‘Lot of uncertainty’: Consumers more alarmed about inflation

From: POLITICO's Morning Money - Monday Nov 13,2023 01:01 pm

Nov 13, 2023

Presented by Goldman Sachs

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QUICK FIX

The Labor Department will release the latest inflation reading on Tuesday, and as far as consumers are concerned, the outlook for prices is … not good. Americans’ expectations for long-term inflation have risen to the highest level in 12 years, according to the preliminary November reading from the University of Michigan’s Survey of Consumers released Friday.

Consumers expect prices to increase at an annual rate of 3.2 percent over the next five to 10 years, an increase from their 3 percent expectation a month earlier. And they believe costs will rise 4.4 percent over the next year (up from a 4.2 percent expectation last month). Expectations for gas prices, both over the short- and long-term, rose to their highest level this year.

“This is definitely not a blip — they have been trending up over the last two months,” Joanne Hsu, the director of the survey, told MM. “This is not the direction that the Fed wants to see.”

Consumers “understand that inflation is slowing, but prices are persistently high and it continues to weigh on them,” added Hsu, a former Fed economist.

“They are perceiving a lot of uncertainty because of the election next year, and there are also a lot of consumers who are worried about the fact that there are two wars, in Ukraine and Gaza right now, and so there’s just a lot for consumers to be anxious about,” she said. “Consumers are worried things are going to get worse.”

Long-run inflation expectations matter because businesses and consumers are less likely to react and change their behavior – by raising prices or asking for wage increases — if they view inflation as temporary.

The Fed envisions holding interest rates at their current punishing levels in the hopes that the rise in prices will continue to cool, our Victoria Guida notes, and policymakers will be watching closely to make sure that happens. “Inflation has given us a few head fakes,” Fed Chair Jerome Powell said last week. “If it becomes appropriate to tighten policy further, we will not hesitate to do so.”

What the central bank wants to avoid is a scenario where inflation not only stays buoyed at current levels but actually reaccelerates.

Inflation expectations are a key gauge of whether that might happen: If people and companies expect prices to keep increasing rapidly, it can become a self-fulfilling prophecy. Actual inflation depends in part on the expectations of consumers, businesses and investors — if people expect prices to rise 4.4 percent, business will want to raise prices by at least that much, and workers will want similarly sized raises in turn. That spiral is precisely the situation the Fed wants to avoid.

Happy Monday. Thoughts on inflation? Share them with me at kodonnell@politico.com

A message from Goldman Sachs:

Small business owners are already facing a credit crunch, but the Federal Reserve is planning to implement the Basel III Endgame — a new bank capital requirement which will further reduce the amount of capital available and make it more expensive for small business owners to access capital. Only 29% of small business owners say their business can currently afford to take out a loan. Tell the Fed: Stop the Squeeze on Small Businesses.

DRIVING THE WEEK

Monday … Federal Reserve Board Governor Lisa Cook delivers introductory remarks at 8:50 a.m. at a Conference on Nontraditional Data, Machine Learning and Natural Language Processing in Macroeconomics.

Tuesday … Fed Vice Chair Philip Jefferson delivers keynote remarks at 5:30 a.m. at the virtual Conference on Global Risk, Uncertainty, and Volatility, hosted by the Swiss National Bank … Federal Housing Administration Commissioner Julia Gordon delivers keynote remarks at the Urban Institute’s forum on “Challenges and Policy Responses to the Affordable Single-Family Housing Supply Problem,” kicking off at 9:30 a.m. … Fed Vice Chair for Supervision Michael Barr, Acting OCC Comptroller Michael Hsu, FDIC Chair Martin Gruenberg and NCUA Chair Todd Harper testify at the Senate Banking Committee’s hearing on oversight of financial regulators at 10 a.m. … the Senate Health, Education, Labor and Pensions Committee holds a hearing on unions at 10 a.m. … the House Financial Services Committee holds a markup of sanctions bills at 10 a.m.

Wednesday … Fed’s Barr, OCC’s Hsu, FDIC’s Gruenberg and NCU’s Harper testify at House Financial Services hearing at 9:30 a.m. … the House Financial Services Digital Assets Subcommittee holds a hearing on “Crypto Crime in Context” at 2 p.m. … the Joint Economic Committee holds a hearing on “Demographic Drivers of Our Deficit” at 2:30 p.m.

Thursday … Fed’s Cook delivers opening remarks at 6 a.m. at San Francisco Fed’s Asia Economic Policy Conference on “Global Linkages in a Post-Pandemic World” … Fed’s Barr and FDIC’s Gruenberg participate in a discussion on banking supervision and regulation at 7:10 a.m. at the European Systemic Risk Board’s virtual seventh annual conference … the FDIC holds a virtual meeting on the Final Rule on Special Assessment Pursuant to Systemic Risk Determination at 10 a.m. …Fed’s Barr speaks at 10:35 a.m. and Treasury Undersecretary for Domestic Finance Nellie Liang speaks at 11:20 a.m. at the 2023 U.S. Treasury Market Conference

Friday … Fed’s Barr speaks on payments at the Clearing House Annual Conference 2023

JOIN US ON 11/15 FOR A TALK ON OUR SUSTAINABLE FUTURE: As the sustainability movement heats up, so have calls for a national standard for clean fuel. Join POLITICO on Nov. 15 in Washington D.C. as we convene leading officials from the administration, key congressional committees, states and other stakeholders to explore the role of EVs, biofuels, hydrogen and other options in the clean fuel sector and how evolving consumer behaviors are influencing sustainable energy practices. REGISTER HERE.

Driving the day

T-minus 4.5 days until a possible shutdown… Government funding runs out Friday night.

…As U.S. debt faces a potential downgrade by Moody’s — “Moody’s Investors Service on Friday put the U.S. government’s pristine credit rating on a negative outlook, raising the possibility of another downgrade of American debt,” Victoria reports. “The credit rating firm cited risks to the U.S. fiscal outlook — namely, higher interest rates ‘without effective fiscal policy measures to reduce government spending or increase revenues.’

“‘Continued political polarization within [the] US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability,’ the firm added. A lower debt rating raises the risk of higher borrowing costs for the federal government.”

First in MM: 39 Senate Republicans want regulators to pull capital rule — Nearly 80 percent of the Senate Republican Conference has signed on to a new letter asking the Federal Reserve, FDIC and OCC to withdraw their plan to hike capital requirements for large banks, warning of "severe, adverse impacts on the entire U.S. economy."

Support for the request, led by Senate Banking ranking member Tim Scott, covers the ideological spectrum of the chamber’s Republicans, including Minority Leader Mitch McConnell as well as Sens. Mitt Romney, J.D. Vance and Chuck Grassley. They cite concerns about the potential impact on lending, affordable housing and pensions, and argue that the agencies have failed to provide data to justify the costs.

The letter underscores the intense pushback that top regulators are likely to get when they testify on the Hill Tuesday and Wednesday. A number of Democrats are also poised to raise concerns, as MM reported Friday. As we noted last week, Fed Vice Chair for Supervision Michael Barr, who will appear at the hearings, has pointed out that earlier post-crisis banking rules did not curb substantial economic growth.

Mark Warner preps AI plan for FSOC — The Virginia Democrat is working on legislation that would task the Financial Stability Oversight Council with responding to risks triggered by artificial intelligence, according to a prerecorded Q&A that will run Wednesday at the Georgetown Psaros Center's annual financial markets quality conference.

Warner said AI is an "almost tailor-made" issue for FSOC, which convenes top regulators to address risks across industries and markets. Because of AI's potentially dramatic impact, he said FSOC should take it on "and do it in a way where they have to act quickly."

Warner said he's been struck by the lack of urgency from Wall Street when it comes to addressing the possible dangers of AI.

"I've been really surprised that the traditional financial markets — the big banks, the markets themselves, large corporates — that this is not higher on their level of concern," he said.

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U.S. likely to pause trade portion of IPEF talks after Senate pushback — “The U.S. and Indo-Pacific trading partners are unlikely to reach an agreement on any trade provisions of their new regional economic package this week, according to two officials close to the conversations, dealing a blow to Biden’s diplomatic agenda as he prepares to welcome Asian allies — and Chinese leader Xi Jinping — to San Francisco this week,” POLITICO’s Gavin Bade reports. “The impasse on the trade pillar of the Indo-Pacific Economic Framework comes after senior Democrats in the U.S. Senate — including one facing a challenging reelection next year — expressed concerns about the negotiations last week. The U.S. and 13 other member nations have already concluded talks on three other parts of the IPEF agreement — focusing on supply chains, sustainability and anti-corruption — and are still expected to tout those portions this week.”

Yellen to ‘intensify communication’ with China’s He — “U.S. Treasury Secretary Janet Yellen said on Friday that she agreed with Chinese Vice Premier He Lifeng to ‘intensify communication’ on economic issues but warned him to crack down on Chinese companies that give material support to Russia for its war in Ukraine,” Reuters reports.

A message from Goldman Sachs:

Fly Around

Binance’s U.S. platform loses last lobbyists — Binance.US, the U.S. affiliate of the global crypto exchange, has severed ties with its last contracted lobbyists as the exchange struggles with operational problems and increased oversight from U.S. regulators. From our friends at POLITICO Influence: “Financial services lobbying firm FS Vector stopped working for Binance.US at the end of September, according to a newly disclosed filing. Binance.US had hired the firm only a year ago as part of a burst of hiring that came just before the dramatic collapse of rival exchange FTX. Fierce Government Relations, the other firm added during the mini hiring spree, also stopped lobbying for Binance.US at the end of September, according to a termination filed last month.”

WSJ: How Hamas turned to crypto to get money from Iran — A “pivot” to digital exchanges, the Wall Street Journal reports, “helped Hamas and affiliates such as Palestinian Islamic Jihad to receive large sums from Iran during the two years that preceded the attacks on Israel in October, [U.S.] officials said. It was an attempt to use a new financial technology to lessen the risks of moving physical money and goods.

A message from Goldman Sachs:

Of small business owners who applied for a new business loan or line of credit in the last year, only 41% received all of the funding they requested, including:

- 32% of Hispanic small business owners

- 26% of Black small business owners

Minority-owned small businesses are integral to our economy. Tell the Fed: Stop the Squeeze on Small Businesses.

Source: Survey of 1,240 Goldman Sachs 10,000 Small Businesses participants conducted by Babson College and David Binder Research from October 9-12, 2023. The survey included small business owners from 48 U.S. states, Washington, D.C., and Puerto Rico.