The debt ceiling is not Powell’s problem
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President Joe Biden and Speaker Kevin McCarthy took a key step toward avoiding a cataclysmic default on U.S. government debt on Wednesday. That is to say, they talked.
“The president and I had a first good meeting — I shared my perspective with him, he shared his,” McCarthy said afterward. “No agreements, no promises, except that we would continue this conversation.”
At this stage in the game, there isn’t a whole lot for them to agree on. While key members of McCarthy’s caucus have compiled a list of policies and spending cuts they’d like to see in exchange for raising the debt limit — which would allow Treasury to continue paying bondholders and delivering on federal benefit programs — the speaker declined to detail any proposals he may have pitched to Biden, our Adam Cancryn reports.
Meanwhile, the White House is still more than a month away from releasing its budget proposal. And administration officials are shooting down any notion that the president will consider cuts to entitlements or other key components of his agenda.
“What you’re not going to see is either party move their position,” a Biden adviser told Adam. “This is the meeting where folks scope things out and get a sense of where everybody is.”
One thing’s for sure, Federal Reserve Chair Jerome Powell isn’t giving much credence to the notion that Treasury or the central bank can facilitate a payment prioritization program that some Republicans and Wall Street bigwigs have floated as a possible escape hatch for the debt ceiling.
“There is only one way forward here, and that is for the Congress to raise the debt ceiling so the United States government can pay all of its obligations when due,” Powell said during a press conference on Wednesday. “Any deviations from that path would be highly risky, and no one should assume the Fed can protect the economy from the consequences of failing to act in a timely manner.”
Speaking of Powell: The Fed met expectations and raised interest rates by a quarter of a percentage point. While Powell was eager to highlight how soaring consumer prices have started to cool down, he also “had a stark warning for Americans: It’s still way too hot,” our Victoria Guida writes.
More from Victoria: “The U.S., he said, is merely in the early stages of disinflation, and more belt-tightening is likely in store even after eight consecutive rate hikes by the central bank. And he said Fed officials plan to hold rates at punishingly high levels until price spikes have faded much more extensively.”
“‘We have more work to do,’ he said. ‘We’re going to be cautious about declaring victory and sending signals that we think the game is won.’”
That specific message didn’t exactly resonate with markets. Both the S&P 500 and Dow Jones Industrial Average climbed steadily during the Fed Chair’s 45-minute press conference as traders seized on some of Powell’s more dovish commentary as a sign that more forgiving rates could be on the horizon.
Shortages spurred on by the Covid-19 pandemic and Russia’s war with Ukraine are no longer exerting as much pressure on the prices of consumer goods, Powell said. While there’s still significant inflation in service sectors of the economy, something the Fed has pegged to labor costs, “we expect to see that that disinflation process will be seen — we hope soon,” Powell said.
That would suggest there’s a real chance the Fed could defy history and avoid a recession despite its rapid series of rate increases over the last year.
“My base case is that the economy can return to 2 percent inflation without a really significant downturn, or a really big increase in unemployment,” Powell said. “Many forecasters would say, it’s not the most likely outcome, but I would say there’s a chance of it.”
IT’S THURSDAY — Send tips to Sam at [email protected] and Zach Warmbrodt at [email protected]. You can also find us on Twitter @samjsutton and @zachary
Driving The Day
The Bank of England and the ECB will announce interest-rate decisions today … Transportation Secretary Pete Buttigieg will speak at a Punchbowl News event on infrastructure investment at 9 a.m. … The Senate Energy and Natural Resources Committee will convene to discuss the infrastructure law’s implementation at 10 a.m. …
FIRST IN MM: THE TIM SCOTT AGENDA — Our Eleanor Mueller:The top Republican on the Senate Banking Committee, Sen. Tim Scott (S.C.), will release his priorities for the new Congress later today.
What caught our eye: Developing “a bipartisan regulatory framework” for crypto, according to an announcement provided early to Eleanor. That’s big news for those tracking the industry given that Scott hasn’t talked much about digital currency in the past.
The senator’s agenda indicates some skepticism of crypto, noting “several high-profile failures resulted in lost consumer assets, exposed regulatory gaps, and highlighted concerns with illicit finance.”
It may be an area where he can find common ground with Chair Sherrod Brown, according to aides, on top of housing and financial literacy. Brown is an outspoken crypto critic.
Also on the agenda:
— Reducing barriers to credit, including via “innovative financial tools, like more dynamic credits scoring models”
— Expanding access to capital formation
— Supporting financial literacy programs
— Cracking down on federal agencies, including “inflation-inducing spending” and practices of “discriminating against industries and investment opportunities simply because they may be viewed as politically disfavored by this Administration”
— Using economic tools to protect national security
— Encouraging “responsible homeownership”
“Under progressive leadership, the American Dream has slipped further and further out of reach,” Scott said in a statement. “By focusing on commonsense policies like expanding access to credit, fostering innovation, and promoting financial inclusion, we can build an opportunity economy that opens doors, improves lives, and empowers everyday Americans to achieve their dreams.”
Read the full outline here.
KEY COMMITTEES TAKE SHAPE — Eleanor also has news on how House Democrats have stacked a Financial Services subcommittee on crypto with some of the industry’s sharpest critics and strongest allie s. Senate Republicans also said Wednesday that freshman Sens. J.D. Vance of Ohio and Katie Britt of Alabama will join the Banking Committee.
STRANGE BEDFELLOWS — With McCarthy having hinted that defense cuts are still in play in the debt ceiling deate, Sen. Elizabeth Warren (D-Mass.) fired off a bipartisan letter with Sens. Angus King (I-Maine), Mike Lee (R-Utah), Mike Braun (R-Ind.) and Reps. Pramila Jayapal (D-Wash.) and Tom McClintock (R-Calif.) to demand that the Defense Department rein in “wish list” budget requests that “have become wasteful and inefficient tools that increase spending beyond DoD’s core priorities.”
SPIT IN THE BUCKET — If the looming debt ceiling imbrogliotells us anything, it’s that it’s hard to craft policy in a divided government. The Peter G. Peterson Foundation gave MM a first look at a series of essays from former policymakers and top academics on how Washington can break the logjam in 2023 and 2024. Former Democratic Sen. Heidi Heittkamp’s take? Voters don’t view debt or the deficit as a policy concern because neither party has offered real leadership on the issue.
“There’s people on the Democratic side who think that all of this attention to debt and deficit is exaggerated, and that it doesn’t need to be addressed,” the North Dakotan told Sam. “Then there’s people on the Republican side who live in the world of magical thinking who think that you can balance this debt — that you can balance the deficit — on the back of [cutting] waste, fraud and abuse … That is a spit in the bucket compared to what needs to be done to develop fiscal discipline.”
That would require big changes to entitlement programs, she said, including raising contribution limits for Social Security or overhauling Medicare prescription drug benefits. While novel solutions have been presented — Heitkamp plugged Sens.Joe Manchin (D-W.V.) and Mitt Romney’s (R-Utah) bill to create rescue committees for endangered government trust funds — the current political environment isn’t particularly accommodating.
“You’re never going to get to that point until you get serious people in the room. And you’re never going to get serious people in the room until the public says it’s important,” she said.
CREDIT CARD BLOWBACK — Lawyers, start your engines. Banking and credit union industry groups are blasting the CFPB’s rule proposal to rein in credit card late fees, warning that Director Rohit Chopra may have violated the law with his plan to cap penalties at $8. The measure — which has been criticized by the American Bankers Association, Consumer Bankers Association, Bank Policy Institute, Independent Community Bankers of America and National Association of Federally-Insured Credit Unions – would also strip banks of their ability to ratchet up late fees with inflation.
Unless the CFPB softens its stance,“we would expect an almost immediate legal challenge that could push the fight over this issue into the back half of 2024,” BTIG’s Isaac Boltansky wrote in a research note on Wednesday.
Consumer advocates, meanwhile, are praising the measure: “Regulations seldom deliver such concrete benefits to consumers as the plan that the CFPB has set in motion today,” Elyse Hicks, consumer policy counsel at Americans for Financial Reform, said in a statement.
VENTURE’S PATH TO EXIT GETS STRONGER — Our Josh Sisco: Meta notched early court approval of its bid to purchase Within Unlimited, maker of the virtual reality fitness app Supernatural, a critical blow to the Federal Trade Commission’s efforts to fight against consolidation in the tech sector.
REAL ESTATE FUNDS BEWARE — Our Katy O’Donnell: “Senate Democrats are pushing Fannie Mae and Freddie Mac’s regulator to review the companies’ programs for the sale of nonperforming and reperforming loans, given how many loans go to large investors who then lease the property or sell it to other investors after foreclosure.”
LIKE A VR PHOENIX — WSJ’s Salvador Rodriguez: “Facebook parent Meta Platforms Inc. reported improving conditions in its underlying business and said it would buy back an added $40 billion in shares, a turnabout greeted warmly by investors after years of challenges stemming from competition and privacy restrictions”
ARCHEGOS FALLOUT — FT’s Tabby Kinder, Ortenca Aliaj and Owen Walker: “Banks that lost billions from the meltdown of Archegos Capital Management will get back as little as 5 cents on the dollar from its restructuring, with brokers such as Goldman Sachs funding the payouts using cash left in the family office’s trading accounts.”
Tabitha Edgens, a former attorney in the OCC’s Chief Counsel’s office, has joined the Bank Policy Institute as a senior vice president and senior associate general counsel on its regulatory affairs team.
A GEORGE SANTOS CRYPTO ANGLE — Bloomberg’s Gregory Korte, Laura Davison, Annie Massa and Bill Allison: “The Long Island village of Southampton has long served as a getaway for New York’s ultra-wealthy, but in the summer of 2022,it welcomed a crop of newly minted magnates. George Santos, an underdog congressional candidate from the other end of the island, was there to greet them.”
COINBASE — Bloomberg’s Chris Dolmetsch: “Coinbase Inc. won dismissal of a lawsuit by consumers alleging the cryptocurrency exchange facilitated the sale of unregistered securities on its platform.”
But, but, but: “US District Judge Paul A. Engelmayer didn’t make a determination about whether the digital tokens were actually securities.”
NEXT UP — With the Fed’s rate hike out of the way, all eyes now turn to the European Central Bank, which is “almost certain to raise interest rates by half a percent” shortly after this newsletter hits your inbox, per POLITICO’s Johanna Treeck. Like the U.S., headline inflation in Europe has come down. Core inflation has continued to climb, however, writes Johanna.
SANCTIONS — Our Kelly Garrity: “The Treasury announced sanctions on Wednesday against 22 people it says have helped Russia obtain weapons and evade sanctions imposed on the Kremlin and its allies since its full-scale invasion of Ukraine almost a year ago.”
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