What higher for longer means

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QUICK FIX

Another hotter-than-expected inflation report is upending hopes of Federal Reserve interest rate cuts this year, in what could be a blow to President Joe Biden’s reelection campaign and parts of the economy most vulnerable to higher borrowing costs.

Wednesday’s consumer price index report showed the cost of living increased more rapidly than expected last month. CPI rose by 3.5 percent from a year earlier, more than economists anticipated and more than prices rose in February.

Market aspirations for a June rate cut have vanished, with interest rate traders now banking on the first reduction happening in September, according to CME’s FedWatch tool.

The hot takes have been unleashed. “You have to take seriously the possibility that the next rate move will be upwards rather than downwards,” former Treasury Secretary Larry Summers said on Bloomberg Television.

MM spoke with several experts Wednesday afternoon about which parts of the economy would be most vulnerable in a scenario where borrowing costs remain higher for longer.

Krishna Guha, vice chairman of Evercore ISI, said housing and auto sales may take a hit.

“Normally you would add business investment,” he said. “But some categories there will be less rate sensitive than usual including infrastructure and industrial investment subsidized by Biden fiscal policies and AI-related investment.”

Unlimited Funds CEO Bob Elliott also pointed to autos but said housing may be somewhat more insulated because of full cash purchases, significant down payments and the likelihood that many home buyers have assets that have been going up in value.

He said companies may take a hit if they’ve been banking on a cutting cycle, in particular those that have weak cash flow and are private equity- and private credit-financed.

“The overall economy’s pretty strong and has been able to tolerate rates in the ballpark of these levels for a while now,” he said. “But the way tightenings flow through the real economy is they create pressure on those companies or individuals that need to do borrowing.”

Rakeen Mabud, chief economist of the left-leaning Groundwork Collaborative, argues that the Fed needs to cut soon. She said gasoline and housing are helping drive rising prices and aren’t something the central bank can tamp down on with higher rates.

“It’s really important for the Fed to recognize they are playing chicken with our economy, and they are playing chicken with the lives of millions of people,” she said.

Fed Chair Jerome Powell has made clear what the risk is.

“We’re in a situation where if we ease too much or too soon, we could see inflation come back,” Powell told reporters last month. “If we ease too late, we could do unnecessary harm to employment and people’s working lives.”

But the story of the post-Covid economy is that it’s full of surprises.

“The traditional economic models predicted a much larger macroeconomic response to the Fed’s 500-basis point rate increases than what was expected,” Brookings Institution senior fellow Aaron Klein said. “Some may say the underlying economy is stronger than the models thought it would be. But others could look at the data and wonder whether the economy is structurally less interest-rate sensitive.”

With an uncertain backdrop, the mantra of Fed officials is that they are data-driven. EY-Parthenon chief economist Gregory Daco wrote Wednesday that there’s a growing risk the Fed may cut just twice instead of three times this year “not because it would be optimal, but because several policymakers have become myopically data dependent.”

An obvious near-term impact is on voters. Klein said research has shown that voters form their opinion of the economy at this stage of the election cycle, in the spring and early summer.

Rep. Stephen Lynch (D-Mass.) told our Eleanor Mueller it’s “not the best environment for the president’s re-election.” (An understatement to be sure.)

Biden “doesn’t have control,” Lynch said. “And I know he doesn’t want to badger the Fed. He’s been hands-off — quite different than the previous president. He’s trying to respect their role. So I think there are a lot of other issues that he’s going to have to talk about.”

Other Democrats want Biden to get into it. Rep. Gregory Meeks (D-N.Y.) told Eleanor that Democrats “need to talk about the root causes of inflation.” He includes in that bucket the impact on commodities from the war in Ukraine and the conflict in the Middle East.

It’s further fuel for Republicans who have focused on inflation as the main line of attack against Bidenomics amid a strong labor market. Rep. Byron Donalds, a Florida conservative who’s a potential Trump VP pick, said “we were right.”

“But being right when the country’s going to hell is no prize,” he said. “Our hope is that the American people see this as well and they make different choices in six months.”

It’s Thursday — Send tips to [email protected].

Driving the day

PPI for March is released at 8:30 a.m. … IMF managing director Kristalina Georgieva gives an address on the global economy at the Atlantic Council at 9 a.m. … The CFTC’s Agricultural Advisory Committee meets in Overland Park, Kansas, at 10:30 a.m. … Treasury Undersecretary Jay Shambaugh will discuss the U.S. vision for global debt and development finance at Peterson at 1 p.m.

Lucas is in — Rep. Frank Lucas says he will run to succeed Rep. Patrick McHenry as the top Republican on House Financial Services, entering a contest with at least three other senior committee members, Eleanor reports.

The Oklahoma lawmaker is the most senior Republican on Financial Services. He chairs the Science Committee and has also chaired the Agriculture Committee.

“With 30 years of experience on the Financial Services Committee in addition to my more than two decades of committee leadership experience across multiple House committees, I am well positioned and well equipped to lead the committee,” Lucas said in a statement.

Lucas will face off against Reps. Andy Barr of Kentucky, French Hill of Arkansas and Bill Huizenga of Michigan. Lucas said in an interview Tuesday that he has yet to meet with members of the House GOP steering committee, which will decide whom to nominate for the role at the end of the year.

Powell’s night out — The Fed chair was on the guest list for Wednesday night’s White House state dinner for Japanese Prime Minister Fumio Kishida. JPMorgan Chase CEO Jamie Dimon and BlackRock CEO Larry Fink were also invited.

DOJ digs into U.S. Steel deal — Josh Sisco scoops that the Justice Department has opened an in-depth antitrust investigation of Nippon Steel’s takeover of U.S. Steel, which is under fire from lawmakers and labor unions. Biden said last month that “it is vital for [U.S. Steel] to remain an American steel company that is domestically owned and operated.”

In related news, Gavin Bade scoops that Sen. J.D. Vance is urging the SEC to review whether U.S. Steel sufficiently disclosed to investors the risk that the government will reject the acquisition by Nippon Steel. The Ohio Republican opposes the deal.

Japan hit by U.S. inflation — The dollar surged after Wednesday’s inflation report delayed expectations for Fed rate cuts. The yen fell to its lowest level versus the greenback since 1990, prompting Japan’s top currency official to say that authorities were ready to respond, Bloomberg reports.

“Whether this involves currency intervention or not, we authorities are prepared for all situations all the time,” Vice Finance Minister for International Affairs Masato Kanda told reporters Thursday morning.

A Trump-Wall Street rift? — Hedge fund billionaire John Paulson, who’s been floated as a potential Trump Treasury secretary, told the FT that “we don’t want to decouple from China.”

“China is the second-largest economy in the world,” he said. “We need to have a good economic and political relationship with them.”

Regulatory Corner

FDIC reassures on big bank failures — FDIC Chair Martin Gruenberg on Wednesday sought to shore up public confidence about the agency’s ability to unwind a failed megabank, with a report outlining steps that it would take in such a situation.

As Michael Stratford reports, Gruenberg said, “We believe we have the authorities, resources, and capabilities to do the job if it becomes necessary,” though he acknowledged it will be “extraordinarily challenging under any circumstances.”

The FDIC has faced questions about how it would respond to a big bank failure following the government’s response to Silicon Valley Bank’s collapse, which resulted in the lender’s uninsured depositors receiving a federal backstop. Gruenberg in an FT interview knocked Switzerland’s decision last year to merge the ailing Credit Suisse with UBS, saying “the fact that Swiss authorities did not put Credit Suisse into resolution ... was frankly unhelpful and ultimately a missed opportunity.”

Crypto

SEC vs. DeFi — Declan Harty reports that the SEC is threatening to sue Uniswap Labs, according to the firm. Uniswap is the creator of one of the world’s largest decentralized finance exchanges. The looming SEC charges are related to allegations that Uniswap is operating an unregistered securities exchange and broker, Uniswap Chief Legal Officer Marvin Ammori said.

Fly Around

People moves — Jason Rosenberg, previously of Block and JPMorgan Chase, will succeed Bill Daley as Wells Fargo’s head of public affairs … The American Council of Life Insurers is combining government relations and public affairs into one department and has named Jill Kozeny as executive vice president and chief advocacy officer (h/t POLITICO Influence) … Gordon Gray, previously of the American Action Forum and the staff of former Sen. Rob Portman, is launching the Pinpoint Policy Institute, a “nonpartisan, nonprofit organization dedicated to promoting and defending the essential pillars of America’s economic growth and prosperity.”