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| | | Tick. Tick. Tick. — Is that the sound Federal Reserve Chair Jay Powell hears when he falls asleep at night? Powell essentially said Wednesday that his nightmare isn’t that the Fed’s interest-rate increases tip the U.S. economy into a recession (though that would surely be a bad dream). Rather, it’s that the economy shifts from an era of very low inflation and idiosyncratic price pressures to an era of persistently high inflation. “Our job is literally to prevent that from happening,” Powell said at a central bank conference in Sintra, Portugal. “And we will prevent that from happening.” But the Fed doesn’t have endless amounts of time. “There’s a clock running here,” he emphasized. A multiplicity of shocks — For decades, Americans paid little attention to inflation because price pressures were practically non-existent. But a “multiplicity of shocks,” including the pandemic and the war in Ukraine, have fueled faster inflation over the past year — and higher anxiety among households grappling with those costs. While Americans still expect inflation to come down over the medium and longer term, Powell said, the longer it takes to restore price stability, the greater the risk that those future expectations could rise — or put differently, that the U.S. could shift to a high-inflation regime. That could force the Fed to raise interest rates even higher to bring it under control. “We have high inflation running now for more than a year,” Powell said. “It would be bad risk management to just assume that those long-term inflation expectations will remain anchored indefinitely in the face of persistently high inflation. So we’re not doing that.”
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Fed Chair Jerome Powell, with European Central Bank President Christine Lagarde, warned of the risk that inflation could become entrenched. | Sérgio Garcia/European Central Bank | Back it up — The comments shed a little more light on why Fed officials reacted the way they did to surprisingly downbeat data the Friday before their last policy meeting. In addition to a higher-than-expected increase in consumer prices, a University of Michigan survey suggested consumers’ expectations of future inflation had risen (though the figures were later revised down, suggesting not much had changed from the month before). While Fed officials signaled they were likely to raise rates by a half-percentage-point, they quickly pivoted to a three-quarter-percentage point hike, the biggest since 1994. Why risk eroding the credibility of the Fed’s verbal guidance by doing something different than what they had already signaled, WSJ’s Nick Timiraos asked at the Fed's post-meeting press conference. Powell pointed to the sanctity of well-anchored inflation expectations: “If we even see a couple of indicators that bring that into question, we take that very seriously. We do not take this for granted.” Looking ahead — Asked about the possibility that the Fed may tighten policy too much, Powell on Wednesday echoed a point he made in congressional testimony last week: There are worse outcomes than a recession. “Is there a risk that we would go too far? Certainly there’s a risk,” he said. “But I wouldn't agree that it’s the biggest risk to the economy. “The bigger mistake to make, let’s put it that way, would be to fail to restore price stability,” he said. It’s worth remembering that the price pressures we’re seeing now have only cropped up relatively recently, compared to the high prices that prevailed for more than a decade in the 1970s and 80s. Powell wants to avoid that at all costs, and made clear Wednesday that some pain — even a recession — is an outcome the Fed is willing to accept. IT’S THURSDAY — The Klondike bar is 100 years old! And it's cheaper now (about $4 for a six pack, or 67 cents a piece) than when it came out in 1922 (10 cents each, or $1.75 in today's dollars), per CNN. Are you Team Klondike or Team Dove Bar? (We're partial to the Dove Minis.) Got a tip, story idea or ice cream rec? Send them our way: kdavidson@politico.com, aweaver@politico.com, or find us on Twitter @katedavidson or @aubreeeweaver.
| | | | A message from Grayscale: As other countries approve spot Bitcoin ETFs, the U.S. is falling behind. SEC approval is critical for both investors and the future of the digital asset ecosystem. That's why Grayscale Investments is currently seeking regulatory approval from the SEC to convert the company's flagship fund — Grayscale Bitcoin Trust (GBTC) — into an ETF. CEO Michael Sonnenshein connected with POLITICO Focus to discuss the pending SEC approval and the future of the cryptocurrency landscape. Read on for more. | | | | | | PCE ON DECK — Powell & Co. will get an update at 8:30 a.m. on their preferred inflation gauge, the personal consumption expenditures price index, which rose 6.3 percent in May from a year earlier, or 0.2 percent from the previous month. White House officials expect that higher energy prices drove up headline inflation last month, but annual core PCE likely continued to improve and monthly core was relatively stable, a senior administration official said Wednesday (before seeing the official data). “There clearly continue to be a range of risks to the inflation outlook, major uncertainties surrounding the war in Ukraine chief among those, but we do think that core PCE is an important metric and that the recent progress is encouraging,” the official said. That progress is also consistent with other data that suggests goods inflation is easing, as demand is normalizing and supply chain pressures improve, and with labor market data that suggests inflation is not being driven by wage pressures, the official added. RULING ON ROE SPARKS DEBATE OVER LABOR-FORCE IMPACT — Our Victoria Guida: “The demise of Roe v. Wade is raising alarms among abortion rights advocates that historic gains for lower-income women in the workplace will be in jeopardy. “Some economists — including Treasury Secretary Janet Yellen — argue that access to abortion opened up opportunities for many of the most financially vulnerable women to enter the labor force and earn higher wages. They fear that new limits on the practice will not only hurt those people but the overall economy as well at a time when inflation is raging and low workforce participation looms as an obstacle to the recovery.” GRAYSCALE LAUNCHES LEGAL CHALLENGE AFTER SEC REJECTS BITCOIN FUND — Our Sam Sutton: "The SEC on Wednesday rejected Grayscale Investments’ bid to convert its Bitcoin trust into an exchange-traded fund, setting in motion a legal battle that will determine the future of the world’s largest digital asset fund. Grayscale — a subsidiary of the crypto behemoth Digital Currency Group — has claimed for months that the SEC was legally obligated to approve its plan to offer shares of the $12.9 billion fund through NYSE Arca." THE CHAMBER AND CHOPRA, PART 2 — Dennis Kelleher, president and CEO of Better Markets, emailed MM with another thought on the Chamber of Commerce’s public campaign against CFPB Director Rohit Chopra. Some MM readers suggested Wednesday the attacks would add fuel to Chopra’s agenda. But Kelleher said there’s nothing wrong with it! “CFPB Director Chopra isn’t ‘airing his grievances’ or ‘radically reshaping’ anything,” He is doing exactly what the law mandates: aggressively protecting financial consumers. He’s being targeted because the CFPB is once again a smart, effective cop on the beat and its Director can’t be intimidated and isn’t looking to spin through the revolving door for a job in the financial industry.” BIDEN ISN’T TO BLAME FOR INFLATION — That’s what former Fed Vice Chair Alan Blinder writes in a Wall Street Journal op-ed. “The Fed’s error in timing seems to have had two main sources. One is that inflation burst out of the gates, catching the central bank flatfooted. Using the PCE measure again, the inflation rate leapt from 1.4% in January 2021 to 4% in May 2021—and not because of anything Mr. Biden did. The main factors are well known: Covid, oil prices and food prices.” TREASURY ANNOUNCES $1.3 BILLION ECONOMIC AID TO UKRAINE — The Treasury Department said it had transferred $1.3 billion in aid to Ukraine via the World Bank, the first tranche of $7.5 billion in emergency economic assistance Congress approved last month. “With this delivery of economic assistance, we reaffirm our resolute commitment to the people of Ukraine as they defend themselves against Putin’s war of aggression and work to sustain their economy,” Treasury Secretary Janet Yellen said in a statement. The World Bank has estimated Ukraine’s economy may shrink by 45 percent in 2022 amid the war, which has pushed up military spending and sent tax revenue plunging, driving budget shortfalls of roughly $5 billion a month. NEW TURMOIL ROCKS CRYPTO AS COURT ORDERS HEDGE FUND TO LIQUIDATE — Our Sam Sutton: “A British Virgin Islands court has ordered the crypto hedge fund Three Arrows Capital to liquidate its assets , another blow to digital asset markets that are already cratering amid the collapse of once-high-flying startups.”
| | | | INTRODUCING POWER SWITCH: The energy landscape is profoundly transforming. Power Switch is a daily newsletter that unlocks the most important stories driving the energy sector and the political forces shaping critical decisions about your energy future, from production to storage, distribution to consumption. Don’t miss out on Power Switch, your guide to the politics of energy transformation in America and around the world. SUBSCRIBE TODAY. | | | | | | | | CONSUMER SPENDING WAS WEAKER THAN REPORTED — NYT’s Ben Casselman: “Consumer spending was weaker in early 2022 than previously believed , a sign that cracks may be forming in a crucial pillar of the U.S. economy. Spending, adjusted for inflation, increased 0.5 percent in the first three months of the year, the Commerce Department said Wednesday. That was a sharp downward revision from the government’s earlier estimate of 0.8 percent growth, and a slowdown from the 0.6 percent growth in the final quarter of 2021. Spending on services rose significantly more slowly than initially reported, while spending on goods actually fell.” —And the U.S. economy entered the second quarter on shakier footing than previously thought, WSJ’s Sarah Chaney Cambon reported. HIGHEST MORTGAGE RATES SINCE 2008 HOUSING CRISIS COOL SALES — NYT’s Conor Dougherty: “For the past two years, anyone who had a home to sell could get practically any asking price. Good shape or bad, in cities and in exurbs, seemingly everything on the market had a line of eager buyers. Now, in the span of a few weeks, real estate agents have gone from managing bidding wars to watching properties sit without offers, and once-hot markets like Austin, Texas, and Boise, Idaho, are poised for big declines.”
| | | Powell also said Wednesday there’s ‘no guarantee″ the central bank can tame runaway inflation without hurting the job market, AP’s Paul Wiseman wrote. MESTER SAYS FED IS ON TRACK FOR 0.75 POINT RATE HIKE IN JULY — WSJ’s Michael S. Derby: “Federal Reserve Bank of Cleveland President Loretta Mester said the U.S. central bank is on track for another big interest-rate rise next month based on current economic conditions. If the rate-setting Federal Open Market Committee meeting was being held today, Ms. Mester said Wednesday on CNBC that she would advocate for a 0.75-percentage-point rate increase ‘because I haven’t seen the kind of numbers on the inflation side that I need to see in order to, you know, think that we can go back to a 50 [basis-point] increase.’” NY FED BEGINS PUBLISHING CORPORATE BOND MARKET DISTRESS INDEX — Reuters’ Davide Barbuscia: “The Federal Reserve of New York will publish monthly updates on the U.S. corporate bond market to help identify signs of market distress similar to those seen during the global financial crisis and in early 2020.”
| | | | A message from Grayscale:   | | | | | | PRIVATE LENDERS ARE OFFERING CHEAPER DEBT THAN WALL STREET BANKS — Bloomberg’s Rachel McGovern, Lisa Lee and Giuliua Morpurgo: “A dirty little secret in a $1.2 trillion world of credit is getting exposed as the Wall Street rout deepens: Private debt is now the cheaper financing option for big-ticket leveraged borrowers than the ailing public market -- upending industry norms. As banks get pummeled by risk aversion and sinking asset values, direct lenders are lavishing risky companies and private-equity firms with capital at rates below what’s available in the volatility-lashed high yield and syndicated loan market.” CEO STOCK SALES RAISE QUESTIONS ABOUT INSIDER TRADING — WSJ’s Tom McGinty and Mark Maremont: “As Plug Power Inc. shares soared to a 15-year high in January 2021, longtime Chief Executive Andrew Marsh unloaded some of his stock in a well-timed sale. In his biggest-ever payday from selling the company’s shares, Mr. Marsh netted $36 million by selling about 40 percent of his holdings under an automatic trading plan. The plan, it turned out, had been set up only the month before. And shortly after he sold, a string of negative company announcements sent the fuel-cell maker’s shares plunging—down 60 percent over three months.” MARKETS CHALLENGE FED TIMELINE, THREATENING MORE SWINGS IN TREASURIES — Reuters’ Davide Barbuscia: “Bond traders expect the gyrations convulsing U.S. Treasuries to continue in the second half of 2022 as investors challenge the Federal Reserve’s projections for how far it will tighten monetary policy to quell the worst inflation in decades. At issue is the expected high-water mark for the Fed’s rate hiking cycle.”
| | | | A message from Grayscale: The U.S. digital asset marketplace has been rapidly evolving for years, with more consumers than ever before collecting, trading and using cryptocurrency. But as other countries approve spot Bitcoin ETFs, some are concerned that the U.S. hasn't kept pace. That's why Grayscale Investments, the world’s largest digital currency asset manager, is seeking SEC approval to convert its flagship fund, Grayscale Bitcoin Trust (GBTC), into an ETF. Grayscale Investments CEO Michael Sonnenshein joined POLITICO Focus for a conversation on how spot Bitcoin ETFs could promote financial accessibility and safety and why GBTC is the best-suited option for the transition. Read on for more. | | | | | | | Follow us on Twitter | | | | Follow us | | | | |  |
