Failing the Fed's progress test

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So much for peaking — Hawk-eyed Federal Reserve officials are searching for “clear and convincing” evidence of slowing inflation. Friday’s Consumer Price Index report gave them the opposite.

What was clear? Fed Vice Chair Lael Brainard was right when she said it was too soon to declare that inflation has peaked.

The CPI rose 1 percent in May from 0.3 percent the previous month, pushing annual inflation up 8.6 percent — a much stronger reading than economists expected and well above the 8.3 percent increase seen in April.

Fed officials have already signaled they’re prepared to raise rates by half a percentage point when they meet this week, and again in July. Friday’s report gave them little reason to consider backing off the current pace when they gather again in September.

“The surprisingly strong May CPI data have meaningfully lowered the probability that the Fed will be able downshift the pace of policy tightening at the September 21 meeting,” said Deutsche Bank economists Matthew Luzzetti, Peter Hooper, Brett Ryan, Justin Weidner and analyst Amy Yang, who now expect the Fed to raise rates by a half percentage point in September and in November.

Big question: Friday’s report has also revived a question that seemed unthinkable just a few months ago — would the Fed consider a 75-basis-point increase at its July meeting?

Chair Jerome Powell at his last post-meeting press conference said a rate increase of that size was not something the committee was actively considering. He suggested half-percentage-point increases would be on the table for the next couple of meetings “assuming that economic and financial conditions evolve in ways that are consistent with our expectations.”

“Expectations are that we’ll start to see inflation, you know, flattening out—and not necessarily declining yet, but we’ll see more evidence,” he said. “We’ll want to really feel like we’re making some progress there.”

Officials will see plenty more data over the coming months, and it’s never a good idea to put too much weight on any one report. But it’s hard to see how Friday’s inflation figures meet the Fed’s progress test.

Signal searching? Powell has been careful not to get too boxed in when asked about policy moves more than a few months out. For hints on that, best to look to the Fed’s quarterly summary of economic projections.

Luckily, we’ll get fresh projections Wednesday that will give us some sense of where officials see rates settling at the end of this year — and in turn, how many more half-percentage-point increases they see as appropriate.

One note: Those projections will also include forecasts from two new Fed officials, Governors Philip Jefferson and Lisa Cook.

Bernanke v. Summers — The recession narrative seems to have taken hold over the past week, with a string of dire warnings from Wall Street executives about an impending downturn. JPMorgan CEO Jamie Dimon called it a hurricane. Morgan Stanley’s Ted Pick called it a “fire” and “ice” narrative, with hot inflation and cooling growth. Billionaire investor Carl Icahn has warned of “a recession or even worse.”

Former Fed Chair Ben Bernanke offered a dose of optimism Sunday, saying he thinks a recession is possible but not inevitable.

“Economists are very bad at predicting recessions,” he told CNN’s Fareed Zakaria, “but I think the Fed has a decent chance, a reasonable chance, of achieving what Jay Powell calls a soft-ish landing, either no recession or very mild recession to bring inflation down.”

Bernanke said he’s counting on supply chain pressures to ease (he sees some evidence of that already) and is guessing that energy and food prices will stabilize. Also, the underlying economy is strong, the labor market is roaring and household balance sheets are healthy, he said.

That followed a glass-half-empty (or perhaps just realistic?) assessment from former Treasury Secretary Larry Summers, who said on CNN’s “State of the Union” that “it’s more likely than not that we’ll have a recession within the next two years.” Summers said he disagreed with Treasury Secretary Janet Yellen, who said Thursday, “There’s nothing to suggest a recession is in the works.”

“I think the optimists were wrong a year ago in saying we have no inflation, and I think they’re wrong now if anyone is highly confident that we’re going to avoid recession,” Summers said.

IT’S MONDAY — Big week ahead! We hope you found time to recharge this weekend.

Send us your best questions for Powell for this week’s presser, and we’ll feature them Wednesday morning: [email protected] or @katedavidson, and [email protected] or @aubreeeweaver.

TODAY — Fed’s Brainard speaks at the National Community Reinvestment Coalition Community Reinvestment Act conference at 2 p.m.

THIS WEEK — House Financial Services Chair Maxine Waters (D-Calif.) speaks at the NCRC conference Tuesday … House Financial Services marks up legislation Tuesday … Senate Banking hearing on index fund voting process Tuesday … SEC Chair Gary Gensler speaks at a Wall Street Journal event about new climate disclosures Tuesday …

Federal Open Market Committee meeting Tuesday and Wednesday … Powell press conference on Wednesday … House Ways and Means hearing on working women and a stronger economy Wednesday … Senate Finance hearing on supply chain backlogs Wednesday … New York Fed conference on the international roles of the U.S. dollar Thursday and Friday.

GLOBALIZATION’S GUT CHECK — Our Doug Palmer and Sarah Anne Aarup: “The future of globalization faces a major test as the World Trade Organization kicks off its first big decision-making meeting in five years in Geneva on Sunday. …

“The bigger question looming over the gathering is whether the WTO can still forge international cooperation at a time when multiple crises and increasing frictions between the United States and China are upending the world order. Those crises have spurred a widespread re-think of globalization: Countries are increasingly turning their economic focus inward, looking to protect and promote their own industries — often at the expense of the open trade system that the WTO was designed to promote.”

HOW SCOTUS’ UPCOMING CLIMATE RULING COULD DEFANG WASHINGTON — Our Alex Guillen and Sarah Owermohle: “The Supreme Court is expected to issue a ruling this month hobbling the Biden administration’s efforts to rein in greenhouse gases — but its impact could weaken Washington’s power to oversee wide swaths of American life well beyond climate change.

“The upcoming decision on the Environmental Protection Agency’s climate oversight offers the conservative justices an opportunity to undermine federal regulations on a host of issues, from drug pricing and financial regulations to net neutrality. Critics of the EPA have clamored for the high court to do just that, by declaring it unlawful for federal agencies to make “major” decisions without clear authorization from Congress.”

Pro readers can check out a list of all the potential rules at risk here.

TREASURY TO REIN IN ANONYMOUS CRYPTO WALLETS — Our Sam Sutton: “The Treasury Department is planning to crack down on crypto services that let people buy and sell digital assets without providing any identifying information, Deputy Treasury Secretary Wally Adeyemo said at a cryptocurrency conference in Austin on Friday.”

SEC INVESTIGATING GOLDMAN SACHSOVER ESG FUNDS— Scoop from WSJ’s Dave Michaels: “The Securities and Exchange Commission is investigating Goldman Sachs Group Inc.’s asset-management arm over its funds that aim to invest based on environmental, social and governance standards, according to people familiar with the matter. The SEC’s probe is the latest known instance of regulators’ scrutiny of ESG investing, which has been a boon for asset managers that struggled in recent years to compete with low-fee index funds.”

ALLEN LEAVES BROOKINGS AMID FEDERAL PROBE — WaPo’s Reis Thebault and Alex Horton: “Retired four-star Marine Gen. John R. Allen has resigned as president of the Brookings Institution, one of the world’s most renowned think tanks, after he was placed on administrative leave amid a federal investigation into his suspected lobbying on behalf of the government of Qatar years ago, the firm announced to employees Sunday.”

Executive vice president Ted Gayer has taken over as acting president, Brookings officials said last week after placing Allen on leave. Just a reminder: Your MM host reported on May 27 that Gayer, who joined Brookings in 2009 as co-director of the economic studies program, has been named the new president of the Niskanen Center. Gayer is set to take over at Niskanen in August, the center said in a May 31 press release.

FOOD PRICES TO KEEP GOING UP AS COSTS SURGE — WSJ’s Jaewon Kang and Annie Gasparro: “Some of the nation’s biggest food suppliers and restaurants, including Kraft Heinz Co. and some McDonald’s Corp. franchisees, said they would continue to raise prices as they face starkly higher costs.

“Kraft Heinz notified retailer customers this past Monday that it would raise prices in August on items ranging from Miracle Whip and Classico pasta sauce to Maxwell House coffee products and some deli meat. Cory Onell, chief sales officer at Kraft Heinz, wrote in the memo to retailers that inflation continues to affect the economy and shape consumption patterns. Costs continue to rally and the persistence of increases makes it necessary to announce price changes, he wrote.”

TREASURIES DARE FED TO STEP UP HIKES OR RISK INFLATION DEFEAT — Bloomberg’s Michael Mackenzie and Liz McCormick: “Treasury traders are throwing down the gauntlet to a Federal Reserve that’s fallen further behind in its fight to cool the hottest inflation in four decades.

“A bruising bond selloff ensued Friday, led by policy-sensitive short-term yields, after May data dashed any idea that inflation has peaked. The rout deepened when traders boosted bets on the likelihood of the Fed raising rates by three-quarters of a percentage point in July, while economists at Barclays Plc and Jefferies LLC say this move could come as early as next week.”

Stocks have tumbled this year in the face of rising interest rates. But with inflation showing little sign of cooling, many investors fear corporate earnings could be the market’s next support to fall. — WSJ’s Karen Langley

The rise of the dollar to its highest level since 2002 has led to billions in losses for US companies from detergent makers to dating apps this year. — FT’s Kate Duguid and Nicholas Megaw

Real-estate agents in places like New York, Los Angeles and the Hamptons say the frenzied deal making and record-setting prices that characterized the past few years has eased, thanks to a growing disconnect between what sellers want and what buyers will pay. — WSJ’s E.B. Solomont


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