President Trump — dug in and drumming on his demand — is prevailing on the most consequential economic front in Washington.
It isn’t over the government shutdown, which remains stalemated over Trump’s insistence on money for a border wall. Rather, the Federal Reserve looks likely to hold off on further interest rate hikes, as Trump has been insisting since he started inveighing against the central bank last summer.
“The final pieces of the puzzle fell into place on Wednesday that essentially ensure it will be months before the Fed contemplates another rate rise,” the Wall Street Journal’s Michael Derby writes. “In comments in speeches and press interviews, three of the four new voting members on this year’s iteration of the rate-setting Federal Open Market Committee all signaled they are willing to take some time to gain greater clarity about the outlook before doing anything with monetary policy.”
The Fed’s pause, to the extent it materializes, won’t owe to Trump’s jawboning (which he renewed in a Tuesday tweet). Instead, some central bank policymakers are shifting on the need to continue hiking because inflation appears tame — and a cloudy economic outlook warrants a go-slow approach.
Two of the regional Fed bank presidents who on Wednesday indicated a new willingness to wait — Eric Rosengren of Boston and Charles Evans of Chicago — have been relatively hawkish. But given recent uncertainty, including the stock market’s choppiness, “current monetary policy seems appropriate for now,” Rosengren said.
The comments came as minutes from the Fed’s December meeting revealing central bank policymakers are feeling increasingly cautious about how to proceed. At that meeting, bankers closed out the year by approving their fourth rate hike of 2018; just a few months prior, they had penciled in another four hikes for this year. (Goldman Sachs continued projecting four hikes in 2019 until last month.) But with global growth stumbling, trade tensions rising and stocks gyrating, “many participants” said the Fed “can afford to be patient,” the minutes said.
And Fed Chair Jay Powell confirmed the approach on Friday, when he struck what investors heard as a note more sensitive to financial markets during a question-and-answer session in Atlanta. “With the muted inflation readings that we’ve seen coming in, we will be patient as we watch to see how the economy evolves,” Powell said.
Taken together, the commentary supports the conclusion “now firmly embedded in markets that the next rate hike will come no sooner than June, if it comes at all,” Pantheon Macroeconomics’s chief economist Ian Shepherdson wrote in a Wednesday note. But he also pointed to what he argued is some faulty logic in the stock market:
if I have this straight, stocks are rallying because investors think the trade war, which pushed stocks down, will soon be over. But they still think that the Fed can’t hike again, even though the Fed only stepped back its rate forecasts because the trade war trashed stocks. Huh?
— Ian Shepherdson (@IanShepherdson) January 9, 2019
In his note, Shepherdson predicted that if the United States and China strike a trade deal, stocks will rally sharply, smoothing the path for the Fed to resume hiking. “Fed officials, we think, will come to regret their knee-jerk reactions to the drop in stocks in the fourth quarter, because the bigger picture hasn’t changed much,” he writes. “In short, if you believe that the U.S. and China will soon reach a trade agreement, then the risk of further Fed rates hikes later this year is much greater than is currently implied by markets.”
Nevertheless, for the first few months of this year at least, the Fed looks primed to back off the monetary tightening that has been enraging Trump.
And, as CNBC’s Jeff Cox notes, that should reduce one risk emanating from the White House: That the president would try to fire Powell in a fit of pique, a move that is “universally regarded as difficult to achieve and likely disruptive if not disastrous for the market.”
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MONEY ON THE HILL
— Trump walks out of shutdown negotiations. The Post’s Erica Werner and co.: “Talks between [Trump] and congressional Democrats aimed at ending the partial government shutdown collapsed in acrimony and disarray Wednesday, with the president walking out of the White House meeting and calling it ‘a total waste of time’ after Democrats rejected his demand for border-wall funding. Furious Democrats accused Trump of slamming his hand on the table before he exited, and they said he ignored their pleas to reopen the federal government as they continue to negotiate over his border wall demands. With the shutdown nearing the three-week mark, some 800,000 workers are about to miss their first paycheck. ‘He thinks maybe they could just ask their father for more money. But they can’t,’ said House Speaker Nancy Pelosi (D-Calif.), an implicit dig at Trump’s wealthy upbringing.”
Some House GOP defect on bill to reopen Treasury. The Post’s Felicia Sonmez and John Wagner: “House Democrats passed a bill that would reopen the Treasury Department and ensure that the Internal Revenue Service would remain funded as tax season kicks off and millions of taxpayers begin to file their returns. Eight House Republicans voted in favor of the bill, defying the president’s pleas for unity. But the measure has no path to passage, as Trump has said he opposes any legislation that does not include funding for the border wall.”
— House Dems seek answers from Mnuchin. NYT’s Alan Rappeport and Ken Vogel: “House Democrats have summoned Steven Mnuchin, the Treasury secretary, to Congress on Thursday to deliver a classified briefing about the Trump administration’s plans to end sanctions on companies linked to the billionaire Russian oligarch Oleg V. Deripaska. The briefing is an early instance of Democratic lawmakers flexing their new oversight muscles after taking control of the House last week… Congress is reviewing the administration’s decision — announced in December by the Treasury Department — to lift sanctions against three companies that Mr. Deripaska controls, EN , Rusal and JSC EuroSibEnergo.”
— Stocks cautiously climbing. Bloomberg’s Sarah Ponczek and Reade Pickert: “Stocks rose as investors cheered the dovish approach discussed in minutes from the latest Federal Reserve meeting, but the gains were muted by concerns that the partial shutdown of the U.S. government will continue for some time. The dollar fell and Treasuries rose, while oil surged above $52 a barrel and entered a bull market.
“The S&P 500 Index was up for a fourth consecutive day led by energy producers, reaching the highest level in almost a month. The Nasdaq benchmarks were the strongest performers on strength in semiconductors and technology hardware manufacturers.”
Why stocks tanked in December. CNBC’s Liz Moyer: “When U.S. stocks posted their worst December since the Great Depression, traders put plenty of the blame on actions by the Federal Reserve and that other favorite scapegoat, computerized trading. But it now seems clear that the market was mostly anticipating what has actually happened in recent days: companies are cutting profit forecasts and trying to temper expectations for earnings growth this year after a big 2018.
“On the first day of trading in 2019 last week, Apple warned that its fiscal first-quarter sales wouldn’t be as high as previously projected and said its profit margin would be ever so slightly narrower than forecast. The Nikkei Asian Review reported this week that Apple is cutting its iPhone production by 10 percent for the next three months. It is more of the same for other companies. Beverage giant Constellation Brands said Wednesday that its fiscal 2019 earnings per share would be $9.20 to $9.30, down from the range of $9.60 to $9.75 it forecast earlier. The company said it expects weak sales in its wine and spirits business next quarter.”
Computers still bearish. WSJ’s Stephanie Yang: “Investors have started to shake off last year’s steep losses, helping markets regain some ground in 2019. But the robots are still almost uniformly bearish. Trend-following investment strategies—a computer-based way of trading that has become a major force in some markets—have gone from bullish to bearish to a degree not seen in a decade, according to an analysis of algorithms that buy or sell based on asset-price momentum.
“Funds that use such strategies likely went from holding net long positions, or betting that prices would rise, in four major asset classes—stocks, bonds, currencies and commodities—in the third quarter of 2017, to being short, or wagering against, everything but bonds by 2019. And even their embrace of bonds is bearish, signaling a flight to haven assets.”
New tech stocks on the block. Annie Pei at CNBC: “It could be in with the new and out with the old when it comes to technology this year. While many large-cap tech names have started the year off strong, there’s a wave of smaller, more new-age tech stocks that have seen a huge rally. Companies like Twilio, Etsy, Square, Roku and Dropbox have soared, with many up double digits in the first few trading days of 2019.
— May tries again to sell her Brexit deal. AP’s Jill Lawless: “Britain’s battle over Brexit turned into political trench warfare between Parliament and the government Wednesday, as Prime Minister Theresa May brought her little-loved EU divorce agreement back to lawmakers who appear determined to thwart her plans. A month after postponing a vote on the deal to avert near-certain defeat, May urged Parliament to support it to prevent Britain leaving the EU on March 29 with no agreement on exit terms and future relations, an outcome that could cause economic and social upheaval. …
“May postponed the vote in mid-December when it became clear lawmakers would resoundingly reject the agreement, a compromise deal that has left both pro-European and pro-Brexit politicians unhappy. Rather than warming to May’s deal since then, lawmakers have tried to wrest control of Brexit from the government and put it in the hands of Parliament. An alliance of governing Conservative and opposition legislators has dealt May two defeats in as many days — symbolic setbacks that suggest a power shift from the executive to the legislature.”
— Beijing talks yield progress. Bloomberg’s Andrew Mayeda and Miao Han: “The Trump administration is pushing for a way to make sure China delivers on its commitments in any deal the two nations reach to defuse a trade war that has roiled financial markets and dimmed the outlook for global growth. The U.S. wrapped up three days of mid-level talks with China in Beijing on Wednesday, noting a commitment by President Xi Jinping’s government to buy more U.S. agricultural goods, energy and manufactured products. For its part, China said the meetings were “extensive, in-depth and detailed,” and laid the foundation for a resolution of the conflict.”
High-level talks may be next. Keith Bradsher at NYT: “The trade talks could help clear the way for higher-level talks this month when [Trump] attends the World Economic Forum in Davos, Switzerland. Vice Premier Liu He, China’s economic czar, is expected to go to Washington sometime after that… The United States delegation plans to report back to the White House to determine what happens next. The administration has set a March 2 deadline for raising tariffs on roughly two-fifths of annual American imports from China if no deal is reached.”
But Trump could skip Davos. The White House is considering canceling the president’s trip to the Swiss forum, which starts Jan. 22, if the shutdown is still dragging on, the WSJ’s Michael Bender reports.
— Trump, GOP to battle on trade powers. Bloomberg’s Jenny Leonard: “Trump is setting himself up for a fight with congressional Republicans if he seeks to expand his unilateral tariff powers or proceed with threatened duties on imports of cars and auto parts. Trump is expected to urge Congress in his State of the Union address this month to pass new legislation that would boost his powers to break down tariff and non-tariff barriers to American exports…
“Sen. Chuck Grassley of Iowa, who now chairs the Finance Committee with jurisdiction over trade, told reporters Wednesday that Trump will not be allowed more power because Congress has already delegated too much authority to the executive branch. ‘Oh, we aren’t going to give him any greater authority, we’ve already delegated too much,; Grassley said in response to a question on the Bloomberg News report.”
Grassley is also looking into his authority to see Trump’s tax returns, telling reporters he has requested a briefing from nonpartisan tax advisors on the subject. House Democrats are expected to move quickly to try to recover the documents, and Grassley said he wants to learn more about the process.
— Bezos’s divorce and his stake in Amazon. WSJ’s Laura Stevens and Sara Randazzo: “Amazon.com Inc. Chief Executive Jeff Bezos and his wife, MacKenzie, are divorcing after 25 years of marriage, a period during which Mr. Bezos amassed a personal fortune while building the world’s most valuable company. The divorce could have implications for the ownership structure of Amazon, where Mr. Bezos is the largest shareholder with a 16.3% stake, according to the company’s latest proxy filed in April 2018. Much will depend on whether a prenuptial or postnuptial agreement outlining the terms of a possible split exists, according to lawyers who handle divorces for wealthy individuals.
“Mr. Bezos is the world’s wealthiest man, with a net worth of about $137 billion, according to the Bloomberg Billionaires Index. Ms. Bezos, who was instrumental in helping to launch Amazon, could be entitled to half the couple’s wealth depending on where they divorce, attorneys said. If Ms. Bezos ends up with a chunk of Mr. Bezos’s stake, she could influence shareholder votes on resolutions and press for changes at the company. No matter what, Mr. Bezos is expected to remain one of the company’s largest holders. The next biggest holders are Vanguard Group and BlackRock Group Inc., each with a little more than 5% of the company. In a message Wednesday on Mr. Bezos’s Twitter account, the couple said that after a trial separation, they had chosen to proceed with the divorce.” (Bezos owns The Post.)
— Sweden is way ahead of AOC on tax rates. Bloomberg’s Jonas O Bergman and Kati Pohjanpalo: “U.S. Congresswoman and Bronx-native Alexandria Ocasio-Cortez would find herself at home in Stockholm. The newly minted lawmaker is proposing to lift the top marginal tax rate to 70 percent on incomes starting at $10 million. The idea has drawn both praise and jeers from across the political spectrum. For a real world example, critics and fans alike should look to Sweden. The Nordic country has a marginal tax wedge — the difference between the cost to the employer and what a worker takes home — of 69.7 percent on salaries above $79,000. That’s almost 30 percentage points higher than in the U.S., and it kicks in a lot earlier than Ocasio-Cortez is proposing.
“Critics of high taxes claim the policy stifles economic growth by reducing the incentive for people to work. But Sweden’s employment rate is 77.5 percent, beating the U.S.’s 71 percent. The Nordic country has also surpassed the U.S. in terms of economic growth this decade, expanding 2.7 percent a year, on average, compared with 2.2 percent for the U.S.”
Larry Summers: AOC right in spirit. CNN: “Former Treasury Secretary Larry Summers said Democratic Rep. Alexandria Ocasio-Cortez of New York was “right in spirit” to call for higher taxes on the nation’s highest earners. ‘The congresswoman is right,’ Summers told CNN’s Christiane Amanpour on Tuesday. ‘We need more progressive taxes in the United States. The top one percent and the top tenth of a percent and the top hundredth of a percent, they should all be paying more than they are.'”
— Ginne Mae chief quits. Bloomberg’s Elizabeth Dexheimer: “Michael Bright has stepped down from running Ginnie Mae to join a trade group, according to a person with knowledge of the matter. Bright, who has been chief operating officer of the government-owned mortgage guarantor since July 2017, will be joining the Structured Finance Industry Group as its president, the person said, asking not to be named because the move hasn’t been announced. Bright was nominated by [Trump] last year to become Ginnie Mae’s president and had bipartisan support on the Senate Banking Committee. He didn’t get a confirmation vote from the full Senate.”
— From The New Yorker’s Ivan Ehlers
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