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Delivered daily by 8 a.m., Morning Money examines the latest news in finance politics and policy. | | | | |  | | By Kate Davidson and Aubree Eliza Weaver | 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. President Joe Biden has tossed out plenty of ideas for battling inflation, but the most promising one may be the easiest — staying out of the Federal Reserve’s way. "My plan to address inflation starts with the simple proposition: Respect the Fed, respect the Fed's independence, which I have done and will continue to do," he told reporters during a meeting Thursday with Fed Chair Jerome Powell. It was the first sit-down between the president and the Fed chief since Biden nominated Powell to a second term last year. Biden has leaned into the idea of letting central bank officials make decisions about the path of interest rates without commentary from the West Wing. To the extent he has weighed in publicly, it’s been to echo Powell’s sentiments that inflation is the biggest challenge facing the U.S. economy — an implicit endorsement of the Fed’s aggressive campaign to ratchet up interest rates and tamp down price pressures. In an op-ed in the Wall Street Journal Monday, Biden also outlined his plan to combat inflation, but said the job rests primarily with the Fed. That may come off as passing the buck. But economists largely agree that while Biden faces the heat from scorching prices — and has little choice but to put forward ideas for cooling them — Powell is the one holding the hose. Of the steps Biden has taken, “far and away the most important has been how consistently he has given the Fed space to do its job — a contrast with the majority of his predecessors over the last 60 yrs,” Jason Furman, the former chairman of President Barack Obama’s Council of Economic Advisers, said on Twitter.
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President Joe Biden meets with Fed Chair Jerome Powell and Treasury Secretary Janet Yellen in the Oval Office Tuesday. | Kevin Dietsch/Getty Images | It’s not a small thing. It wasn’t so long ago that former President Donald Trump railed against the Powell Fed, urging officials to lower interest rates and begin buying government bonds to bolster the economy (while at the same time touting sturdy growth spurred by GOP tax cuts). That was a stark departure from the previous two decades, when White House policy was to avoid commenting publicly on Fed interest-rate decisions — a much easier job when annual inflation averaged below 3 percent. At other times, presidents facing a hawkish Fed have relayed their frustration privately. In the summer of 1984, White House Chief of Staff James Baker famously told then-Fed Chair Paul Volcker, as President Ronald Reagan sat silently, “The president is ordering you not to raise interest rates before the election.” Why does independence matter? It’s well established that countries with independent central banks have better economic outcomes over time, despite the short-term pain that often comes with keeping prices in check. In the U.S., Fed officials have steeled themselves against political interference. But research from Duke University and the London School of Economics found the jawboning by Trump, which often occurred during the periods leading up to Fed meetings, actually affected market expectations of Fed policy. That is, investors assumed Trump’s tweets would lead to (slightly) lower interest rates, the data suggested. Now, at a time when expectations about the Fed’s future decisions are essential to help tame inflation, a signal of support from the White House is a huge boost, said Sarah Binder, a George Washington University political science professor who has studied the Fed’s relationship with the executive branch and Congress. Binder prefers to call it “interdependence.” There’s a two-way street between what the White House needs and what the Fed needs, she said. “The Fed needs everyone to know that it’s going to do what it takes to get inflation under control,” she said. “If Biden is there endorsing that this is the Fed’s job … I think it aids the Fed’s credibility of making the claim that, ‘We’re going to stick with it.’” Of course, that support will be tested if the Fed’s efforts tip the economy into a recession — a risk that markets and some economists see as increasingly likely. “But in the short-term Biden needs to show he’s doing something about the No. 1 issue that voters seem to care about — gas prices, high inflation – and the Fed needs that support to actually tackle it,” Binder said. IT’S WEDNESDAY — Were you one of the many thousands who lined up to see “Top Gun: Maverick” last weekend? Better get there soon! WSJ says supply chain issues are hitting the concession stand, raising the specter of a summer popcorn shortfall. The horror! But seriously, was the sequel as good as the original? We want to know (and please send your tips, story ideas and feedback while you’re at it): kdavidson@politico.com or @katedavidson, and aweaver@politico.com or @aubreeeweaver.
| | | | 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. | | | | | | | | JOLTS data released at 10 a.m. … Fed’s Beige Book released at 2 p.m. FDIC PULLS BACK FROM INTERAGENCY CRYPTO WORK — A scooplet from our Victoria Guida: “The Federal Deposit Insurance Corp. has paused its work with fellow regulators on several cryptocurrency-related matters, including forthcoming guidance for banks that hold virtual assets on behalf of clients, according to people familiar with the matter. “The agencies published a joint statement last year outlining areas where they planned to give banks more clarity around digital assets, including stablecoins and activities that might lead banks to put crypto products on their books. The FDIC has pulled back from a number of those workstreams, which include the Federal Reserve and the Office of the Comptroller of the Currency, people said.” YELLEN: ‘I WAS WRONG’ ABOUT INFLATION PATH LAST YEAR — Bloomberg’s Christopher Condon: “Treasury Secretary Janet Yellen gave her most direct admission yet that she made an incorrect call last year in predicting that elevated inflation wouldn’t pose a continuing problem. “‘I was wrong about the path inflation would take,’ Yellen said in an interview that aired Tuesday on CNN. ‘There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that at the time I didn’t fully understand.’” — A Treasury spokesperson later sought to clarify the comments in a statement to MM: “The Secretary was pointing out that there have been shocks to the economy that have exacerbated inflationary pressures which couldn’t have been foreseen 18 months ago, including Russia’s decision to invade Ukraine, multiple successive variants of COVID, and lockdowns in China. As she also noted, there has been historic growth and record job creation and our goal is now to transition to steady and stable growth as inflation is brought down.” MORE ON THE BIDEN-POWELL MEETING — Our Jonathan Lemire reports that White House aides “believe that while Biden, of course, will continue to pledge to fight inflation and empathize with struggling Americans, there was little upside to making him front and center for the response. One aide said a lesson to be learned was to avoid the approach taken by then-President Donald Trump in the early days of the pandemic when he became the face of the COVID response team even though aides urged him to play a backseat role to scientists in battling a lengthy crisis whose endgame was unknown. … “Aides have expressed some hope that prices could decline some before November. But they also acknowledge that even a mild decrease might not be enough to offset voters’ feelings about inflation – and that discontent could fuel how they cast their ballots.” BIDEN’S POTENTIAL BIG MISTAKE ON STUDENT LOANS — Economists Katharine Abraham (an Obama CEA alum) and Michael Strain (director of economic policy at the conservative American Enterprise Institute) write for POLITICO Magazine: “Blanket forgiveness of student loans, as President Joe Biden appears poised to offer, would be a huge mistake . It’s regressive and unfair. Over time, it could well increase the number of people struggling with student debt. And while billed as a ‘one time’ policy, it would set a terrible precedent. This is not to say there aren’t student borrowers who need help. But there are better ways to support them than a giveaway that would primarily benefit well-off professionals.” SHERROD BROWN WANTS WELLS FARGO CEO TO FIX PROBLEMS ‘ONCE AND FOR ALL’ — NYT’s Emily Flitter: “The Democrat in charge of the Senate Banking Committee is not happy with Wells Fargo’s chief executive, Charles W. Scharf. In a letter on Tuesday, the committee’s chairman, Senator Sherrod Brown of Ohio, demanded that Mr. Scharf ‘once and for all address Wells Fargo’s governance, risk management and hiring practices — weaknesses that have plagued the bank for almost a decade.’ Mr. Brown listed recent misbehavior by the bank, including a report by The New York Times that Wells Fargo had conducted sham interviews of Black and female candidates, and cited claims that it had avoided refinancing Black homeowners’ mortgages while interest rates were low.”
| | | BASEL COMMITTEE TO FINALIZE CRYPTO STANDARDS — Our Sam Sutton: “The Basel Committee on Banking Supervision is aiming to finalize standards for how banks treat crypto by the end of the year, the global regulatory group said Tuesday. BCBS, which represents 45 central banks and banking authorities from 28 jurisdictions, will also solicit feedback on a new consultation paper in the next month covering prudential oversight of banks’ exposure to cryptoassets.” CHELSEA MANNING LEARNS TO LIVE WITH CRYPTO — Our Bjarke Smith-Meyer in Brussels: “U.S. whistleblower Chelsea Manning isn’t a fan of cryptocurrencies. And yet the former intelligence analyst is backing crypto to power a computer platform called Nym Technologies that prevents governments and corporations from tracking people’s online activity.”
| | | STOCK REBOUND IS POWELL’S HEADACHE AS FINANCIAL CONDITION EASE — Bloomberg’s Katherine Greifeld: “A rebound in risk assets could prove to be a problem for a Federal Reserve trying to curb excesses across markets. Stocks have bounced sharply since mid-May’s lows and credit spreads have tightened back to levels seen ahead of the March liftoff of interest-rate hikes while the Bloomberg Dollar Spot Index has cooled from two-year highs reached earlier this month. Taken together, a Bloomberg measure of US financial conditions -- a cross-asset measure of market health -- has returned to levels seen before March’s hike.” FED FEARS HIT MORTGAGE BONDS, ATTRACTING INVESTORS — WSJ’s Matt Wirz: “A $5.5 trillion bond market supporting the U.S. mortgage industry is being roiled by fears it will be hit in the Federal Reserve’s battle against inflation. Prices are falling for bonds backed by agency mortgage loans from government-owned lenders Fannie Mae and Freddie Mac. That is primarily because the Fed has started raising interest rates, which hits the value of all existing fixed-rate bonds, but also because it might start selling some of its $2.7 trillion holdings of the bonds, potentially further diminishing their value.”
| | | James Lightbourn is now senior vice president for corporate finance at Arctic Securities. He most recently was chief strategy and investment officer at Norse Atlantic Airways. (h/t Daniel Lippman)
| | | | DON'T MISS DIGITAL FUTURE DAILY - OUR TECHNOLOGY NEWSLETTER, RE-IMAGINED: Technology is always evolving, and our new tech-obsessed newsletter is too! Digital Future Daily unlocks the most important stories determining the future of technology, from Washington to Silicon Valley and innovation power centers around the world. Readers get an in-depth look at how the next wave of tech will reshape civic and political life, including activism, fundraising, lobbying and legislating. Go inside the minds of the biggest tech players, policymakers and regulators to learn how their decisions affect our lives. Don't miss out, subscribe today. | | | | | | | | U.S. consumer confidence edged lower in May as Americans’ view of their present and future prospects dimmed in the midst of persistent inflation. — AP’s Matt Ott After months of rolling lockdowns in scores of Chinese cities that have forced hundreds of millions of people to remain in their homes, it is clear that President Xi Jinping is prepared to pursue his policy of zero-Covid at the expense of all other concerns. — FT's Ed White, Andy Lin, Dan Clark, Sam Joiner and Caroline Nevitt ZOMBIE FIRMS FACE SLOW DEATH AS ERA OF EASY CREDIT ENDS — Bloomberg’s Lisa Lee: “They are creations of easy credit, beneficiaries of central bank largesse. And now that the era of unconventional monetary policy is over, they’re facing a challenge like never before. They are America’s corporate zombies, companies that aren’t earning enough to cover their interest expenses, let alone turn a profit." | | | | Follow us on Twitter | | | | Follow us | | | | |  |
