Business

A 'break the glass' moment on inflation


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President Joe Biden’s consideration of a gas tax holiday has revived criticism that such a move is a gimmick that would provide little benefit to consumers and could actually add to inflation by stimulating demand.

The White House is desperate to show voters it’s trying to deliver relief from price pressures, especially soaring gasoline costs pushed higher by the war in Ukraine. And officials have chided domestic producers for not doing more to boost supply.

Employ America, a research and advocacy think tank focused on strengthening the labor market, is calling on the administration to help mitigate commodity supply shocks through the novel use of a controversial weapon — the Treasury Department’s Exchange Stabilization Fund.

Skanda Amarnath, the group’s executive director, chatted with MM on Tuesday about the proposal and what they call a “break the glass” moment. (The conversation is edited for length and clarity.)

Can you walk me through the basics of this idea? 

There are two key legs of the proposal. [It’s] about how we deal with commodity shortages, where there’s underinvestment, hyper-volatility, cyclicality in a lot of these commodities. …

What we’re proposing on the first leg is providing downside price insurance that the Treasury is authorized to engage in through the Exchange Stabilization Fund. They could do this for oil and coordinate with the Department of Energy to serve as an insurer on oil price insurance for producers. If you have the storage capacity, you can provide the insurance for the downside if prices crashed. …

The second leg is financing — offering leverage in abundance and making it affordable. When you combine enough price certainty and you have access to financing, that should change the proposition for investment itself. Because then you have confidence that you will at least make a certain amount of return, at the same time you’re directing investment to where it’s needed most.

Is it clear that Treasury has the authority to do something like this?

The Exchange Stabilization Fund has always been controversial. But we have two pretty useful precedents for guiding this question. We have the Mexican peso crisis of 1994-95, when there was an intervention. They took a pretty flexible approach to financing some of the debts that were in question through that crisis. I think the discretion existed for that. [Then-Treasury Secretary] Hank Paulson used it in 2008 to directly guarantee money market funds.

What we’re calling for is getting to the root causes of what is growing exchange rate instability, but also specifically a balance of payments instability for a lot of developing and underdeveloped countries that are seeing their import bills rise dramatically right now. … It’s not good for global financial stability, and it has a chance to get worse.

Some of the previous uses of the ESF — including more recently, during the pandemic — were in clear moments of economic crisis. Why do you think this moment warrants such dramatic action?

We have a policy mix right now that’s not actually promoting a faster investment response, which is precisely what I would say we need, in the context of the risks that loom very large.

Right now we are in a crisis because we do have a scarcity of commodities and nobody can really say with any credibility that inflation is coming down, that oil supply and demand will balance out neatly in the absence of direct action. There are understandable reasons why investment has been slow to respond, and I think it’s about the administration’s willingness to address those uncertainties constructively, instead of exuding a certain level of powerlessness and helplessness.

If you say you don’t have the power, it’s really a statement of, ‘I don’t think this is really a crisis.’ If they want to say that, I think they should come out and be transparent about it. But they’ve also been very keen to use emergency powers on a number of other issues.

So how much will this actually help with inflation, and why is there perhaps a bigger role for fiscal policymakers to play in aiding the Fed?

Leaning on the Fed with its blunt and oblique tools to somehow get supply and demand to balance is going to involve tightening financial conditions to a point that it doesn’t just have demand side effects, it also has supply side effects, and adverse ones … You’re seeing a whiff of this in energy, where now there’s more talk about, ‘Why should I invest so much when I’m going to be holding the bag in a recession?’

And that’s where you need a richer toolkit to actually start to deal with some of these challenges, especially if you want the Fed to do its job and be able to achieve the soft landing it’s trying to achieve. It’s not a moment to say, “Well it’s inflation so it’s the Fed’s problem.”

Fed Chair Jerome Powell testifies before Senate Banking at 9:30 a.m. …House Financial Services markup of pending legislation at 10 a.m. … Chicago Fed President Charles Evans speaks at 12:50 p.m. … Philadelphia Fed President Patrick Harker and Richmond Fed President Tom Barkin speak at 1:30 p.m.

FED’S POWELL MAY FEEL THE HEAT FROM BOTH SIDES TODAY — Our Ben White: “Starting with the Senate Banking Committee on Wednesday, he’ll face members in both chambers who are increasingly alarmed by the rapid rate of consumer price inflation and deteriorating economic signals suggesting a looming recession. … ”

“Senate Banking Chairman Sherrod Brown plans a sharp line of questioning at his panel,” according to a person familiar with the Ohio Democrat’s thinking.

“‘Senator Brown will use the hearing to urge Chair Powell to focus on workers while fighting inflation,’ the person said. ‘Brown will press Powell on the drivers of inflation, including corporate power and concentration. While the Fed has shown that it is doing its part to tackle inflation, it is critical that working families do not bear the brunt of the economic fallout from rising rates.’”

FIRST IN MM: HIMES RELEASES CBDC WHITE PAPER — Rep. Jim Himes (D-Conn.) is out with a new white paper this morning that provides a roadmap for potential legislation to develop a central bank digital currency. Under Himes’s proposal, the CBDC would be run by third party intermediators that help facilitate transactions and validate payments, but wouldn’t be limited to traditional financial institutions. He also proposes a cap for CBDC wallets, and said the wallets shouldn’t pay interest — two measures aimed at addressing concerns about run risk.

Among his primary arguments for moving ahead: A CBDC would preserve the dollar’s role as the world’s primary reserve currency, and would be uniquely secure and trusted with the understanding that it has the full faith and credit of the U.S. government behind it. He argues it could also bring unbanked and underbanked consumers into the financial system.

“The potential benefits of developing a CBDC meaningfully outweigh the risks, many of which can be mitigated,” the paper says.

SINGH LEAVES WHITE HOUSE FOR PGIM — Daleep Singh, the former head of the New York Fed markets group and a senior Biden economic official, has officially left the White House two months after stepping back from his high-profile role as the administration’s point person on Russia sanctions.

Singh has been named chief global economist and head of global macroeconomic research at PGIM Fixed Income, Prudential Financial’s asset management arm, the company announced Tuesday.

Last we heard, Singh, who served as deputy national security adviser for international economics and a deputy director of the National Economic Council, was taking an extended leave of absence for family reasons, per the Washington Post. The White House tapped Mike Pyle, Vice President Kamala Harris’s chief economic adviser, to fill the role temporarily. The White House hasn’t said whether Pyle is likely to stay in the gig permanently.

ANOTHER NEC DEPARTURE — Seth Harris, the president’s top labor adviser and another deputy NEC director, is also leaving the White House, people familiar with the matter told our Daniel Lippman and Alex Thompson. A White House official confirmed the move to MM Tuesday, saying Harris “will be taking some well-deserved time off” beginning July 1.

Harris, an attorney who was the Biden campaign’s principal labor policy adviser, served as deputy and acting Labor secretary during the Obama administration. He’s also a visiting professor at Cornell University’s Institute for Public Affairs. No word on what Harris is up to next.

The move follows the resignation of Deputy NEC Director David Kamin, who left last month to return to his teaching job at New York University.

YELLEN MAY SOON GET HER NAME ON THE GREENBACK — NYT’s Deborah B. Solomon: “Treasury Secretary Janet L. Yellen moved one step closer to finally getting her signature on the U.S. dollar on Tuesday, when President Biden named Marilynn Malerba as treasurer of the United States. … While Ms. Yellen sat for her official currency signing more than a year ago, her name could not appear on the greenback until a U.S. treasurer was in place. Under arcane rules, both signatures must be added to new series of currency in tandem.”

FACEBOOK PARENT META SETTLES LAWSUIT OVER ALLEGED DISCRIMINATION IN HOUSING ADS — Reuters’ Jonathan Stempel and Luc Cohen: “In a lawsuit filed in federal court in Manhattan, the Department of Justice said Meta encouraged advertisers to target users based on features like race, religion, and sex, in violation of the Federal Housing Act. … As part of the deal, the company agreed to stop using an algorithmic tool known as ‘Special Ad Audience’ and design a new housing advertising tool by the end of the year.”

WITH MARKETS IN DISARRAY, INTERNATIONAL INVESTORS ARE STOCKPILING DOLLARS — WSJ’s Julia Ambra-Verlaine: “Foreign investors selling stocks and bonds are hoarding the U.S. dollar as market volatility picks up. Typically investors repatriate cash into their local currency, but not this time. U.S. capital flow data show the foreign cash pile of dollars is close to records as investors reduce risky assets in portfolios and hang on to the world’s reserve currency.”

BITCOIN’S PRICE REVERSES WEEKEND SLIDE — WSJ’s Vicky Ge Huang: “Bitcoin and other cryptocurrencies bounced back Tuesday, after a tumultuous holiday weekend marked the lowest prices in more than a year.”

But short sellers are having a field day betting against crypto stocks — Bloomberg’s Vildana Hajric: “Traders betting against stocks have generally done well this year, with bearish wagers against crypto shares proving to be a major standout. Short sellers in digital-asset stocks have gained an average of 130 percent in 2022, according to Ihor Dusaniwsky, head of predictive analytics at S3, a technology and data-analytics firm.”

POWELL FACES RISING CRITICISM FOR INFLATION MISSTEPS — AP’s Christopher Rugaber: “Federal Reserve Chair Jerome Powell won praise for his deft leadership during the maelstrom of the pandemic recession. As threats to the U.S. economy have mounted, though, Powell has increasingly struck Fed watchers as much less sure-footed.”

— Former Trump economic adviser Gary Cohn tells CNN’s Matt Egan CEOs are frustrated with the Federal Reserve for waiting too long to attack inflation. ‘I think the business community is disappointed in the Fed having taken as long as they did to come to the reality of what the business community saw,” he said.

FED’S BARKIN BACKS 50 OR 70 BPS RATE HIKE IN JULY — Reuters’ Lindsay Dunsmuir: “Federal Reserve Chair Jerome Powell’s guidance that the U.S. central bank will most likely raise interest rates by 50 or 75 basis points in July is ‘reasonable,’ Richmond Fed President Thomas Barkin said on Tuesday, even as he cautioned against the bank moving so fast that it damages the economy.”

Philip Morris International Inc. is embroiled in the most complicated transaction in the company’s history, but the headache isn’t the recent $16 billion deal to buy rival Swedish Match. It is trying to get out of Russia. — WSJ’s Jennifer Maloney and Thomas Gryta

Credit Suisse Group AG’s Bermuda life insurance unit said a loophole in Bermuda company law means it shouldn’t have to pay a billionaire client a $607 million court award. — WSJ’s Margot Patrick

The ruble cemented its unlikely status as the world’s best-performing currency, rising to new multiyear highs this week. — NYT’s Jason Karaian



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