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With his future atop the Fed secure for another four years, will Jerome Powell suddenly ditch the suit and glasses and change into an inflation-fighting superhero — or employment-quashing villain, depending on your view.
That’s the big question following President Joe Biden’s announcement that he intends to keep Powell around, favoring continuity and stability at the central bank at a time of enormous uncertainty for the U.S. economy.
A key part of Powell’s appeal is his ability to attract support from both sides of the aisle. Progressives in particular have praised a historic shift in Fed policy under his leadership last year, when he pledged to keep rates near zero until the economic recovery is felt by all.
A lot has changed since then, and surging inflation could place that promise in jeopardy before it even takes hold, our Victoria Guida writes:
“Price spikes are reaching 30-year highs, and if they don’t ease, the Fed might start to pull back its support for the labor market before the economy reaches a point where anyone who wants a job can get one.”
Powell “would disappoint many progressives and Fed watchers if he chooses to curb the Fed’s efforts to boost the economy. But pressure will also grow more intense for the central bank to raise interest rates if price increases continue.”
In the last week, moderate Democrats have ramped up their calls for the Fed to speed up the withdrawal of its support for the economy. Meanwhile, progressive groups are on edge, urging the Fed not to lose sight of its employment goals.
Austan Goolsbee, a top economic adviser to President Barack Obama: “The big challenges facing the Fed are: figuring out the nature of this inflation and this moment in the economy — and then carrying out a plan in the face of a lot of yelling.”
So far, Powell has stressed patience. Will he suddenly pivot to a more hawkish stance?
Cornerstone Macro’s Roberto Perli says no. “This line of thinking implies that in recent months Powell misrepresented his and the FOMC’s views to get four more years on the job; we don’t buy it, and we give him more credit than that.”
Perli says Powell’s thinking has been consistent with the Fed’s new framework. If inflation persists, a couple of rate hikes next year are plausible — but so are no rate hikes, if inflation subsides, he said in a note to clients. “The outlook will determine the policy course, not some Machiavellian calculations by the chair.”
Fiscal interventions: Meanwhile, Biden continued to take steps on his own to try to ease price pressures this week. He announced Tuesday his administration would tap the nation’s Strategic Petroleum Reserves to try to tamp down rising fuel prices, in a coordinated action with countries like China, Japan, India and South Korea.
Joe Brusuelas, chief economist at RSM US, notes that recent jawboning by the administration and its global allies has already resulted in a 9 percent decline in U.S. benchmark West Texas Intermediate oil since late October and a 6 percent drop in the cost of the global benchmark Brent crude oil. Further price decreases depend on a number of factors, including risks around speculation in the oil and energy market, possible increases in U.S. shale production and the willingness of OPEC to follow through on its global supply commitments.
“As such, the actual probability of policy success here is quite limited and will have more to do with public and political optics rather than resulting in major change in pricing dynamics inside the global energy complex,” Brusuelas said in a note to clients.
IT’S WEDNESDAY — A belated congrats to the Pace University College Fed Challenge team, which took home its fifth national title in the central bank’s annual competition last Friday. The Pace team, led this year by seniors Winnie Liu and Fiona Waterman, has taken home five of the last seven Fed challenge titles.
And remember, MM will be on hiatus for the next couple of days and back in your inboxes on Monday. Thank you all so much for reading and sharing your feedback.
Commerce Department releases data at 8:30 a.m. on third-quarter GDP and October durable goods orders … Commerce at 10 a.m. also releases consumer spending, personal income, inflation and new home sales … Fed releases minutes from its Nov. 2-3 policy meeting at 2 p.m.
BANK REGULATORS ANNOUNCE CRYPTO WORK PLAN — Victoria Guida: “Bank regulators on Tuesday announced they will give more guidance to lenders next year on prudent ways to deal with cryptocurrencies, following a months-long review of their policies around virtual assets.
“The Federal Reserve, Office of the Comptroller of the Currency and the FDIC in a joint statement said crypto ‘presents potential opportunities and risks for banking organizations, their customers and the overall financial system.’”
OCC REINS IN TRUMP-ERA CRYPTO GUIDANCE — Victoria again: “The Office of the Comptroller of the Currency on Tuesday updated Trump-era guidance to emphasize that banks need to ask permission before engaging in cryptocurrency-related activities on behalf of their clients, putting the agency in a significantly more restrictive stance toward the growing virtual currency market.”
BROWN SEEKS DETAILS FROM STABLECOIN ISSUERS, EXCHANGES — Senate Banking Chair Sherrod Brown (D-Ohio) on Tuesday sent letters to several stablecoin issuers and exchanges seeking information on how companies are protecting consumers and investors. “I have significant concerns with the non-standardized terms applicable to redemption of particular stablecoins, how those terms differ from traditional assets, and how those terms may not be consistent across digital asset trading platforms,” Brown wrote in a letter to Circle. He also sent letters to Coinbase, Gemini, Paxos, TrustToken, Binance.US and Centre.
INTERNATIONAL REGULATORS WANT SCRUTINY OF ESG DATA — Our Lorraine Woellert: “A global body of securities regulators concerned about greenwashing is calling for more scrutiny of companies that rate corporate sustainability. The International Organization of Securities Commissions, in a report issued Tuesday, said rating companies and data providers focused on environmental, social and governance (ESG) activities aren’t aligned on definitions, what to measure or how to measure.”
U.S., INDIA LOOK TO BOOST AG, HEALTH, SERVICES TRADE — From our colleague Doug Palmer: “Top trade officials from the United States and India agreed Tuesday to move toward boosting trade across a variety of sectors including health care, pharmaceuticals and agriculture, but failed to resolve a dispute that led to India’s ejection from an American trade benefits program.”
POWELL WATCH —
HOW BIDEN WENT FOR STABILITY OVER FRESH BLOOD AT THE FED — Bloomberg’s Nancy Cook, Jennifer Jacobs and Steven Dennis: “The Fed chief, whom Biden interviewed the same day as Brainard, shored up his chances with assuring responses to probing questions from the president about financial regulation and climate risks. Under fire from his political opponents over rising prices for housing, food, energy, cars and other goods, and struggling to revive his sunken approval ratings, Biden opted for the politically safe choice. Stability and an apolitical Fed wound up outweighing whatever chemistry he enjoyed with Brainard.”
—Biden’s Powell pick marked a rare split with Sen. Elizabeth Warren (D-Mass.), WSJ’s Ken Thomas and Siobhan Hughes write: “But in casting her opposition to Mr. Powell, Ms. Warren is also staking out ground on a critical nomination to come: vice chair of supervision. The Fed board role ‘must be filled by a strong regulator with a proven track record of tough and effective enforcement,’ Ms. Warren said, urging Mr. Biden to act quickly.”
— In the NYT, economist Michael Strain says the Fed is erring too much on the side of maximum employment: “Instead, Mr. Powell must tip the scales back in favor of price stability. If he doesn’t, he risks inviting a sluggish economy — or even a recession — in the coming years.”
—The Powell pick leaves open questions on the direction the central bank will take in regulating Wall Street, WSJ’s Andrew Ackerman and Orla McCaffrey write: “The extent to which the Fed will spend the next several years tightening regulatory policy—after easing rules under Trump-appointed officials—will depend on whom Mr. Biden ultimately picks to succeed Randal Quarles, the departing central bank governor who served as its regulatory point man until last month.”
IMMIGRATION AND THE LABOR SHORTAGE — WaPo’s Catherine Rampell writes in the Opinion section: “There’s one underappreciated factor contributing to labor shortfalls that the Biden administration could alleviate almost immediately: the ‘missing’ immigrant workers. Immigration inflows slowed sharply during the Trump administration … But the labor force is also losing immigrants already here legally, whose work permits are expiring because the Biden administration hasn’t gotten its act together.”
REQUIRED READING: INFLATION — Anyone else bracing for the hot inflation takes from family around the Thanksgiving table this year? Prepare yourself by reading Jason Furman’s paper on rising prices and what the Fed should do about them, or this blog post from Hamilton Project’s Wendy Edelberg on what current inflation tells us about future inflation.
Sebastian Mallaby also updates (again) his 2020 inflation forecast, when he wrote that advanced economies were entering a new age: the age of magic money, in which central banks face no penalty for conjuring money out of thin air. The thesis is in trouble, he says, because its premise — dormant inflation — has been battered.
CONFUSION AND CRYING: THE ‘BUY THE CONSTITUTION’ AFTERMATH — VICE’s Jordan Pearson and Jason Koebler: “The community of crypto investors who tried and failed to buy a copy of the U.S. Constitution last week has descended into chaos as people are realizing today that roughly half of the donors will have the majority of their investment wiped out by cryptocurrency fees.”
DOLLAR TREE IS NOW $1.25 TREE — CNN’s Nathaniel Meyersohn: “The company — one of America’s last remaining true dollar stores — said Tuesday it will raise prices from $1 to $1.25 on the majority of its products by the first quarter of 2022. … Dollar Tree said in a quarterly earnings release Tuesday that its decision to raise prices to $1.25 permanently, however, was ‘not a reaction to short-term or transitory market conditions.’”
GLOBAL REGULATORS RAISE CAPITAL REQUIREMENTS FOR THREE BIG BANKS — NYT’s Emily Flitter: “The Financial Stability Board has raised capital requirements for three banks considered systemically important — BNP Paribas, Goldman Sachs and JPMorgan Chase — as part of a yearly review of the safeguards it sets to try to prevent another global financial crisis.”
AS INFLATION HITS 31-YEAR HIGH, BANKS ASSESS RISKS AND OPPORTUNITIES — Reuters’ Matt Scuffham: “Wall Street banks are planning for a sustained period of higher inflation, running internal health checks, monitoring whether clients in exposed sectors could pay back loans, devising hedging strategies and counseling caution when it comes to deals. … Senior bank executives have become less convinced by central bankers’ arguments that the spike is a temporary blip caused by supply chain disruption and are stepping up risk management.”