Here comes the FedJuly 26, 2021
Editor’s Note: Morning Money is a free version of POLITICO Pro Financial Services' morning newsletter, which is delivered to our subscribers each morning at 6 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro.
Here comes the Fed — All of Wall Street’s eyes and ears will be on the Federal Reserve and Chair Jerome Powell on Wednesday at 2:00 p.m. for the latest statement on interest rates and discussion of the eventual wind down of asset purchases as the economy continues to recover and inflation hits fairly uncomfortable levels. Nothing is going to change on rates.
But the Fed in its statement and Powell in his press conference may at least begin talking about “tapering” asset purchases. More detail will likely wait for Jackson Hole meeting next month. But at least some discussion is likely.
This could jolt Wall Street even though taper talk has been around for a while. Bond yields spiked and stocks tanked in 2013 during the so-called “taper tantrum” when the central bank announced it would start pulling back on the amount of money it was pumping into the economy. The tumult proved short lived.
And tapering this time is so well telegraphed that it shouldn’t spark a similar freak out. But the rise in jobless claims, the cooling housing market and rising fears that the economy has already peaked could make the Fed’s messaging and Wall Street’s reaction more complicated.
Standard Chartered’s Steven Englander: “We think the FOMC message will be that one-off inflation shocks will be tolerated as long as the path to the target zone does not push long-term inflation expectations off track. ...
"We expect that Fed Chair Powell will convey more patience than many recent Fed speakers about bringing inflation lower"
RSM’s Joe Brusuelas: “Should the Fed mention the Delta variant in the statement or should … Powell go out of his way to identify it as a material risk to the economic outlook, we could see the market re-test recent lows in the U.S. 10-year Treasury yield”
Speaking of delta and the economy … Via Megan Cassella and me over the weekend: “The resurgence of the coronavirus is threatening to undercut the U.S. economic recovery and upend Americans’ plans to return to work just as the sweeping social safety net that Congress built during the pandemic is unraveling. …
“Biden — whose Gallup approval rating dropped to 50 percent this week, its lowest yet — is already drawing attacks from Republicans over the issue. Rep. Kevin Brady of Texas, the top GOP tax writer in Congress, said the president has focused too much on pushing his “$4 trillion spending binge” and not enough on the virus …
Jason Furman, a former top economic adviser to President Barack Obama who is close to the current White House economic team, said the West Wing is very aware of the risks to the economy from the spike in Covid cases.
“Any problem that has a 5 to 10 percent chance to derail the economic recovery you are looking at very closely and are worried about”
GOOD MONDAY MORNING – Happy Monday, all. Email me on [email protected] and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaer on [email protected] and follow her on Twitter @AubreeEWeaver.
FOMC on Wednesday at 2:00 p.m. not expected to change policy but could include new language on inflation and asset purchases. Powell will be pressed on both issues at his press conference following the announcement …
President Biden heads to Lower Macungie Township, Pa. on Wednesday “where he will deliver remarks on the importance of American manufacturing, buying products made in America, and supporting good-paying jobs for American workers.” …
Senate Banking has a hearing on Tuesday at 10:00 a.m. on crypto currencies and on Thursday at 10:00 a.m. on interest rate caps … House Financial Services subcommittee has a hearing on Tuesday at 10:00 a.m. on central bank digital currencies … First look at second quarter GDP on Thursday at 8:30 a.m. expected to show strong growth 8.5 percent …
MORE CLASHES OVER INFRASTRUCTURE DEAL — Our Marianne LeVine: “House Speaker Nancy Pelosi and Sen. Rob Portman clashed Sunday over the next steps for the bipartisan infrastructure package.
“During separate appearances on ABC’s "This Week with George Stephanopoulos," Pelosi and Portman (R-Ohio) … offered dueling views as to when the bipartisan package should head to President Joe Biden’s desk for a signature. Pelosi said Sunday that while House Democrats are “rooting for the infrastructure bill to pass,” she reiterated her pledge that the House will not take it up unless the Senate also passes a separate $3.5 trillion social spending package.”
TRADERS SEEK GROWTH IN EMERGING MARKETS — Bloomberg’s Justin Villamil and Selcuk Gogoluk: “Some of the assets most exposed to fears around the spread of the delta variant are luring traders with tempting signals of strength and stability. Emerging-market corporate earnings have outpaced estimates for the first time in 30 months amid an economic rebound in developing nations. Meanwhile, MSCI’s index of emerging currencies and stocks both remain up this year, defying the declines seen this month.”
INVESTORS ARE BUYING AMERICAN — WSJ’s Sebastian Pellejero: “Investors around the globe are pouring money into U.S. financial assets, a sign of confidence that the world’s largest economy remains poised to pull through the Covid-19 pandemic better than many others.
“Investors world-wide have funneled more than $900 billion into U.S.-domiciled mutual and exchange-traded funds, on a net basis, during the first half of the year, according to data compiled by Refinitiv Lipper. That is a record in data going back to 1992 and is more than investors have put into funds elsewhere around the world combined during the first two quarters of 2021.”
LEADER IN CRYPTO INDUSTRY MOVES TO CURB THE HIGHEST RISK TRADES — NYT’s Ephrat Livni and Eric Lipton: “A popular cryptocurrency exchange announced on Sunday that it was curbing a type of high-risk trading that has been blamed in part for sharp fluctuations in the value of Bitcoin and the casino-like atmosphere on such platforms globally.
The move by the exchange, FTX, would reduce the size of the bets that investors can make by lowering the amount of leverage it offers to 20 times from 101 times. Leverage multiplies the traders’ chance for not only profit, but also loss.”
ICYMI:YELLEN WARNS CONGRESS ON DEBT LIMIT — Reuters’ Doina Chiacu: “U.S. Treasury Secretary Janet Yellen urged lawmakers on Friday to increase or suspend the nation's debt limit as soon as possible and warned that if Congress does not act by Aug. 2 the Treasury Department would need to take ‘extraordinary measures’ to prevent a U.S. default.
In a letter to House of Representatives Speaker Nancy Pelosi, Yellen said that Oct. 1, the first day of the next fiscal year, could be a critical date for the U.S. ability to pay its obligations without debt limit legislation due to large federal outlays scheduled for then.”
BIG TECH COMPANIES RETAKE MARKET REINS WITH EARNINGS ON TAP — Reuters’ Lewis Krauskopf: “The rally on Wall Street faces a fresh test next week with a flood of earnings reports from major U.S. companies, including the tech and internet behemoths that have recently retaken leadership of the market.
“More than one third of the S&P 500 is set to report quarterly results next week, headlined by Apple. Microsoft, Amazon and Google-parent Alphabet, the four largest U.S. companies by market value.
U.S. SET TO PUSH GLOBAL ECONOMY OVER THE RECOVERY LINE — WSJ’s Paul Hannon: “The U.S. economy likely returned to its late-2019 size during the three months through June, helping to lift global output above its pre-pandemic level for the first time. Economists surveyed by The Wall Street Journal estimate that figures to be released Thursday will show that the U.S. gross domestic product rose at an 8.5 percent seasonally adjusted annual rate in the second quarter.
“That likely left U.S. GDP — the value of all goods and services produced across the economy, adjusted for seasonality and inflation — above the $19.2 trillion level reached in the final quarter of 2019, the last before the spread of Covid-19 pushed large parts of the global economy to shut down and contract, they say.”
WHITE HOUSE SHIFTS MESSAGING ON INFLATION — Bloomberg’s Nancy Cook: “The White House is shifting the way it talks about inflation, as polls show increasing voter concern and Republicans try to use rising prices to kill off President Joe Biden’s sweeping plans to spend trillions of dollars on social programs and infrastructure projects.
“Out: wonky words like ‘transitory’ and complicated statistical explanations for price indicators. In: plain-language explanations from the president himself, who sought in remarks last week to acknowledge ordinary Americans’ jitters about higher costs — for items ranging from housing, food and gas to lumber and used cars — while reassuring them that the increases will fade in time.”
POPULATION GROWTH, AN ECONOMIC DRIVER, GRINDS TO A HALT — WSJ’s Janet Adamy and Anthony DeBarros: “America’s weak population growth, already held back by a decadelong fertility slump, is dropping closer to zero because of the Covid-19 pandemic. In half of all states last year, more people died than were born, up from five states in 2019. Early estimates show the total U.S. population grew 0.35 percent for the year ended July 1, 2020, the lowest ever documented, and growth is expected to remain near flat this year.
“Some demographers cite an outside chance the population could shrink for the first time on record. Population growth is an important influence on the size of the labor market and a country’s fiscal and economic strength.”