Market insights and outlook
October 5, 2021
Federal Reserve’s growing credibility crisis;
What is the debt ceiling solution?
October 5, 2021
THE FEDERAL RESERVE, long known as apolitical, faces a serious credibility crisis as inflation rises and President Jerome Powell’s criticism grows harsher. They are bluntly asking if it’s time to clean up the Fed.
AFTER TWO REGIONAL BANK PRESIDENTS were kicked out last month for active trading, Fed supporters (like us) were hoping the damage to public relations could be contained. That was shattered in recent days when it was revealed that Vice President Richard Clarida had traded between $ 1 million and $ 5 million in early 2000, shifting bond investments to an equity fund.
THE NEXT DAY, President Powell announced that the Fed would take action to support the economy if the pandemic threatened economic growth.
THIS ENHANCED SEN. ELIZABETH WARREN, who wants Powell out. The struggling Fed chairman, who this summer insisted inflation was transient, has political criticism – but his biggest headache is the lax internal supervision over traders active in the Bank. An internal Fed watchdog has opened an investigation into the trading.
POWELL’S ANOTHER TERM ODDS aren’t much better than 50-50, an astonishing slip after he was considered a shoo-in earlier this year.
THE NAMES OF POTENTIAL SUCCESSORS have always included the conciliatory Governor Lael Brainard, but there are other candidates, including Atlanta Fed Chairman Raphael Bostic, who could become the first African-American and openly gay Fed Chairman. . Both Brainard and Bostic are said to be more aggressive banking regulators than Powell.
PRESIDENT BIDEN NEEDS ALL THE SUPPORT HE CAN GET, as his agenda stammers. So he must keep the spirited progressive Warren happy. Warren yesterday called for an SEC investigation and said “it is not clear why President Powell has not stopped these activities, which eat away at the confidence and effectiveness of the Fed.”
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DEBT CEILING – MOST LIKELY PATH: Chuck Schumer will likely lose another Senate debt ceiling vote tomorrow; he still tries to blame the crisis on Mitch McConnell. But that tactic didn’t work, so Democrats could be forced to use the complicated budget reconciliation process to approve an increase in the debt ceiling.
THERE ARE LONGSHOTS, like minting a $ 1 trillion coin (or multiple coins) that would pay off debts, but these do not pass the smell test. A path to reconciliation, which McConnell wants, is the most logical move – but it is a long process, likely to take weeks. Unfortunately, there are no more weeks until a default crisis arrives.
IS OCTOBER 18 THE REAL DEAD DATE? It could happen a bit later, in early November – but if Congress hesitates, a sense of crisis later this month could prompt the faltering Fed to take highly controversial emergency measures to prevent bonds from defaulting.
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OUTRAGEOUS IRS TAKEOVER: We don’t always agree with Wall Street Journal editorials, but your blood pressure will rise after reading today’s screed, titled “The IRS Wants to Examine Your Bank account “.
IRS OFFICIALS and many Democrats, eager to end tax evasion, apparently want to examine every account above a $ 600 balance, or with more than $ 600 in transactions in a year. It would affect virtually everyone – and could turn into an explosive election issue next year.
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