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TODAY’S THE DAY – We know what’s (most likely) coming this afternoon when the Federal Reserve releases its interest-rate decision. Wall Street is still on pins and needles.
All the speculation over what Fed Chair Jerome Powell will say at his post-meeting press conference – about the central bank’s future plans and his view of the US economy – has convulsed financial markets, our Ben White writes.
Ben chatted with some of the top minds in the markets about where they think the Fed is headed, and what it means for this year’s midterm campaigns and the 2024 presidential election.
Mohamed El-Erianpresident of Queens College, Cambridge, and chief economic adviser at Allianz – “The Fed is more likely to commit another policy error because it is already so far behind in recognizing the inflation threat and doing something about it.”
On elections – “It’s just going to be a shellacking for Democrats. Inflation has become a major vulnerability. ”
Bill Adams, chief economist for Comerica – “The Fed wants monetary policy to be neutral right now, but they also do not want to shock the financial system by immediately pushing rates even higher even faster,” Adams said. “And they are not really sure what the ‘neutral’ rate is right now anyway.”
Rubeela Farooqi, chief US economist at High Frequency Economics – “There are so many risks around the economic outcome that it’s going to be a challenge for them,” she said. “The last thing they want to do is kill the economy, and one way to kill the economy is to kill demand by moving rates up too fast.”
MILK DISPATCH –
ALL ABOUT THAT BASE (LINE): The Congressional Budget Office will release its long-awaited update to its budget and economic forecasts at the end of the month, Director Phil Swagel said at the Milken Institute Global Conference on Tuesday. Swagel was on a panel on national debt with former Obama Council of Economic Advisers Chair Jason Furman, former CBO Director Douglas Holtz-Eakin and Stony Brook University Professor Stephanie Kelton.
The forecasts will obviously show higher interest rates and higher inflation, Swagel said.
“It has an interesting effect on the fiscal trajectory, because first of all, revenues are running really strong, even stronger than would be predicted by the state of the economy. But that probably reflects to some extent high inflation or the forces behind the high inflation. ”
“Spending has gone up as well – with inflation, some parts of our spending are indexed. Those two basically offset. And so the fiscal danger, in a sense, or the risk, is all through interest rates. If interest rates inflect upward, that would cause a serious challenge to our fiscal situation. ”
SPEAKING OF THE DEFICIT: President Joe Biden will deliver remarks this afternoon on the economy focusing on deficit reduction, growth and jobs. Biden will say that during his first year in office, the deficit fell by over $ 350 billion and that the administration projects it will decline by more than $ 1.5 trillion this year, the largest reduction ever in a single year. Biden will credit the economic recovery, which has boosted incomes and revenue, as well as the winding down of emergency spending. The Treasury Department also estimates that it will pay down the national debt this quarter for the first time since 2016.
IT’S WEDNESDAY – Thanks to those of you who said hi at the Milken conference. We’re back in DC – have tips, ideas or just want to catch up in person? Let us know: [email protected], @katedavidson or [email protected], @aubreeeweaver.
Assistant Treasury Secretary for Financial Institutions Graham Steele speaks at the ICBA summit at 7:45 am… Trade data released at 8:30 am… Treasury Secretary Janet Yellen speaks at a Wall Street Journal event at 11:30 am… Fed statement at 2 pm and Powell press conference at 2:30 pm… Senate Banking hearing on transfer fees at 2:30 pm
[MICHAEL STIPE VOICE] CBOE THE LETTER – From our Sam Sutton: CBOE Global Markets is positioning itself as a competitor to crypto exchanges. As digital asset platforms like FTX and Coinbase scoop up CFTC-regulated crypto derivatives platforms, the longstanding securities and commodities exchange operator is framing its acquisition of Eris Digital Holdings – a crypto spot market exchange and futures-trading platform that holds CFTC licenses to operate as a designated contract market and derivatives clearing organization – as a more efficient way to capture crypto market share with traditional investors on traditional platforms. ErisX reportedly considered offers from other crypto exchanges but, in ErisX CEO Thomas Chippas’ words, its avenue for growth will be stronger in-house at CBOE “whichever way the regulatory winds blow.”
As if to underscore that point, CBOE’s Chief Strategy Officer and Head of Corporate Initiatives John Deters said the crypto industry’s push to acquire CFTC-regulated entity is “almost like it’s validation” for his company’s strategy, he said. “The investable assets and cash that are ready to be deployed in investing strategies outside of the crypto-first infrastructure? It’s many, many multiples greater than what’s inside [that crypto ecosystem] even though that crypto-first infrastructure gets the attention. ”
CBA TAPS JOHNSON AS PRESIDENT – Your MM host: The Consumer Bankers Association has named Lindsey Johnson, president of the US Mortgage Insurers, as its new president and chief executive.
Johnson, who has served as head of the mortgage insurers group since 2015, will take over for retiring CBA President Richard Hunt on July 5, the group said in an announcement Tuesday. Prior to joining USMI, Johnson served as a director at PricewaterhouseCoopers and was a Republican aide on the Senate Banking Committee.
INVESTORS ARE SO BEARISH ON STOCKS THAT IT MAKES THE MARKET LOOK BULLISH – Bloomberg’s Jan-Patrick Barnert and Justin Zacks: “Investors have become so negative about the stock market that Wall Street is starting to think a rally may be on the way. JPMorgan Chase & Co. strategists led by Marko Kolanovic said this week that ‘investor sentiment is reaching extreme weakness,’ meaning a rebound could be on the cards. Meanwhile, a Societe Generale SA sentiment indicator recently dropped to levels last seen during the peak of Covid-19 lockdowns in 2020. ‘This will likely culminate in a bounce in equities,’ Societe Generale strategists Manish Kabra and Arthur Van Slooten wrote last week. ”
WALL STREET SEES GREATER RISK OF DEFAULT AT MAJOR BANKS – Reuters’ Mehnaz Yasmin: “The cost to insure bonds of Goldman Sachs, Morgan Stanley and Citigroup against default hit two-year highs on Monday on growing fears the US Federal Reserve’s aggressive moves to tame inflation might tip the economy into recession. Credit risks have worsened since the Ukraine crisis as some big US banks took a hit to their mainstay businesses, with capital market activity coming to a standstill and lending expected to remain lackluster. That has prompted bondholders to consider hedging strategies to protect against potential defaults. ”
JOB OPENINGS HIT HIGH POINT IN MARCH – NYT’s Talmon Joseph Smith: “Even as recession fears grow, a government survey released Tuesday showed that businesses were continuing to hire, with 11.5 million jobs listed as available in March, a record high since tracking began, while unemployment remained low. The number of ‘quits’ – a measurement of the amount of workers voluntarily leaving jobs – also reached a high, an indicator that many workers are confident they can leave their jobs and find employment that better suits their desires or needs. ”
And as some states hit record low unemployment, the Fed faces a tough adjustment – When Reuters’ Howard Schneider: “When Georgia matched its record low unemployment rate of 3.4 percent last October, officials in the southern US state could, in an important sense, mark the COVID-19 pandemic’s economic impact as being behind them. As the rate fell steadily and hit 3.1 percent in March, they realized trouble of a different sort had arrived as businesses struggled to fill vacancies, raising wages and benefits to lure workers and passing on the costs to customers through higher prices, with no relief in sight. ”
YELLEN, ZELENSKY AMONG THOSE TO SPEAK AT WSJ CEO COUNCIL – WSJ’s Stephen Fidler and Andrew Duehren: “US Treasury Secretary Janet Yellen and Ukrainian President Volodymyr Zelensky are set to address The Wall Street Journal’s CEO Council this week, as Russia’s invasion of Ukraine has upended geopolitics and amplified economic challenges that have emerged because of the Covid-19 pandemic. With the war in Ukraine front and center of global events, Mr. Zelensky is scheduled to address the event by video link. The meeting will open in London on Tuesday evening, when the head of the British armed forces, Adm. Tony Radakin, is also set to speak.
The invitation-only event will also bring together business leaders, including Microsoft Corp. founder Bill Gates, James Gorman of Morgan Stanley, James Quincey of Coca-Cola Co., Brian Chesky of Airbnb Inc. and Michael Moritz of Sequoia Capital, a California venture-capital firm focusing on the technology sector. ”
QUARLES SAYS US IS LIKELY TO SUFFER RECESSION – Bloomberg’s Rich Miller: “The US economy will probably fall into a recession as the Federal Reserve combats multidecade-high inflation, Randal Quarles, the Fed’s former vice chair for supervision, said. ‘Given the intensity of inflation, the degree to which unemployment has been driven down – to bring that back into an equilibrium, it’s unlikely the Fed is going to be able to manage that to a soft landing,’ he said on the IntraFi Network’s Banking with Interest podcast. “The effect is likely to be a recession.”
FED’S MESSAGE ON INTEREST-RATE PATH, DESTINATION WILL BE SCRUTINIZED – WSJ’s Nick Timiraos: “Investors tuning into Federal Reserve Chairman Jerome Powell’s news conference Wednesday will focus on his comments about how high interest rates might rise beyond this year to combat inflation. This is partly because the Fed has clearly telegraphed its plans for an aggressive ramp-up in policy tightening at this week’s two-day policy gathering, which begins Tuesday. Officials are preparing to raise rates by an unusual half percentage point and to follow that move in June with another half-point increase – and possibly more after that. They have not raised rates by more than a quarter percentage point at any meeting since 2000. ”
INFLATION BONDS ARE EARNING EYE-POPPING RATES – NYT’s Ann Carrns: “There’s not much good to say about inflation, with higher prices dogging consumers at the grocery store and the gas pump. But there is one bright spot: Government I bonds are earning eye-popping rates. New I bonds – low-risk federal savings bonds indexed to inflation – issued through the end of October will earn an annualized rate of 9.62 percent for six months, the Treasury Department announced this week. The rate also applies to older I bonds that are still earning interest. ”