Mnuchin blames the Fed Presented by U.S. Bank

MNUCHIN BLAMES THE FED — The executive branch generally stays out of the business of commenting on interest rate policy enacted by the Federal Reserve, which is supposed to be insulated from partisan politics. Treasury Secretary Steven Mnuchin dispensed with that approach on Sunday in ways that some market observers viewed as troubling.

During his interview with Chris Wallace on “Fox News Sunday,” Mnuchin cited the Fed as a key reason for last week’s massive stock market swoon rather than President Trump’s announcement of tariffs on China and China’s vow to retaliate.

Mnuchin, asked by Wallace if the market was wrong to react so badly to the China tariff announcement: “There’s a lot of things that went on last week, including the Fed.”

A slightly more hawkish Fed certainly played a role in declines late last week. But rate hikes this year come as a surprise to no one. The 3,000 point, 12 percent decline in the Dow since Jan. 26 can be traced directly to Trump’s emergence as an aggressive protectionist from steel and aluminum to China.

Mnuchin, asked if the Fed is raising rates too quickly, said: “I respect Fed independence.” But then he added: “I think the Fed is very committed to making sure they don’t cut off economic growth.”

Despite the nod to Fed independence, Mnuchin’s comments could be seen as the executive branch trying to lean on the central bank to avoid significant rate hikes despite a jobless rate likely to soon dip below 4 percent for the first time in nearly two decades and yet another shot of massive fiscal stimulus from Congress in the form of a $1.3 trillion spending bill.

The amount of spending and tax cut stimulus set to pump through the economy is unheard of for this point in an economic expansion. It’s more often seen during recession. And it could leave the Fed with little choice but to respond with hikes to keep the economy from overheating and driving up inflation. Which makes Mnuchin’s comments somewhat more ominous. Fed independence is likely to be more important than ever over the next couple of years. It's OK to respond to a question on Fed hikes by saying: "I don't comment on what the Fed does."

Hightower Advisors’ David Bahnsen emails: “Mnuchin mentioned the Fed three times in his interview with Wallace on Fox, in the context of explanations for stock market distress. Setting the table for something???”

SPEAKING OF MNUCHIN… He also suggested Congress give President Trump the line item veto, which the Supreme Court has declared unconstitutional. Video.

SPEAKING OF THE FED — POLITICO’s Victoria Guida: “Republicans in Congress have long complained about the Federal Reserve’s iron regulatory grip on banks, stemming from broad new directives in the Dodd-Frank Act. Now, they’re about to pass legislation that gives the Fed even more freedom.

“The bipartisan bill that passed the Senate last week aims to reduce regulations on some of the country’s biggest banks, but it leaves the substance of how that would happen largely to the Fed — now run by appointees of Trump.” Read more.

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BIGGER DROP TO COME? — Certainly been a harrowing few days. But Leuthold’s Jim Paulsen in a note to clients argues it could get worse: “A proxy for safe haven investments has barely moved from its lows this year despite a turbulent stock market. This seems to suggest far too much confidence this correction represents a buying opportunity rather than a scary event to run from and to rush toward safe haven assets. …

“Best be prepared for an even more frightening decline, one which causes a spike in safe haven investments, before believing a bottom has been reached. Too much calm before another storm?”

IT AIN’T SMOOT-HAWLEY — Pantheon’s Ian Shepherdson: “Everyone needs to take a deep breath: This is not 1930, and Smoot-Hawley all over again. Global trade flows plunged by 66% … in the four years after the U.S. greatly increased tariffs on a wide range of goods. The subsequent collapse in trade flows … was a global economic disaster …

“But the Trump administration's tariffs on selected imports from China will amount to only about $15B per year, some 0.08% of U.S. GDP and less than 0.02% of global GDP, well within the margin of measurement error. Markets, therefore, are reacting much more to the threat of further, more aggressive actions”

AND TALKS GO ON BEHIND THE SCENES — WSJ’s Lingling Wei in Beijing and Bob Davis in Washington: “China and the U.S. have quietly started negotiating to improve U.S. access to Chinese markets, after a week filled with harsh words from both sides over Washington’s threat to use tariffs to address trade imbalances, people with knowledge of the matter said.

“The talks, which cover wide areas including financial services and manufacturing, are being led by Liu He, China’s economic czar in Beijing, … Mnuchin and U.S. trade representative Robert Lighthizer in Washington … Mr. Mnuchin is weighing a trip to Beijing to pursue the negotiations, one of these people said” Read more.

Treasury Secretary Steven Mnuch had lots to say on Sunday. | Getty

GOOD MONDAY MORNING — Welcome to your Stormy Daniels-free (other than this reference) daily economics briefing. The Giannis Antetokounmpo piece on CBS’ “60 Minutes” was much more enjoyable. Email me on [email protected] and follow me on Twitter @morningmoneyben. Email Aubree Eliza Weaver on [email protected] and follow me on Twitter @AubreeEWeaver.

POLITICO Space is our new, free weekly briefing on the policies and personalities shaping the second space age in Washington and beyond. Sign-up today to start receiving the newsletter right at launch on April 6. Presented by Boeing.

THIS MORNING ON POLITICO PRO FINANCIAL SERVICES — Colin Wilhelm on Whitefish Energy Holding’s push to get paid, six months after Hurricane Maria hit Puerto Rico. To get Morning Money every day before 6 a.m., please contact Pro Services at (703) 341-4600 or [email protected].

DRIVING THE WEEK — Congress is gone after the Friday drama over the omnibus (we told you last Monday there could be drama!). But Trump is DC with rumors of more firings and troubles with the legal team. So who knows what he could say or do …

Trump heads to Ridgefield, Ohio on Thursday (near Cleveland) for an infrastructure event … Fed Vice Chair for Supervision Randy Quarles at 7:10 p.m. Monday speaks at the Operation HOPE Global Forum in Atlanta …

Case-Shiller Home Prices at 9:00 a.m. Tuesday expected to rise 0.5 percent … Consumer Confidence at 10:00 a.m. Tuesday expected to rise to 131.0 from 130.8 … Third estimate of Q3 GDP on Wednesday at 8:30 a.m. expected to be revised up to 2.7 percent from 2.5 percent …

WHAT’S UP WITH THE BANKING BILL? — CompassPoint’s Isaac Boltanksy: “The precise path to passage at this point is murky given Chairman Hensarling’s demands and the steadfastness of the moderate Senate Democrats that carried this package through the upper chamber, but we remain bullish given the legislative momentum thus far.

“Given the calendar and the ongoing inter-Chamber squabble, our sense is that resolution will slip to the end of 2Q18. Although S.2155 is burdened by rhetorical hyperbole, procedural uncertainty, and policy complexity, we maintain our 90% odds of passage.”

BDCs ADVANCE IN OMNIBUS — CapAlpha’s Ian Katz: “We think the provision in the omnibus bill allowing business development companies to double their leverage is mildly helpful to the SIFI bank relief bill …

“We were encouraged by House Financial Services Committee Chairman Jeb Hensarling’s comments to Politico. ‘I feel good we've already improved on the Senate package by getting these things done,’ he said. He was referring to the BDC part and an amendment requiring the SEC’s Advocate for Small Business Capital Formation to identify challenges for business in areas affected by natural disasters.”

CHINA TAKES IT EASY… SO FAR — NYT’s Sui-Lee Wee and Keith Bradsher: “In a tit-for-tat trade battle with the United States, China’s response has so far been restrained. But that is with good reason: As it waits to see how far … Trump plans to go in imposing sweeping tariffs on China, Beijing knows that it has more effective weapons in its arsenal. …

“Analysts say the latest round of United States tariffs, if imposed, would likely have a minimal impact on the Chinese economy. While Mr. Trump chose confrontational language toward China in announcing his latest move, actual details were sparse and amounted in many ways to a threat as opposed to an actual imposition of tariffs” Read more.

REGULATORS SPLIT OVER BANKS — WSJ’s Ryan Tracy: “Should bank examiners work every day inside the offices of banks they oversee, or not? Two federal banking regulators have opposite answers, showing how 10 years after the 2008 bailouts, regulators are still trying to figure out the best way to stop bankers at Wells Fargo & Co. and other firms from causing trouble.

“The Federal Reserve Bank of New York recently finished moving examiners — who act like a tripwire to catch Wall Street misdeeds — to its headquarters on Maiden Lane in downtown Manhattan. They previously worked inside big banks’ offices, but the agency changed course after criticism that examiners had grown too close to the bankers they oversee, a phenomenon known as ‘regulatory capture.’” Read more.

FINAL SHOW FOR FANG STOCK QUARTET? — Reuters’ Noel Randewich: “The quartet of technology stocks that has driven Wall Street indices to record highs in recent years may be breaking up, possibly undermining one of the best growth stories in a nine-year bull market. Facebook and Google-parent Alphabet tumbled this week as the benchmark S&P 500 index fell back toward lows seen in February, when the index gave back more than 10 percent in 10 days after reaching a record high in January.

“Netflix and Amazon.com, which along with Facebook and Alphabet make up the so-called “FANG” stocks, did not do as badly as the S&P 500 index this week, falling 4.0 percent, compared to the index’s 6.0 percent fall. But growing concerns about potential government regulation in the U.S. and Europe in response to privacy issues have investors assessing whether they may be forced to choose between those technology stocks leading the new economy.” Read more.

BIG BANKS DEVELOP NEW PLATFORM FOR BONDS — FT’s Eric Platt and Robin Wigglesworth: “JPMorgan, Bank of America and Citi are developing a new platform to overhaul the disjointed bond issuance process, hoping to solidify their control of the lucrative underwriting business that last year generated billions of dollars in fees for investment banks. ” Read more.

CITIGROUP GIVES BANKS ANOTHER CHANCE — WSJ’s Telis Demos: “After years of Citigroup Inc. shrinking its U.S. retail banking franchise to focus on affluent customers and a handful of big cities, the global bank is ready to become a national player once again. This time, however, it doesn’t plan on gobbling up rivals or opening any new branches. Instead, Citigroup says it will use an expanded mobile app to fully serve new customers.

“The move puts Citigroup more in line with upstart Silicon Valley rivals, who believe that consumers want purely digital services, than its megabank peers, who believe that their large physical footprints are still central to retail banking. The strategy also resembles that of a different Wall Street titan, Goldman Sachs Group Inc. That investment bank has made an uncharacteristic push into consumer banking in the last two years using a digital strategy that avoids branches.” Read more.

CHINA LEADS BLOCKCHAIN PATENT APPLICATIONS — FT’s Laura Noonan: “China was the most active filer of blockchain patent applications last year as the country’s technology and financial services groups rushed to claim exclusivity on the ‘mutual distributed ledger’ that could revolutionize finance and other supply chains. Data collated by Thomson Reuters from the World Intellectual Property Organization (Wipo) database showed that in 2017, more than half of the 406 blockchain related patent applications were from China.

“Patent applications for blockchain, whose uses span everything from the distribution of cryptocurrencies such as bitcoin to the tracking of Chinese chickens, trebled last year, while patents specific to cryptocurrencies — which are not included the blockchain patent category — rose 16 percent to 602 in 2017.” Read more.







THE CASE FOR TRADE — John Dearie, president of the Center for American Entrepreneurship, and Robert Litan, nonresident senior fellow at the Brooking Institution, write about how to make the case for free trade here.

WILLIAMS FOR NY FED — WSJ’s Nick Timiraos: “San Francisco Fed President John Williams is the leading candidate to become the next president of the Federal Reserve Bank of New York, one of the most influential positions within the U.S. central bank … Mr. Williams has been recommended by the New York Fed’s board for the position. If approved by the Washington-based Fed board of governors, Mr. Williams would succeed William Dudley, who plans to step down this summer.” Read more.

LEFT NOT HAPPY— Sam Bell emails: “Would be quite something if NY Fed hired John Williams — who was supposed to be supervising Wells Fargo the last few years - to be the next New York Fed President, especially without any public vetting and with the many challenges the NY Fed has had with supervision.”

EDDIE LAMPERT SPEAKS — Vanity Fair special correspondent William D. Cohan “sits down with Eddie Lampert, the polarizing C.E.O. of Sears Holdings, for his first one-on-one interview in 15 years. Since having himself named C.E.O. in 2013, Lampert has faced a difficult four years, with Sears Holdings suffering some $10.4 billion in losses, a revenue decline of 47 percent, and at least 200,000 out-of-work Sears and Kmart employees.” Read more.

TRANSITIONS: NEW AT THE ABA — Per release: “I’m pleased to announce that beginning Monday, March 26, ABA public relations will have a new vice president, Ian McKendry. Ian comes to us from American Banker, where he spent more than three years reporting on bank legislation and financial regulation, covering some of ABA’s most important policy priorities”

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