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Happy Tuesday! Team USA is about to take on Japan in the World Baseball Classic championship game. Who’s pumped?
Here’s what else is happening.
Fed Walking a Tightrope as Decision Day Looms
As the Federal Open Market Committee kicked off a two-day meeting Tuesday, officials at the Federal Reserve face a difficult decision: Should they raise interest rates for the ninth time in a row to signal that they remain committed to their fight against inflation, or pause their tightening campaign to ease up on banks threatened by a fears of system-wide crisis?
Despite the recent failure of Silicon Valley Bank and the fire sale of Europe’s Credit Suisse, most analysts expect the Fed to raise rates once again. According to the CME FedWatch Tool, which measures market expectations, investors think there’s an 86.4% chance that the Fed will raise its target interest rate by 25 basis points tomorrow, to a range between 4.75% and 5.00%.
Some prominent economists are calling for the Fed to press ahead in its battle against inflation. "It would be very unfortunate if, out of solicitude for the banking system, the Fed were to slow down its rate of interest-rate increase beyond what was appropriate given the credit contraction," former Treasury Secretary Larry Summers told Bloomberg.
Michael Feroli of J.P. Morgan said that the Fed cannot afford to pause. "You lose time on the fight against inflation if you wait," he told The New York Times.
Still, there are plenty of people on Wall Street who think the Fed should tap the brakes to avoid putting further pressure on the banks. "At this point in time, for the Fed, a pregnant pause is warranted," said Diane Swonk, the chief economist at KPMG. "It’s a marathon, not a sprint — hold back now, promise to do more later if needed."
Jeremy Stein, a former Fed governor, said the Fed could justify a pause by explaining that the banking crisis is tightening credit, which is one of the goals of the rate increase campaign. "You would want to say, ‘This is doing some of our monetary policy job for us,’" Stein told The Wall Street Journal. "If you can communicate that well and effectively, the choice between 25 and 0 is less consequential than how you explain it."
But failing to raise rates could send a troubling signal. Former Obama administration economist Jason Furman said Tuesday that several prominent former Fed officials were arguing that the central bank should raise rates because failing to do so would tell investors that "the underlying situation was worse than realized."
The bottom line: The Fed is facing one of its toughest calls since the banking crisis in 2008. We’ll learn more tomorrow afternoon when the Fed announces its decision on interest rates and chief Jay Powell speaks to the press about the central bank’s view of the economy. "It’s going to be a tough decision with very tricky communications," William English, a former Fed economist, told the Journal.
Quote of the Day
"As a Democrat, I actually look forward to them voting to put foreign investors ahead of American families for payment. I’m not sure that’s the message they want to take to the public in 2024, but God bless them if they do."
− Senate Budget Committee Chair Sheldon Whitehouse (D-RI), in a Politico article detailing Democrats’ response to a Republican bill that would instruct the Treasury Department to prioritize certain debt payments, including those to China, Japan and other foreign nations, if the debt ceiling is breached. GOP supporters argue their plan would lessen the impact of a potential debt default and protect seniors from having Social Security and Medicare payments frozen.
Democrats warn that Republicans are flirting with economic catastrophe and downplaying the risk they’re creating — and officials warn that the prioritization Republicans envision can‘t be done in government systems anyway. But, they say, the biggest problem is that the GOP plan ignores the costs of any default.
"The reality that the GOP bill would prioritize foreign obligations over domestic bills, from paying the military to food stamps, might seem like a political gift to Democrats," Politico’s Jennifer Scholtes writes. "But President Joe Biden’s party is also concerned about the effort for a wonkier reason, warning that it’s a ploy to make the public more comfortable with taking the country up to and even beyond, the debt-limit brink for the first time in history."
News
- Push to Insure Big Deposits Percolates on Capitol Hill – New York Times
- US Studies Ways to Insure All Bank Deposits If Crisis Grows – Bloomberg
- Janet Yellen Says the U.S. Is Ready to Protect Depositors at Small Banks if Required – NPR
- After Signature Bank Deal, FDIC Is Left With $11 Billion in ‘Toxic Waste’ Loans – Bloomberg
- Trump Throws GOP Retreat Off Course – The Hill
- US Previously Owned Home Prices Fall for First Time Since 2012 – Bloomberg
- US Speeds up Abrams Tank Delivery to Ukraine War Zone – Associated Press
- As Budget Cuts Loom, Group Warns of Effects on House Staff Pay – Roll Call
- Biden Will Release Covid-19 Origin Intelligence – Politico
- ‘We Were Helpless’: Despair at the C.D.C. as the Pandemic Erupted – New York Times
- Biden Creates National Monuments in Nevada and Texas – Politico
Views and Analysis
- The Fed Can Fight Both Inflation and Bank Contagion – Bill Dudley, Bloomberg
- Banking Turmoil Intensifies the Need for Better Federal Reserve Policymaking – Mohamed El-Erian, Financial Times
- Four Ways to Fix the Bank Problem – Martin Wolf, Financial Times
- This Banking Crisis Won’t Wreck the Economy – Tyler Cowen, Bloomberg
- The Lessons of the Great Depression Are Being Ignored – Charles W. Calomiris, Politico
- Private Opulence, Public Squalor: How the U.S. Helps the Rich and Hurts the Poor – Dave Davies, NPR
- To Grow the Economy More Equitably, Invest in Early Childhood – Kali Thorne Ladd, The Hill
- How to Fight Climate Change for a Bargain – Peter Coy, New York Times
- Six Months in, the Inflation Reduction Act Is Already Unleashing Clean Energy’s Potential – Bob Keefe, The Hill