The Finance 202: Powell has some bad, good and ugly news for Trump

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THE TICKER

Federal Reserve Chair Jerome Powell offered President Trump some bad news, some good news, and some worrying news when he testified before Congress on Wednesday. 

The bad news: Powell won’t leave his post without a fight, if the president tries to fire or demote him. The central bank chief implied as much in response to a question from House Financial Services Committee Chairwoman Maxine Waters (D-Calif.) about what he’d do if Trump called and fired him. “Of course, I would not do that,” Powell replied. “My answer would be no.”

See the exchange here: 

The good news: The Fed is likely to cut interest rates by a quarter-point at the end of the month, meeting Trump’s demands for more accommodative monetary policy. Some Fed watchers had speculated that the trade truce Trump struck with Chinese President Xi Jinping at the G-20 summit last month would remove a major, looming threat to the economy, thereby convincing the central bank to hold off on any rate cuts for the time being. Powell signaled that the Fed is likely to deliver a modest rate cut at the end of month anyway. 

The worrying news: The reason the Fed is likely to proceed with the cut is that the central bank still sees storm clouds gathering at home and abroad that threaten the economic expansion — a bracing assessment for a president counting on a strong economy to buoy his reelection bid.

“Uncertainties about the outlook have increased in recent months,” Powell said in his prepared testimony. “Economic momentum appears to have slowed in some major foreign economies, and that weakness could affect the U.S. economy. Moreover, a number of government policy issues have yet to be resolved, including trade developments, the federal debt ceiling, and Brexit.” 

Further, Powell said, growth in business investment has “slowed notably,” housing investment and manufacturing output have hit skids, and overall growth has declined. While the labor market remains healthy, he stopped short of calling it hot. “To call something hot, you need to see some heat,” he said in his back-and-forth with lawmakers. “While we hear lots of reports of companies having a hard time finding qualified labor, nonetheless we don’t see wages really responding, so I don’t really see that as a current issue.” And he said the strong June jobs report hasn’t changed the Fed’s thinking. 

Powell isn’t alone in taking a dim view of an economy that Trump has touted as robust and the envy of the world. Minutes from the June meeting of the Federal Open Market Committee revealed that many Fed officials believe risks to the economy have “increased significantly” in recent weeks.

“Many participants noted that, since the Committee’s previous meeting, the economy appeared to have lost some momentum and pointed to a number of factors supporting that view including recent weak indicators for business confidence, business spending and manufacturing activity; trade developments; and signs of slowing global economic growth,” according to the minutes. 

“The minutes confirm that officials see rate cuts primarily as insurance against ‘possible future adverse shocks,’ ” Michael Pearce, senior U.S. economist for Capital Economics, wrote in a Wednesday note. “We expect the incoming data will continue to deteriorate,” prompting the Fed to cut its benchmark interest rate by three-quarters of a point by early next year. 

Meanwhile, the New York Fed’s probability model, which projects the likelihood of a recession in the next year, came in at 32.9 percent for June, the tracker’s highest level since 2009. That could spell trouble, “considering the measure has breached the 30% threshold before every recession since 1960,” per Business Insider’s Carmen Reinecke. The May reading came in at 28 percent.

And the bond market continues to telepgraph distress. The yield on short-term Treasurys has run higher than on long-term bonds since late May. That yield curve inversion has frequently forerun a recession. “While expansions do not die of old age, the current one looks tired and increasingly fragile, amid persistent protectionist tensions,” Silvia Dall’Angelo, senior economist at Hermes Investment Management, said in a note. 

Whether the warnings about the expansion’s fragility get through to the president is an open question. And it’s likely he will instead seize on a consolation prize amid all the gloom the Fed is projecting: The stock market, arguably Trump’s favorite scoreboard for the economy, climbed Wednesday on the signal of the imminent rate cut, with the S&P 500 briefly cresting the 3,000 mark for the first time in its history. 

MONEY ON THE HILL

— White House pushes Congress on debt ceiling deal: “The White House is pushing congressional leaders to strike a spending deal and increase the debt limit in the next two or three weeks, jolted by a recent report that found the Treasury Department was running out of cash much faster than previously forecast,” my colleagues Damian Paletta and Erica Werner report.

“Treasury Secretary Steven Mnuchin consulted with House Speaker Nancy Pelosi (D-Calif.) this week and met Wednesday with GOP leaders, alongside acting chief of staff Mick Mulvaney, trying to forge a solution. Pelosi has made clear that any increase in the federal debt limit should come as part of a broader, two-year budget deal — an approach also favored by leading Senate Republicans — but it’s far from clear whether lawmakers and the administration will be able to reach such an agreement before Congress leaves town for its annual summer recess in August.”

  • This moment: “At one point during a budget negotiation in May, Pelosi snubbed acting budget director Russell Vought when he spoke up to reiterate a point. Turning to Vought, Pelosi asked, ‘What was your name again, dear?’ according to an individual who witnessed the exchange and spoke on the condition of anonymity to recount it.”

The presidential contender sees the disdain he elicits from corporate titans as a selling point. Among them: Dimon, former Goldman Sachs CEO Lloyd Blankfein, and former Federal Reserve Chairman Alan Greenspan.

HuffPost

TRUMP TRACKER

TRADE FLY-AROUND:

Trump team fears China will drive a harder bargain. The Post’s Robert Costa and David Lynch: “The Trump administration is increasingly concerned about prospects for a trade deal with China, amid an unexpected reshuffling of the Chinese negotiating team and a lack of progress on core issues since the Group of 20 summit in Japan, according to U.S. officials and senior Republicans briefed on the discussions. Commerce Minister Zhong Shan, regarded by some White House officials as a hard-liner, has assumed new prominence in the talks, participating in a Tuesday teleconference alongside Chinese Vice Premier Liu He, who has headed the Chinese trade team for more than a year.”

Trump may have given up more than he got at the G-20. NYT’s Ana Swanson and Keith Bradsher: “Trump emerged from a June meeting in Japan with Xi Jinping, the Chinese president, saying that China would immediately begin purchasing American farm products in return for a trade truce that would forestall more United States tariffs on Chinese goods.

“China did not see it that way. People familiar with the negotiations say China has denied making any explicit commitment to buy American farm products during those discussions and instead saw large-scale purchases as contingent on progress toward a final trade deal that is still nowhere in sight. That is raising questions among trade experts about whether the United States gave up more than it got during Mr. Trump’s recent efforts to de-escalate the trade war.”

— USTR launches probe of French tech tax: “In an unusual move that threatens to worsen trade tensions with Europe, the Trump administration said it will investigate whether a proposed French tax on tech companies discriminates against U.S. businesses, a step that could lead Washington to impose trade penalties,” my colleagues Jeanne Whalen and Tony Romm report. “The 301 investigation — the same type of probe that led the United States to slap tariffs on China last year — is a rare tool for Washington to use against a close ally, underscoring the Trump administration’s intent to continue playing tough on trade.”

— USMCA could be submitted to the Hill this week: “The White House plans to send its replacement for the North American Free Trade Agreement to Congress after Sept. 1, setting up a vote by the end of the year, sources told CNBC,” CNBC’s Kayla Tausche reports. “The White House could submit the bill to Congress as soon as this week to start the approval process. House Democrats are meeting in working groups to hammer out issues with the existing agreement.”

— Trade war “victors” don’t always win: “Unlike many American corporations, companies in industries like steel, aluminum, lumber and home appliances asked Mr. Trump to raise tariffs or backed his trade policies. These businesses, which include United States Steel, Century Aluminum and Whirlpool, had long complained of unfair foreign competition, often from Chinese companies that they argue benefit from unfair government subsidies,” the New York Times’s Peter Eavis reports… “There are signs that some of the companies have expanded too fast. Partly as a result, the prices of their products are falling. And some have found that the tariffs, while helpful, can’t solve their most pressing problems.”

— Acosta fights for his job: “Embattled Labor Secretary Alex Acosta on Wednesday defended his role as a federal prosecutor in brokering a decade-old plea deal for sex offender Jeffrey Epstein, but lawyers for alleged victims criticized his explanation and Democrats called for him to appear at a congressional hearing in two weeks,” my colleagues Kimberly Kindy, Felicia Sonmez, Ashley Parker and Seung Min Kim report.

  • He refused to apologize: “‘Look, no regrets is a very hard question,’ Acosta said, adding, ‘There is a value to a short guilty plea because letting him walk — letting what the state attorney was ready to do go forward — would have been absolutely awful.’”
  • He said the world of 2019 is very different: “Asked at Wednesday’s news conference whether he would have made the same deal today, Acosta declined to say. He argued that ‘today’s world treats victims very, very differently’ and that if a trial were held today, there would be little of the ‘victim-shaming’ that would have taken place 12 years ago.”
  • An audience of one: “[Trump] pushed Acosta to hold the news conference to defend himself and is, for now, not inclined to fire the labor secretary, according to senior administration officials.” Even though Acosta denied trying to “send any signal to the president.”
  • Pressure from Democrats is mounting: “Earlier Wednesday, House Oversight Committee Chairman Elijah E. Cummings (D-Md.), joined by four of his Democratic colleagues, sent a letter to Acosta demanding he appear before the powerful investigative panel to testify July 23 on the Epstein plea deal.”
  • But not from Republicans: “No Senate Republican — who all voted for Acosta’s confirmation — has explicitly called on Acosta to resign at this point, although several are awaiting the results of a Justice Department probe into the handling of Epstein’s 2008 plea deal before commenting on Acosta’s fate.”
  • Manhattan DA tried to cut Epstein a deal: “During a hearing in 2011, a seasoned sex-crimes prosecutor from [Manhattan district attorney, Cyrus R. Vance Jr.’s] office argued forcefully in court that Mr. Epstein, who had been convicted in Florida of soliciting an underage prostitute, should not be registered as a top-level sex offender in New York,” the New York Times’s Jan Ransom reports. “Instead, the prosecutor, Jennifer Gaffney, asked a judge to reduce Mr. Epstein’s sex-offender status to the lowest possible classification, which would have limited the personal information available to the public, and would have kept him from being listed on a registry of sex offenders for life.” 
  • Before Acosta spoke, an accuser came forward: “Jennifer Araoz says she was 14 years old when a young woman approached her outside her New York City high school in the fall of 2001,” NBC News’s Sarah Fitzpatrick, Savannah Guthrie and Rich Schapiro report on Araoz allegations that Epstein raped her when she was 15 years old. “The woman was friendly and curious, asking Araoz personal questions about her family, her upbringing, their finances. Soon she began talking to Araoz about a man she knew who was kind and wealthy and lived nearby. His name, the woman said, was Jeffrey Epstein.” Araoz is not involved in the New York case against Epstein. 
  • Meanwhile, Schumer donates Epstein money to charity: “New York Sen. Chuck Schumer will offset more than $7,000 in campaign contributions from accused sex trafficker Jeffrey Epstein by donating the money to anti-sex trafficking and anti-violence against women groups, CNBC’s Marc Rod reports. “Epstein gave seven $1,000 donations to Schumer between 1992 and 1997, according to the nonpartisan Center for Responsive Politics, and gave more to Schumer-related PACs.”

— Trump wins in emoluments case:A federal appeals court on Wednesday dismissed a lawsuit challenging the legality of payments to [Trump’s] hotels by foreigners during his tenure in the White House,” CNBC’s Tucker Higgins reports. “A three-judge panel of the U.S. Circuit Court of Appeals for the 4th Circuit unanimously ruled that the state of Maryland and the District of Columbia do not have legal standing to sue under a claim that Trump violated the so-called emoluments clause of the U.S. Constitution.”

POCKET CHANGE

— Big banks are finding ways to get bigger again: “Since the 2008 financial crisis, federal regulators have publicly — and often privately — tried to keep giant banks like JPMorgan, already deemed too big to fail, from getting even bigger,” Bloomberg News’s Michelle Davis reports. “That’s over now. The Trump administration has rolled back the stealth campaign. And the implications — for the banks, their customers, investors and the economy — could be enormous.”

  • Trump effect is clear: “Many of the deals wouldn’t have been possible before Trump, because the top banking agencies under Obama followed an informal policy to stop or discourage dozens of banks from expanding while they dealt with compliance issues, according to people with knowledge of the matter. That era’s shadow constraints most often stemmed from compliance issues related to consumer-protection and anti-money-laundering rules, rather than concerns about financial stability, the people said, asking not to be identified discussing confidential information.”
  • The numbers don’t lie:Banks announced more mergers and acquisitions in the first five months of this year than they did during any full-year period in the past decade, according to data from S&P Global. BB&T Corp.’s $28 billion tie-up with SunTrust Banks Inc., announced in February, was the biggest banking combination proposed since the 2008 financial crisis. Four days after that announcement, Morgan Stanley unveiled its largest acquisition in a decade: a $900 million deal to expand the firm’s wealth business. Goldman Sachs Group Inc. followed suit three months later with its biggest acquisition in almost 20 years.”
  • What the Fed and OCC are doing: “Behind the scenes, the industry’s primary regulators — the Federal Reserve and Office of the Comptroller of the Currency — have adopted a friendlier approach, giving banks more leeway to expand into new markets, introduce products and make acquisitions … Much of how regulators such as the Fed and OCC interact with banks is confidential. It’s illegal to divulge supervisory information about specific banks because bad news might panic customers. But people with knowledge of the matter described the growth restrictions as one of the more extreme ways regulators during President Barack Obama’s term exerted their control behind the scenes.”
  • Jamie Dimon feels uninhibited: “Now unfettered, Dimon is on the prowl. While the chief executive officer has frequently said he prefers internal growth over deals, he doubts regulators would stand in his way if he tried to expand JPMorgan, according to a person familiar with his thinking. The 63-year-old CEO told a recent New York conference he’s hunting for the bank’s next acquisition, said a person who was in the audience.”

THE REGULATORS

Powell has serious concers with Facebook’s Libra. Bloomberg’s Jesse Hamilton: “Facebook Inc.’s proposal to create its own digital currency raises major questions that must must be addressed before the plan to create a coin called Libra moves forward, [Powell] said Wednesday. ‘Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,’ Powell told lawmakers… ‘These are concerns that should be thoroughly and publicly addressed before proceeding… I think it’s highly likely that FSOC will be taking this on in a serious way,’ he said.”

Meanwhile CNBC reports some tech executives doubt the currency will launch by next year. 

DAYBOOK

Today:

THE FUNNIES

From The Post’s Tom Toles:

BULL SESSION