Analysis | The Finance 202: Fed’s Powell ignores White House and Wall Street – The...

THE TICKER

Federal Reserve Chairman Jay Powell didn’t heed President Trump’s admonishment to “feel the market.” But he demonstrated a different sort of zen on Wednesday in leading the central bank to its fourth quarter-point interest rate hike of the year — and its first since 1994 amid such gory market conditions.

Indeed, Powell’s mustering of a unanimous vote for the move among the Fed’s 17 policymakers sent a message: This Fed will keep its eye on the economic data as it aims to preserve the expansion, tuning out jawboning from the White House and Wall Street.

Trump, who has kept up a fusillade of attacks on his handpicked Fed chair, has yet to respond. But the thumbs-down from the stock market was immediate. The S&P 500 erased early gains to close down 1.5 percent, with each of its 10 sectors losing ground. That marked its seventh straight decline on a Fed Day, and its worst Fed Day slide on a percentage basis since 2011. (“That’s not a great track record so far!” Bespoke Investment Group noted in an email.)

Powell was in full Buddha mode in his post-meeting news conference, broadcasting what’s becoming a characteristic calm amid the crosswinds.

Of the recently tanking stock market, he said, “From a macroeconomic standpoint, no one market is the single dominant indicator.” And he said he’s “not worried” about Trump’s attacks, “because I know everyone at the Fed is going to do their job… Nothing will deter us from doing what we think is the right thing to do.”

That said, the Fed trimmed its forecast for economic growth next year, from 2.5 percent to 2.3 percent and signaled it will increase rates only twice next year instead of the three hikes it had anticipated — an acknowledgment of gathering risks abroad and at home.

“Until recently, the Fed had been mostly concerned that the economy could overheat, unleashing a wave of inflation that would lead to a recession. Powell has been trying to engineer a ‘Goldilocks’ economy — plentiful jobs, low inflation and solid growth without overheating. It’s a rare scenario that has not happened since the 1990s,” my colleague Heather Long writes. “But a growing number of business leaders and economic forecasters believe that a recession is coming in 2020 and that the Fed is still operating as if there are few problems ahead.”

While the data support Powell’s decision, the central banker could have hedged by offering a more dovish assessment along with it, the Wall Street Journal’s Greg Ip says.

“Mr. Powell could have positioned the Fed for the possibility the markets are right and the data are about to take a turn for the worse with a much more ambivalent statement about future rate increases,” Ip writes. “The fact he didn’t is risky — for the economy and him, personally, since [Trump] will likely hold him responsible for a recession. Markets and economic data frequently diverge; the stock market has predicted nine of the last five recessions, the old joke goes. But that is actually a pretty good record; the Fed hasn’t predicted any of them.”

Powell won some praise for his agility steering through a high-stakes press conference.

From Allianz chief economic adviser Mohamed El-Erian:

#Fed Chairman Jerome #Powell’s communication skills are impressive. Many will find that he brings simplifying clarity to complex notions. #economy #markets

— Mohamed A. El-Erian (@elerianm) December 19, 2018
​

From Hutchins Center director David Wessel:

Powell weathers the most important press conference of his tenure as Fed chair so far without saying anything more than he intended. No mistakes that I heard.

— David Wessel (@davidmwessel) December 19, 2018
​

And Grant Thornton chief economist Diane Swonk argues Powell was in a lose-lose situation in relation to investors:

3) The Fed can’t really “win” with markets at the moment. If it had eliminated rate hikes entirely from 2019 and said it plans to stop reducing its balance sheet, markets would have panicked – the message would be the Fed knows something they don’t.

— Diane Swonk (@DianeSwonk) December 19, 2018
​

But by another measure of the stock market’s recent performance, the Fed’s hike was unprecedented. In 99 rate increases since 1970, none has seen as precipitous a market decline between hikes, per Ritholtz Wealth Management CEO Josh Brown. “This would be the worst drawdown since then between rate raises (roughly -12.6%),” he wrote prior to the Fed meeting. “It’s never happened before. The closest it has come is 1974, in the midst of a grueling battle with inflation. The Fed did a rate hike during an 11% decline for stocks after the last hike. Since then, nothing even close.”

The central bank’s decision to proceed represented “an overly mechanical reaction” to its own models, University of Oregon economist Tim Duy argues. “If this rate hike is a mistake, the rate hikes for at least the first half of 2019 will quickly fall off the table,” he writes. “My instinct tells me that should now be the base case. Eventually – and probably sooner than later – the Fed will realize they need to offset the Trumpian uncertainty. They won’t like it. But they will have to do it.”

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MARKET MOVERS



Traders work on the floor of the New York Stock Exchange in December. (Spencer Platt/Getty Images)


— More on the Fed hike. Former Fed governor Narayana Kocherlakota argues the central bank is engineering a potentially dangerous plan to boost unemployment. “Sometime in the first half of the next decade, it intends to slow the economy enough to increase unemployment by about 1.4 million people — all in the name of reducing inflation by around a tenth of one percent. I can’t help but wonder whether the costs will outweigh the benefits,” he writes for Bloomberg. “The projections show that officials expect the unemployment rate to fall to 3.5 percent in 2019, from the current 3.7 percent — already the lowest in almost five decades. After that, they expect the rate to rise back to 4.4 percent — which, given a labor force of 160 million, would add up to about 1.4 million extra unemployed people… In other words, the Fed is planning to eliminate over a million jobs — and put millions more at risk — in order to avoid a tiny deviation from its inflation target.”

The hike may cost Trump almost $1 million. Bloomberg’s Shahien Nasiripour: “The increase may raise [Trump’s] cumulative cost from the U.S. central bank’s hikes since his inauguration to $6 million per year, according to a Bloomberg News analysis of the president’s financial disclosures and property records… Every quarter-point increase by the Fed raises Trump’s annual interest payments by an estimated $850,000.”

What it means for your wallet. NYT’s Tara Siegel Bernard: “Whether you will cheer or chafe at the increase depends, broadly, on whether you’re a saver or a spender. Savers and retirees seeking juicier yields will have an easier time finding savings accounts that pay more than 2 percent, a figure that looks attractive after they were starved of any interest for nearly a decade. But people trying to whittle down a pile of credit card debt, tap their home equity line of credit or purchase a car may find that it will cost a little more.”

— The market’s performance in Trump’s second year has been historically bad. The Post’s Philip Bump: “As good as Trump’s first year was — and, in terms of market expansion, it was good — his second year hasn’t been that great. In fact, it’s poised to be one of the worst second years for any president in the history of the Dow in terms of points… If we look at the change in 2018 to date as a percentage of where it started, 2018 is the eighth-worst second year for any president since William McKinley. The worst was at the outset of the Great Depression in 1930 (when the markets were open more frequently); the best, 1954.”



— Leveraged loans sell off. Bloomberg’s Davide Scigliuzzo and Sally Bakewell: “Besieged by investor withdrawals, mutual funds that invest in risky corporate loans have been unloading big chunks of loans in recent days. The selling is driving down prices to levels not seen in more than two years and forcing banks to keep some of the unwanted debt on their balance sheets. Lord, Abbett & Co. and Eaton Vance Management are among the fund managers selling holdings to meet redemption requests and build up cash reserves … In just the past four trading days, investors have pulled $2.2 billion from all loan mutual funds and exchange-traded funds. That brings withdrawals from the asset class to almost $9 billion since mid-November… Investors have turned sour on the loans amid global economic jitters.”

— Facebook stock falls as its week gets worse. CNBC’s Lauren Feiner: “Facebook tumbled 7.3 percent Wednesday following a spate of bad news, including revelations that it shared more user data than previously thought and a lawsuit from the Washington, D.C., attorney general. The drop is the second-steepest this year for Facebook, following a 19 percent drop on July 26 after an earnings report warning of slowing sales. Before Wednesday’s Federal Reserve meeting, Facebook had been the only major tech stock in the negative. By the end of the day, it suffered the worst fall among its peers as the Nasdaq Composite Index closed down 2.17 percent.

“On Tuesday night, the New York Times published a story alleging Facebook shared unprecedented amounts of data with partners, based on internal documents from Facebook and interviews with more than 50 former employees. The report says Facebook even allowed some companies, like Spotify, Bing and the Royal Bank of Canada to access user’s private messages. It says some companies were allowed to view certain information from users’ Facebook friends without explicit consent.”

TRUMP TRACKER

TRADE FLY-AROUND:



President Trump. (Jabin Botsford/The Washington Post)


— China uses a Spider Man reference to slam U.S. trade policy. NYT’s Jack Ewing: “The Americans accused the Chinese of being modern-day mercantilists who steal intellectual property. The Europeans accused the Americans of provoking a crisis in the world trading system, threatening the global economy. And the Chinese invoked Spider-Man. Unlike Spidey, the Chinese emissary said, America is not using its superpowers with great responsibility.

“The trash-talking by otherwise restrained diplomats took place at a normally dull occasion: a review of American trade policies at the World Trade Organization in Geneva. The reviews, held every two years, usually attract only lower-ranking diplomats. They are intended to allow W.T.O. members to explain their trade policies and for other members to comment and ask questions. But in an age of severe trade tensions, countries sent full-fledged ambassadors and the sessions, which were held on Monday and Wednesday, became a venue for allies and adversaries alike to vent their anger at American policies they said were illegal and destructive.”

MELTDOWN WATCH:

POCKET CHANGE



(Richard Drew/AP)


— Facebook faces major lawsuit. The Post’s Tony Romm, Brian Fung, Aaron C. Davis and Craig Timberg: “Nine months after a whistleblower revealed Facebook had allowed outsiders to improperly access personal information about millions of its users, the social media giant faced its first major rebuke from regulators in the United States — a lawsuit filed by the attorney general of the District of Columbia. The lawsuit from Karl Racine on Wednesday targeted Facebook mainly for its entanglement with Cambridge Analytica, a political consultancy that harvested names, ‘likes’ and other data from the social site without users’ permission. The incident, which affected more than 87 million users beginning in 2014, came to light this March, sparking investigations around the world.

“The opening salvo from the D.C. attorney general ended a protracted silence on the part of many U.S. regulators, who have faced immense pressure — from members of Congress and average web users — to discipline Facebook for what many see as a reckless disregard for online privacy. Some of Silicon Valley’s toughest critics have urged the government to slap Facebook with severe fines and other penalties that might force it to rethink a business model that monetizes the most intimate details of consumers’ lives.”

— The birth of a drug giant. WSJ’s Denise Roland and Jared S. Hopkins: “Pfizer Inc. and GlaxoSmithKline PLC plan to combine their consumer health-care units and eventually spin off the joint venture, creating the world’s largest seller of drugstore staples like Advil and Sensodyne toothpaste. The deal will free up both companies to concentrate on prescription medicines, which tend to be more profitable if also higher risk. The new business today could command a market valuation of about $42 billion … Combined sales were $12.7 billion last year.

“The joint venture represents an unexpected conclusion to a yearlong process by Pfizer to shed its consumer business, as it and other pharmaceutical companies focus on higher-margin prescription drugs. While Glaxo has shared that focus, the British drugmaker had remained committed to its consumer business, which its chief executive led before her promotion to the top job last year. … The new business today could command a market valuation of about $42 billion.”

— Another court loss for Johnson & Johnson. NYT’s Tiffany Hsu: “Johnson & Johnson lost its motion on Wednesday to reverse a jury verdict that awarded $4.69 billion to women who blamed their ovarian cancer on asbestos in the company’s baby powder and other talc products. The $4.14 billion in punitive damages and $550 million in compensatory damages, together one of the largest personal injury awards on record, was upheld by Judge Rex Burlison in a circuit court in Missouri.

“The plaintiffs — 22 women and their families — were the first to go to court against Johnson & Johnson claiming that their ovarian cancer was linked to asbestos contamination in the company’s talc. … Johnson & Johnson has known for decades about the risk of asbestos contamination in its talc, but fought to keep negative information behind closed doors. The company’s stock fell 10 percent on Friday and has struggled to recover since, slipping again after Wednesday’s decision was posted.”



How to Delete Facebook

Lost faith in Facebook after data leakages, breaches and too much noise? Here’s a guide to breaking up with the social network and its photo-sharing app for good.

The New York Times


MONEY ON THE HILL

— Senate passes funding bill to avert shutdown. The Post’s Erica Werner, Paul Kane and Josh Dawsey: “The GOP-controlled Congress on Wednesday severely undermined President Trump’s drive for a border wall, embracing a short-term spending bill that would keep the government open but deny any new money for his long-promised wall along the U.S.-Mexico border. The agreement announced by Senate Majority Leader Mitch McConnell (R-Ky.) would fund the federal government through Feb. 8, averting a partial shutdown scheduled to take effect at the end of Friday absent action by Congress and Trump.

“But the spending bill would not include any of the $5 billion Trump is demanding for his wall, and it would punt the next round of border wall decisions into the new year, when a new Democratic majority in the House will have the power to stop wall funding from going through Congress… The Senate passed the legislation by voice vote late Wednesday, and the House was expected to take it up on Thursday. Congressional leaders said they expected Trump to sign it before the shutdown deadline.

THE REGULATORS



Consumer Financial Protection Bureau director Kathy Kraninger. (AP Photo/Carolyn Kaster)


— CFPB will keep its name. The Post’s Renae Merle: “For nearly a year, the Consumer Financial Protection Bureau has struggled to execute a controversial plan — changing its name. The watchdog agency has been known as the CFPB since opening its doors in 2011, but its former acting director, Mick Mulvaney, a Trump appointee, believed it should instead be called the Bureau of Consumer Financial Protection, or BCFP. The letters of the bureau’s name were shuffled on the walls of its headquarters in the District to reflect the change, and Mulvaney started using the new acronym — BCFP — in public. Even the bureau’s seal and flag were changed.

“But the new name never stuck, and on Wednesday, the bureau’s new director, Kathy Kraninger, ditched the idea. ‘To be clear, I care much more about what we do than what we are called,’ Kraninger said in an email to staff Wednesday morning.”

THE FUNNIES

— From The New Yorker’s M. Elisabeth McNair:

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