wilson

Would Americans really tolerate higher gas prices to help Ukraine? Don’t bet on it, says Jeff Greenfield, in an opinion piece for POLITICO Magazine.

Investors are rushing to recalibrate their portfolios for a potentially extended period of elevated commodity prices, as Russia’s invasion of Ukraine sparks eye-popping moves in raw materials that threaten to exacerbate inflation and hurt growth. — Reuters’ David Randall

 

A message from United We Succeed:

Big retailers are pressuring Congress to regulate credit cards in a way that would unfairly punish consumers and put their private financial information at risk. These proposed changes would be especially tough on Americans in low income and minority communities. When Congress voted to impose similar regulations on debit cards, consumers were promised lower prices. It didn’t happen. Instead of any consumer benefits, many low income and minority Americans lost access to the banking system. If these regulations were expanded, millions could lose access to credit. Community banks and credit unions rely on revenue from card programs to serve low income and rural communities. These proposed regulations put those programs at risk. They would also threaten the security of credit cards by introducing alternative networks to process transactions - all without the consumers’ knowledge. Congress must not make the same mistakes with credit cards! Learn more.

 
 

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