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75 ON THE TABLE — Our Victoria Guida writes: The Federal Reserve is set to begin its two-day policy meeting where it will consider whether to raise interest rates by three-quarters of a percentage point, which would be the biggest single hike since 1994.
The prospect of that large of a rate increase — after weeks of Fed officials signaling half-point hikes — compounded the S&P 500’s nearly 4 percent drop, as investors considered what it might mean for the full path for borrowing costs over the next couple of years.
That the central bank is even weighing such a big move is a reflection of how bad the economic data has been in the past week.
Fed Chair Jerome Powell had previously suggested a 75-basis-point rise was not even on the table, but that assumed economic conditions continued to evolve as policymakers expected. With the Consumer Price Index showing that price increases are not yet slowing and surveys showing that people’s expectations for further inflation have gone up, central bank officials are likely to want to seriously consider going big.
Here’s Powell in May — “Inflation has obviously surprised to the upside over the past year, and further surprises could be in store. We therefore will need to be nimble in responding to incoming data and the evolving outlook. And we will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time.”
Flashback to November — As we sat down to write Sunday’s MM about the disastrous inflation data, we couldn’t help thinking back to the eve of the Fed’s Nov. 2-3 policy meeting.
The Friday before officials were set to meet, the Labor Department released data showing its employment cost index had jumped in the third quarter.
Fed officials went ahead and announced their widely telegraphed decision to begin scaling back bond purchases to pull money out of the financial system. But Powell later said the ECI report led him to briefly consider speeding up that plan.
“I thought for a second there whether we—whether we should increase our taper,” he said at a Dec. 15 press conference. “[We] decided to go ahead with what we had—what we had ‘socialized.’”
Translation: Fed officials weren’t comfortable tightening policy more than they had already signaled to markets.
The decision was followed days later by a gangbusters jobs report, with little improvement in labor-force participation, and a red hot CPI reading a week later — both prompting a hard pivot by Fed officials at their December meeting to accelerate the taper and position the central bank for earlier (and eventually bigger) rate increases.
Looks like this time, Powell is prepared to deliver on his promise to be nimble, or at least to seriously consider it.
Markets are ready — Thanks to a report from the Wall Street Journal about the Fed’s thinking before the market close, investors have already digested the possibility of a bigger rate hike.
But the late pivot, as former Fed Governor Larry Meyer called it in a note to clients Monday, is not without risk.
“Current market expectations put policymakers in the uncomfortable position of potentially sending a dovish signal to the market if it underdelivers with a 50, and the reaction that would likely provoke is just the opposite of what they intend.”
IT’S TUESDAY — You guys remember those post-crisis years when we waited for the Fed to raise rates just one quarter-percentage point, and then waited another whole year for them to do it again? Wild.
Federal Open Market Committee begins its two-day policy meeting … CFTC Commissioner Christy Goldsmith Romero speaks at an Axios event on crypto at 8 a.m. … House Financial Services Chair Maxine Waters (D-Calif.) speaks at the NCRC conference at 8:30 a.m. … House Financial Services marks up legislation at 10 a.m. … Senate Banking hearing on index fund voting process at 10 a.m. … SEC Chair Gary Gensler speaks at a Wall Street Journal event about new climate disclosures at 1:20 p.m.
CRYPTO MARKETS REEL AS TRADING PLATFORMS SUSPEND CUSTOMER WITHDRAWALS — Our Sam Sutton: “Crypto markets plummeted on Monday morning on news of troubles at another popular decentralized finance platform, dropping below $1 trillion in market capitalization for the first time since early 2021.
“Celsius Network, a crypto lending business whose promise of eye-popping yields for retail consumers attracted a barrage of scrutiny from regulators, announced late Sunday night that it was halting withdrawals and crypto-for-crypto trading services for more than 2 million customers “due to extreme market conditions.”
RICH COUNTRIES TAKE AIM AT NATIONS ADOPTING CRYPTO — Ben Schreckinger: “Across four continents, tensions over the future of money have mounted in recent weeks. As Western investors and developing world leaders pursue new initiatives that encourage countries to adopt Bitcoin as an official currency — and the Central African Republic joins El Salvador in doing so — the stewards of the global financial system are increasingly pushing back.”
WALL STREET FIRMS FACE W.VA. BOYCOTT — Our Jordan Wolman: “Six of the nation’s biggest financial firms have been told that they will be denied access to state contracts in West Virginia as Republican leaders there continue their pushback on what they see as bias against the fossil fuel industry.
“BlackRock Inc., Wells Fargo & Co., JP Morgan Chase & Co., Morgan Stanley, The Goldman Sachs Group Inc. and U.S. Bancorp are due to be placed on the West Virginia’s Restricted Financial Institution List in 45 days, according to letters sent to the companies on Friday by state Treasurer Riley Moore, a Republican. POLITICO reviewed the letters following a public records request.”
LAWMAKERS MAKE BIPARTISAN PUSH FOR NEW GOVERNMENT POWERS TO BLOCK U.S. INVESTMENTS IN CHINA — WSJ’s Kate O’Keeffe, Natalie Andrews and Heather Somerville: “Congress is pressing ahead with legislation that could rewrite the rules for American companies investing abroad, proposing the screening of investments in countries like China seen as adversaries to protect U.S. technologies and rebuild critical supply chains.
“The measure, part of broader legislation to bolster U.S. competitiveness with China, would require American companies and investors to disclose certain new outbound investments and authorize the executive branch to form a new interagency panel to review and block investments on national security grounds, according to congressional aides and a revised draft of the bill reviewed Monday by The Wall Street Journal.”
SCHWAB PAYING MORE THAN $186M IN SETTLEMENT WITH SEC — WSJ’s Dave Michaels: “Charles Schwab & Co. Inc. will pay more than $186 million to settle a regulatory investigation that found it didn’t adequately disclose how keeping a big share of clients’ assets in cash could hurt investment returns.
“The Securities and Exchange Commission said Schwab’s robo-adviser portfolios kept between 6 percent and 29.4 percent of assets in cash, instead of investing the money in stocks or other securities. The practice made money for Schwab’s affiliated bank, which lent out the cash, and the investment adviser made ‘false and misleading statements’ in regulatory brochures about the conflict of interest, the SEC said in a settlement order.”
GOLDMAN’S BOOK PARTY KERFUFFLE — Financial reporters Rob Schmidt and Jesse Westbrook, who left Bloomberg in April to launch their own Substack newsletter, are out with their first edition and it includes this juicy nugget:
“It’s not often that a social gathering causes a flurry of agitation that could blow back on a Wall Street bank. But Goldman Sachs’ John Rogers (a noted member of the D.C.-New York soiree set) may have accomplished just that. In an only-in-Washington tale, some powerful House Republicans are miffed by his decision to host an exclusive book party earlier this month for two New York Times reporters. Their best-seller has garnered a lot of buzz for its revelations about Minority Leader Kevin McCarthy — a man whose power could rise considerably if Republicans, as many expect, win the House majority.”
IT’S A BEAR OUT THERE — Bloomberg’s Rita Nazareth: “US stocks entered a bear market, Treasury yields spiked to levels not seen in a decade and the dollar rallied as the fallout from a hot inflation reading continued to rattle global trading already shaken by worries the Federal Reserve will plunge the economy into a recession.
“Another brutal bout of selling sent the S&P 500 to the lowest since January 2021 and down more than 20 percent from its record. Highly valued tech shares bore the brunt of the rout, with the Nasdaq 100 slumping over 4.5 percent. The Cboe Volatility Index topped 30 and the futures curve inverted in a rare instance of traders pricing in more uncertainty in the here-and-now than in three months.”
What happens when stock markets become bears? — NYT’s William P. Davis, Karl Russell and Stephen Gandel: “Bear markets — when stocks decline at least 20 percent from their recent peaks — are relatively rare, and they frequently precede a recession. This sell-off, dragging the S&P down from a peak on Jan. 3, comes as concerns mount over high inflation, the war in Ukraine, Covid and the Federal Reserve’s attempts to rein in the economy.”
YIELD CURVE INVERTS — Reuters’ Yoruk Bahceli and Sujata Rao: “U.S. two-year Treasury yields rose above 10-year borrowing costs on Monday – the so-called curve inversion that often heralds economic recession – on expectations interest rates may rise faster and further than anticipated.”
FIRST IN MM: HILL INTRODUCES FLOOD INSURANCE EXTENSION — Rep. French Hill (R-Ark.) on Monday introduced legislation to extend the National Flood Insurance Program through Dec. 31, 2023. The measure has 16 GOP co-sponsors, including House Financial Services ranking Republican Rep. Patrick McHenry (R-N.C.). The program is set to expire at the end of September, and the extension will give consumers some predictability while Congress works on a long-term overhaul, Hill said.
“Congress must do the hard work of reforming the NFIP to ensure its long-term financial stability,” he said. “Taxpayers in Arkansas and around the country should not have to bail out this broken program year after year to the tune of billions of dollars each year.”
CITIGROUP DOUBLES BLACK EXEC RANKS — Bloomberg’s Jennifer Surane and Max Abelson: “Black executives are rising inside Citigroup Inc., even as the firm says there’s more to be done. The bank more than doubled its senior Black executives in 2021 to nine from four a year earlier, according to data on its US workforce released this month. The percentage of Black executives hit 7.7 percent, up from 3.8 percent — and the number of Black women with top roles jumped to four from one.”
HOT INFLATION DIMS LIKELIHOOD FED CAN ACHIEVE ‘SOFT LANDING’ — AP’s Christopher Rugaber: “For months, Chair Jerome Powell has held out hope that the Federal Reserve will be able to raise interest rates high enough to throttle rampant inflation without tipping the economy into recession.
“Yet with the Fed set to announce another sharp interest rate hike after it meets this week, days after the government issued a scorching inflation report, the likelihood that the central bank can engineer a so-called ‘soft landing’ appears to be dimming.”