Larry Summers rejoins the chat — Powell for another term? — Is the Fed losing control?

From: POLITICO's Morning Money - Monday Mar 22,2021 12:03 pm
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By Ben White and Aubree Eliza Weaver

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Quick Fix

Larry Summers rejoins the chat — There are not a lot of Democrats willing to criticize President Joe Biden at this point. Sure, he’s gotten some jabs from the left on occasion. But the gravity of the current crisis and the president’s popularity — not to mention the fear of social media cancellation — have most of the party in line. Not so with Larry Summers, former Treasury Secretary to President Barack Obama and top economic adviser to President Bill Clinton.

Summers enraged the White House with his op-ed questioning the stimulus size and raising the specter of damaging inflation. Maybe you thought Larry would take his beating following that op-ed and fade away? Hah. Not his jam.

Summers stuck himself right back into the conversation over the weekend, cementing him as one of the more interesting voices on the stimulus and the economy while nearly everyone else on the left (and at the Fed) are shouting the same choir lyrics.

Per Bloomberg: “Summers warned that the U.S. is suffering from the ‘least responsible’ macroeconomic policy in four decades, pointing the finger at both Democrats and Republicans for creating ‘enormous’ risks.

“‘These are the least responsible fiscal macroeconomic policy we’ve have had for the last 40 years,’ Summers said. ‘It’s fundamentally driven by intransigence on the Democratic left and intransigence and the completely irresponsible behavior in the whole of the Republican Party.’” … “He said there is a one-in-three chance that inflation will accelerate in the coming years and the U.S. could face stagflation.”

Why to care — Summers is a major outlier right now among Democrats. But his views carry weight and if some of his darker scenarios come to pass it will mean a very large reckoning for the party.

Oh and remember Jay Powell is up soon — Via Compass Point’s Isaac Boltansky on something that is not on a lot of people’s minds right now: “Powell’s term as Chair ends in February 2022 and there is already a fair amount of speculation regarding … Biden’s choice. …

“We have no unique insight into what’s next for Chairman Powell, but it is clear that he is respected on both sides of the aisle and could cruise through another confirmation process if renominated.” … True now. Will see if it remains so in February.

GOOD MONDAY MORNING — Cool factoid via @nathantankus: “This is crazy- Federal Reserve guards were the ones who discovered the Watergate burglary .” Email me on bwhite@politico.com and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on aweaver@politico.com and follow her on Twitter @AubreeEWeaver.

 

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Driving the Day

Monday is fairly quiet but there is a lot on tap for the week. Powell and Treasury Secretary Janet Yellen are scheduled to testify before House Financial Services on Tuesday at 12:00pm and Senate Banking on Wednesday at 10:00am. … Biden heads to Columbus, Ohio on Tuesday to promote the stimulus and its impact on health care costs (on the anniversary of the ACA) … Biden (finally) holds a formal press conference on Thursday

Also this week: House, Senate to hold SBA oversight hearings — The House Select Subcommittee on the Coronavirus Crisis “plans to dig into small businesses relief fraud at a hearing Thursday at noon.

“Planned witnesses include the SBA inspector general, the co-chair of the Pandemic Response Accountability Committee and a GAO official. Senate Small Business will hold its own SBA oversight hearing Wednesday afternoon with testimony from agency officials overseeing the PPP and EIDL programs, as well as the SBA IG and GAO.”

BIDEN ITCHES TO TAX THE RICH — Bloomberg’s Nancy Cook: “Biden’s economic team at the White House is determined to make good on his campaign pledge to raise taxes on the rich, emboldened by mounting data showing how well America’s wealthy did financially during the pandemic.

“With Republican and business-lobby opposition to the administration’s tax plans stiffening, Democrats need to decide how ambitious to be in trying to revamp the tax code in what’s almost-certain to be a go-it-alone bill. Interviews with senior officials show there’s rising confidence at the White House that evidence of widening inequality will translate into broad popular support for a tax-the-wealthy strategy.”

ASIAN STOCKS MIXED EARLY — Via Reuters: “Asian stocks turned mixed and bonds bounced on Monday as a plunge in the Turkish lira sparked talk that capital controls might be needed to stem the rout, though the wider fallout was relatively restrained for the moment. …

“Yields on 10-year Treasury notes edged down five basis points to 1.68%, suggesting some favoured safe havens. Investors are still struggling to deal with the recent surge in U.S. bond yields, which has left equity valuations for some sectors, particularly tech, looking stretched.
Bonds had another wobble on Friday when the Fed … decided not to extend a capital concession for banks, which could lessen their demand for Treasuries.”

IS THE FED LOSING CONTROL? — Mohamed A. El-Erian on Bloomberg Opinion: “Is the Federal Reserve losing control of the bond market Last Wednesday’s [FOMC] meeting and its aftermath highlighted the growing contradiction between the Fed’s policy stance and evolving economic realities.

“Central bankers see no need to alter their ultra-stimulative monetary measures even though they substantially revised up both their growth and inflation projections. Market inflationary expectations are at multiyear highs, bond yields have risen and the yield curve has steepened significantly”

Markets

INVESTORS GOT THE STIMULUS BOOST, BUT NOW FACE TAX WORRIES — Reuters’ Lewis Krauskopf and Caroline Valetkevitch: “Investors are turning their attention to prospects that higher taxes could threaten the rally in U.S. stocks as President Joe Biden’s administration moves forward with its agenda and seeks ways to pay for its spending plans.

“In recent days, investors have focused on a rise in bond yields that has pressured share prices, though indexes remain close to their record highs. Nevertheless, some worry that at least a partial rollback of the corporate tax cuts that fueled stock gains during the Trump era could eventually drag on equities, whose valuations have already grown rich by some measures.”

WALL STREET PROS REFLECT ON NEW INFLATION ERA — Bloomberg’s Anchalee Worrachate: “t’s the invisible force rocking Wall Street: An inflation revival for the post-lockdown era that could change everything in the world of cross-asset investing.

“As America’s dalliance with run-it-hot economics sends market-derived price expectations to the highest in more than a decade, Bloomberg solicited the views of top money managers on their make-or-break hedging strategies ahead. One takeaway: The economics of trading from stocks and real estate to interest rates would be turned upside down if projections of runaway prices are to be believed.”

A FED WITH NO FEAR OF INFLATION SHOULD SCARE INVESTORS — WSJ’s James Mackintosh: “It has taken four decades, but the Federal Reserve has finally shaken off its fear of inflation. The markets are only just waking up to the implications of the shift.

"The outlines of the turnaround have been developing for a while as the Fed’s focus has moved from its inflation mandate to a constant emphasis on its goal of full employment. Meanwhile, its measure of rising prices has moved to an average target, allowing inflation to overshoot a 2 percent goal to make up for past misses.”

 

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Fly Around

IMF SEES SIGNS OF STRONGER GLOBAL RECOVERY, BUT SAYS RISKS REMAIN — Reuters’ Andrea Shalal: “The No. 2 official at the International Monetary Fund on Saturday pointed to emerging signs of a stronger global economic recovery, but warned that significant risks remained, including the emergence of mutations of the coronavirus. IMF First Deputy Managing Director Geoffrey Okamoto said that in early April the Fund would update its January forecast for global growth of 5.5 percent to reflect additional fiscal stimulus spending in the United States, but gave no details.

“In a speech to the China Development Forum, Okamoto raised concerns about the growing divergence between advanced economies and emerging markets, with some 90 million people seen falling below the extreme poverty threshold since the pandemic began.”

SHORT-TERM RATES MIGHT BE BETTER LONG-TERM GUIDE ON BANKS’ LEVERAGE — WSJ’s Telis Demos: “When it comes to thinking about the Federal Reserve and banks, some investors might not be looking at the right part of the market. On Friday morning, the Fed said it wouldn’t extend an emergency pandemic rule exempting Treasurys and reserves from a big-bank leverage measure beyond March 31, when it is due to expire.

"Without that exemption, big banks will be running closer to maximum leverage levels. One worry has been that this could force some balance-sheet shrinking and selling of longer-term Treasury bonds, putting further upward pressure on those rates.”

DALIO: FED WILL NEED TO BUY BONDS AS STIMULUS BOOSTS YIELDS — Bloomberg: “The U.S. Federal Reserve will need to buy more bonds as an oversupply of Treasuries drives up yields, said Ray Dalio, founder of Bridgewater Associates.

“The recent fiscal stimulus announced by the Biden administration will result in more bond sales to finance the spending, worsening the ‘supply-demand problem for the bonds, which will exert upward pressure on rates,’ Dalio said Saturday on a panel at the China Development Forum, an annual conference hosted by the Chinese government. That will ‘prompt the Federal Reserve to have to buy more, which will exhibit downward pressure on the dollar,’ he said.

FED’S REVERSAL ON BANK CAPITAL REQUIREMENTS SERVES NO PURPOSE — WSJ’s Greg Ip: “Since the financial crisis more than a decade ago, the general attitude about bank capital has been that there is no such thing as too much. It was in that spirit that on Friday the Federal Reserve reimposed a requirement that big banks hold capital against Treasury bonds and reserves (cash kept on deposit at the Fed) on their balance sheets.

“The case for that requirement is flawed. The purpose of holding capital, usually shareholders’ equity, is to absorb potential losses. But Treasurys and reserves are risk-free. With that capital requirement back in place, the Fed achieves nothing toward making the financial system safer while potentially raising headwinds to its other goal: stoking an economic recovery with easy credit conditions.”

 

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