Putin upended the Fed’s rate calculus- POLITICO – POLITICO

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Putin upended the Fed’s rate calculus- POLITICO  POLITICO

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Federal Reserve officials were prepared to kick off their rate-hiking cycle with a big bang in March. The only thing stopping them: Vladimir Putin.

Minutes from the Fed’s March 15-16 policy meeting released Wednesday showed “many participants” wanted to raise rates by a half percentage point, rather than the standard, quarter-percentage-point increase they ultimately approved.

From our Victoria Guida: “‘In light of greater near-term uncertainty associated with Russia’s invasion of Ukraine, they judged that a [quarter of a percentage] point increase would be appropriate at this meeting,” the minutes said.

“The document also indicates that central bank policymakers are more worried about the war making inflation worse than slowing U.S. economic growth, though both effects are likely.”

A super-sized rate increase seemed like a strong bet in the middle of February, when a string of red-hot economic data — coupled with hawkish remarks from some Fed officials — bolstered expectations that the Fed would go big with its first rate move since 2020. (You may recall, Morning Money flagged this sleeper risk back on Feb. 17.)

By the end of the month, it was clear that Putin’s invasion had turned the rate calculus on its head.

Six weeks into the war, Fed officials are feeling more comfortable. The minutes indicated that many officials thought one or more big rate increases could be appropriate at future meetings — echoing recent public remarks by Fed officials — and that the central bank could start shrinking its balance sheet in May.

Meanwhile, at the White House — NEC Director Brian Deese on Wednesday, asked about Deutsche Bank’s forecast for a U.S. recession in 2023, said he was feeling confident:

“What’s marked about the U.S. economy right now is the degree of resilience that we have seen,” Deese said at a reporter breakfast hosted by the Christian Science Monitor. “Resilience in the labor market, and resiliency in consumption, through a number of shocks.”

“I think the real issue is, how well positioned is the United States to navigate through that? I think the answer to that is, well.”

Cranking up the sanctions machine — The administration on Wednesday announced another round of penalties against Russian financial institutions, oligarchs and businesses, its latest effort to turn up the economic pressure on the Kremlin.

As we’ve told you here, Russia has taken a series of extreme steps to stabilize its currency and calm markets following a wave of U.S. sanctions. Those moves have been aided by rising energy prices and import limits that have helped Russia blunt some of the pain of sanctions.

Following revelations that Russian troops may have committed war crimes, the Biden administration answered back with full blocking sanctions on Russia’s biggest banks, including Sberbank and private bank Alfa Bank (though energy transactions are exempt from those restrictions). It also banned new investment in Russia, sanctioned two of Putin’s adult daughters and announced new sanctions on Russia businesses, with more details to come today.

“These are strong moves,” Eddie Fishman, a former Obama State Department sanctions official, said on Twitter. “But they don’t address the biggest weakness in sanctions: Russia’s continued oil and gas sales, which rake in $1 billion each day for the Kremlin. So long as this gap exists, sanctions pressure will face an upper limit.”

By carving out energy from the financial sanctions, U.S. banks can continue sending payments for Russian energy to Sberbank on behalf of European countries, which rely heavily on those imports and aren’t yet on board with a full embargo. The prospect of oil revenue continuing to make its way to the Kremlin caused some bipartisan frustration, voiced at a hearing with Treasury Secretary Janet Yellen on Wednesday.

White House officials defended the effectiveness of sanctions, pointing to soaring inflation and interest rates in Russia and to estimates that the economy could shrink by double digits this year, even more than it did following a 1998 financial crisis.

Where do they go from here? Evidence that Russian troops murdered hundreds of Ukrainian civilians is leading some U.S. lawmakers to insist that America and its allies keep sanctions on Moscow so long as Putin remains in power — even if he withdraws from Ukraine, our Nahal Toosi reports.

“The sentiment is likely to grow in a Congress where anti-Putin feeling is strong and bipartisan. It could put the White House in a tricky position, making it potentially harder to bring peace to Ukraine by enticing Putin through sanctions relief.”

IT’S THURSDAY — Katy O’Donnell will be your MM host tomorrow and will pass the baton to Victoria next week, while Kate takes some time to recharge. (This will involve sun and sand and drinks with umbrellas. And possibly alligators.)

Please send them all the tips! [email protected] or @katyodonnell_, [email protected] or @vtg2, [email protected] or @aubreeeweaver.

Driving the Day

St. Louis Fed President Jim Bullard speaks at 9 a.m. … IRS Commissioner Rettig testifies at Senate Finance hearing on the tax agency’s budget and filing season at 10 a.m. … Yellen speech on digital assets at American University at 10:30 a.m. … Chicago Fed President Charles Evans and Atlanta Fed President Raphael Bostic speak at 2 p.m.

WHITE HOUSE NOMINATES TWO FOR SEC SEATS — Confirming our reporting in MM last month, the White House on Wednesday announced that President Joe Biden will nominate two new SEC commissioners: Jaime Lizárraga, a longtime aide to House Speaker Nancy Pelosi, and Mark Uyeda, an SEC lawyer detailed to the Republican Senate Banking Committee.

If confirmed, Lizárraga will replace Democratic Commissioner Allison Lee, whose term will expire at the end of June. Uyeda will fill the GOP vacancy created after Republican Commissioner Elad Roisman stepped down in January. This would give Chair Gary Gensler a full slate on the five-member commission as he pushes ahead with a packed agenda this year.

SEC POISED TO ISSUE NEW SWAPS RULES — Our Sam Sutton: “The SEC is poised to propose rules that would clarify its role in overseeing swap markets, finally fulfilling the agency’s decade-old obligations under the Dodd-Frank law to better regulate the financial instruments that helped spark the global financial crisis.

“The proposal, which was approved by the Commission 4-0 on Wednesday morning, would require securities-based swap execution facilities to register with the agency — forcing trading venues to report market activity and subjecting them to filing requirements anytime they issue new rules or products.”

BIDEN TO ERASE STUDENT LOAN DEFAULTS — Our Michael Stratford: “The Biden administration on Wednesday moved to expunge the defaults of millions of federal student loan borrowers who fell behind on payments before the pandemic, as the White House formally unveiled a four-month extension of the pause on monthly loan payments and interest.”

NEW YORK AG ASKS BANKS TO END OVERDRAFT FEES — Reuters’ Elizabeth Dilts Marshall: “New York Attorney General Letitia James on Wednesday asked JPMorgan Chase & Co, Bank of America, US Bancorp and Wells Fargo & Co to end all consumer overdraft fees by the summer. In letters sent to the chief executives of four of the biggest U.S. consumer banks, James said the majority of overdraft fees are levied on ‘the most vulnerable consumers with the lowest average account balances.’”


TOOMEY TUNES — From Sam Sutton: Sen. Pat Toomey has released a discussion draft of legislation that would create a new regulatory framework for stablecoins, marking the latest entrant in a slew of proposals to govern a category of digital assets that federal agencies have identified as a potential threat to payment and financial systems. The draft bill, which Toomey has been working on since last summer, would create a new license for stablecoins issued by bank regulators at the Office of the Comptroller of the Currency. While license holders would be barred from other lines of business, including extending lines of credit, they’d also have access to Federal Reserve accounts and services.

— With the Biden administration actively exploring the development of a digital dollar, Toomey also said he’s skeptical of the Fed’s ability to develop a digital currency amid growing competition from privately issued stablecoins. While he isn’t “reflexively, automatically opposed to any central bank digital dollar … I don’t know that they would get it right, frankly,” he said. “I think it could be a big challenge for them.”

BIG MONEY — Also from Sam: Binance, the largest global crypto exchange, announced that it raised more than $200 million in venture funding for its U.S. subsidiary on Wednesday, pegging its domestic

platform at a $4.5 billion valuation. The “seed” funding round included investments from RRE Ventures, Foundation Capital, Original Capital, VanEck and Circle Ventures, according to the company.

— The exchange is also leading a $150 million funding round to support Sky Mavis, the creator of the popular online game Axie Infinity, which recently lost more than $600 million in cryptocurrency after hackers attacked weaknesses in a “bridge” protocol that allows users to transfer their crypto across different blockchains into its network. The funds will be used to reimburse users who lost funds in the attack.


YELLEN: AIM IS ‘MAXIMUM PAIN’ FOR RUSSIA WITHOUT HURTING U.S. ECONOMY — NYT’s Alan Rappeport and Katie Rogers: “Treasury Secretary Janet L. Yellen said on Wednesday that the United States would continue taking steps to cut Russia off from the global financial system in response to its invasion of Ukraine and argued that the sanctions already imposed have taken a severe toll on the Russian economy.”

IMF SET TO APPROVE SPECIAL UKRAINE ACCOUNT FOR POOLING OF AID — Bloomberg’s Volodymyr Verbyany, Priscila Azevedo Rocha and Eric Martin: “The International Monetary Fund is poised to establish a new account in the coming days that will allow donor nations to provide support to Ukraine’s economy as Russia’s invasion rages on. Creation of the so-called ‘special administered account’ may be approved as soon as Friday, according to people familiar with the matter, who asked not to be named because they aren’t authorized to speak publicly.”

RUSSIA PAYS DOLLAR-DOMINATED DEBT IN RUBLES, RISKING DEFAULT — NYT’s Eshe Nelson and Lananh Nguyen: “Russia’s finance ministry said on Wednesday that it had used rubles to pay about $650 million in dollar-denominated debt obligations after the U.S. government blocked access to dollars held in American banks. The move pushed the country closer to a default.”

Fly Around

Banks are debating a plan to bring Zelle to the checkout at big retailers. — WSJ’s AnnaMaria Andriotis and David Benoit

A surge in hedging to protect against aggressive Federal Reserve tightening has caused liquidity problems in the interest rate options sector, reflecting a trend that has been going on in some parts of the bond market. — Reuters’ Gertrude Chavez-Dreyfuss

If China continues its Covid-zero approach, expect global supply chains to remain stretched, U.S. inflation to remain elevated and for the Fed to be forced belatedly into jumbo rate hikes. — Bloomberg’s Edward Harrison

The return of inflation, like the 2008 financial crisis, may end up fundamentally altering policy makers’ mindsets and priorities. That’s the key takeaway from a noteworthy speech Tuesday by Agustín Carstens, general manager of the Bank for International Settlements. — WSJ’s Greg Ip

Source: politico.com

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Hi there, I am Amanda and I work as an editor at impactinvesting.ai;  if you are interested in my services, please reach me at amanda.impactinvesting.ai

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