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Add one more voice to the Great Recession Debate of 2022 — Fed Chair Jay Powell said Wednesday he does not think the U.S. is in one. Yet.
“There are just too many areas of the economy that are performing too well,” he said at his post-meeting press conference, citing historically low unemployment, robust monthly job growth and continued wage gains.
But what did Powell NOT say?
He did NOT say the U.S. won’t be in a recession at some point. Economic activity in the second quarter has clearly slowed.
He did say the Fed is not trying to cause a recession and doesn’t think officials need to cause one to bring down inflation.
But he did NOT say that the Fed would back off or reverse course if the economy does start to significantly weaken — something markets increasingly seem to expect. He reiterated that growth will need to slow and unemployment will need to rise to get inflation back to the Fed’s 2 percent goal.
Here’s more from our Victoria Guida on the Fed’s decision to raise rates by another three-quarters of a percentage point.
Why power ahead? — Powell took some heat earlier this week from Sen. Elizabeth Warren (D-Mass.), who in an op-ed in the Wall Street Journal used his own words to question why the Fed chief is forging ahead with demand-destroying rate increases, when much of the inflation we’re seeing is driven by supply issues.
Powell addressed this indirectly, conceding that yes, Fed officials would typically look through (i.e. ignore) volatile changes in commodity prices — like we’ve seen since Russia invaded Ukraine — that have added to price pressures.
The problem right now: A sustained period of supply shocks can start to undermine or de-anchor inflation expectations, Powell said. That’s a huge worry for the Fed.
“The public doesn’t distinguish between core or headline inflation in their thinking,” he said. “So it’s something we have to take into consideration in our policymaking, even though our tools don’t really work on some aspects of this, which are the supply side issues.”
GDP weirdness — Powell also excited all the nerds in the room (OK, maybe just your MM host) with a reminder that the published data on first-quarter gross domestic product has tended to come in weaker than other quarters, a phenomenon known as residual seasonality. That may make the numbers appear worse than they are.
Why does that matter? The reason we’re having a recession debate in the first place is because GDP contracted in the first three months of the year, raising expectations that a second consecutive quarterly decline would signal a recession is here.
Setting aside whether that’s the right way to define a downturn (you can read more about our thoughts here), as well as the factors behind the first-quarter contraction (more here), Powell is emphasizing that the first-quarter data may not be the most reliable.
On top of that, the first estimate of quarterly GDP — due out this morning for the second quarter — is often revised, Powell said.
IT’S THURSDAY — Congratulations to those who locked in their mortgage rate in 2021. Send your questions, plus any tips or story ideas, to [email protected], [email protected] or [email protected].
Census Bureau releases initial estimate of second-quarter GDP at 8:30 a.m. … Senate Banking hearing on crypto scams with witnesses from NASAA and FINRA at 10 a.m. … Senate Finance Committee to consider Treasury and Trade nominations at 10 a.m.… Financial Stability Oversight Council meets to discuss climate-related financial risks at 11:20 a.m. … Treasury Secretary Janet Yellen is holding a press conference at 1:30 p.m.
TWEET OF THE DAY — Employ America’s Skanda Amarnath tweets on the potentially more important data point of the week: Friday’s Employment Cost Index data.
CBO PROJECTION — AP’s Josh Boak: “The Congressional Budget Office said Wednesday that the end of pandemic-era spending, fast economic growth and higher tax revenues have caused the federal debt this year to be lower than forecast. But the nonpartisan office also includes a warning in its 30-year outlook about how debt will soon spiral upward to new highs that could ultimately imperil the U.S. economy. The estimates show the complex politics beneath government finances. Debt-related pressures have faded somewhat in the short-term for lawmakers, even as they continue to loom as a troubling risk for future congresses and presidents.”
— CBO Director Phil Swagel will discuss the latest projections this afternoon in a virtual discussion hosted by the Peter G. Peterson Foundation at 3 p.m.
NO ESTRADA, BUT WE’VE GOT CHIPS — From POLITICO’s Gavin Bade: “The Senate on Wednesday voted 64-33 to approve a massive package of semiconductor manufacturing subsidies and scientific research funding known as the “chip plus science” bill, sending the legislation to the House for what Democratic leaders hope will be speedy passage.”
DÉTENTE — After months of protracted negotiations, West Virginia Sen. Joe Manchin and Senate Majority Leader Chuck Schumer announced a deal on a bill that includes energy and tax policy — setting up a vote that could come as soon as next week. Per POLITICO’s Burgess Everett the deal “includes roughly $370 billion in energy and climate spending, $300 billion in deficit reduction, three years of subsidies for Affordable Care Act premiums, prescription drug reform and significant tax changes.”
CENTRAL BANK DIGITAL CURRENCY — House Financial Services Chair Maxine Waters (D-Calif.) and ranking Republican Patrick McHenry of North Carolina said on Wednesday that they’ll continue negotiating with the Biden administration on bipartisan stablecoin legislation and that they hope to bring the bill forward for a markup in September. While the measure is widely expected to establish Federal Reserve guardrails around nonbank stablecoin issuers, Waters also said the bill would direct the Fed “to research and develop a central bank digital currency so we remain competitive globally.”
Federal Reserve officials have been researching the viability of a digital dollar for more than a year and, while the central bank has yet to take a position on how to move forward, Fed Vice Chair Lael Brainard warned Congress earlier this year that a delay could put the U.S. at a disadvantage.
MORE META, MORE PROBLEMS — From POLITICO’s Josh Sisco: “The Federal Trade Commission on Wednesday filed suit to block Facebook-owner Meta from buying the maker of a virtual reality fitness app, the latest signal of aggressive antitrust action from the agency.”
From NYT’s Mike Isaac: “On Wednesday, Meta, the company formerly known as Facebook, reported a 1 percent decline in quarterly revenue from the previous year. It was the first time the social media giant’s revenue had fallen since it went public a decade ago, as it confronts increased regulatory scrutiny and a turbulent economy while trying to build a new frontier of digital communication.”
DELISTED? — From Bloomberg’s Lydia Beyoud: “US and China officials must reach an agreement ‘very soon’ over access to audit work papers for Chinese companies to avoid being kicked off American stock exchanges, Securities and Exchange Commission Chair Gary Gensler said Wednesday.”
FED EYES THE FREEZER AISLE — From NYT’s Jeanna Smialek and Emily Erdos: “If consumers and companies expect fast inflation to be a permanent feature of the American economy, they might begin to shift their behavior in ways that cause prices to keep rising. Consumers might begin to accept price increases without shopping around, workers might demand higher pay to cover climbing costs, and businesses might raise prices both to cover their higher labor bills and because they think customers will stomach the heftier price tags.”
That’s something the Fed’s watching closely, Powell said during yesterday’s press conference: “[When people] start to factor high inflation into their decisions on a sustained basis – when that starts to really happen, and we don’t think that’s happened yet – it just gets that much harder and the pain will be that much greater.”
MARKET REACTS — From Bloomberg’s Rita Nazareth: “About 85% of the S&P 500 companies rose, while the Nasdaq 100 soared over 4%, the most since November 2020. Two-year US yields tumbled as much as 10 basis points. Expectations for the pace of Fed hikes eased — with swap markets showing 58 basis points of tightening priced in for September.”
MAJOR HEALTH CARE COST DRIVER — From WSJ’s David Wainer: “The traveling-nurse market might finally be coming back down to earth. HCA last Friday released second-quarter profit figures that beat Wall Street estimates and, more importantly for investors, reaffirmed its full-year outlook, sending its stock soaring by more than 11%. Tenet Healthcare, another hospital group reporting positive results after the market close on Thursday, shot up 6%.”
TECH WOES BLEED INTO REAL ESTATE — From Bloomberg’s Kurt Wagner: “Twitter Inc. is cutting back on its physical office space in several global markets, including San Francisco, New York and Sydney, as the company cuts costs and leans harder into remote work.”
Russia delivered less gas to Europe on Wednesday in a further escalation of an energy stand-off between Moscow and the European Union that will make it harder, and costlier, for the bloc to fill up storage ahead of the winter heating season. – Reuters’ Christoph Steitz and Nina Chestney
Two US senatorsplan to introduce legislation as early as this week that would give merchants the ability to route Visa Inc. and Mastercard Inc. credit-card transactions over alternative networks. — Bloomberg’s Jennifer Surane and Laura Litvan
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