Biden’s economic reality check

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President Joe Biden and his top aides have been doggedly upbeat about the prospects for the economy in the run-up to his reelection announcement. Treasury Secretary Janet Yellen told your MM host a couple of weeks ago to not “overdo the negativism” about growth.

But as Biden closes out the week of his 2024 campaign kickoff, it’s going to get much harder to dismiss evidence that a slowdown has already begun and that major risks are on the horizon.

First-quarter GDP data released Thursday showed that the U.S. economy was in the process of downshifting well ahead of any potential credit crunch triggered by the banking turmoil that erupted in mid-March.

Amid higher interest rates and persistent inflation, U.S. GDP grew by 1.1 percent in the first three months of the year — below expectations of 2 percent growth and short of the 2.6 percent increase seen in the fourth quarter.

Biden put a positive spin on the news, calling it a transition to “steady and stable growth.” He pointed to the continuing strength of the American consumer bolstered by higher disposable income.

But as our Ben White reports, the data only underlines expectations on Wall Street that the U.S. is headed for a recession.

“In this unique business cycle characterized by elevated economic uncertainty, one would be misguided to take solace in the economy’s moderate Q1 advance,” EY-Parthenon chief economist Gregory Daco said on Twitter.

The weakening only raises the stakes for one of the most consequential decisions of Biden’s presidency – how to head off a U.S. debt default that could rock markets and further dampen economic growth.

Democrats bristle at the notion that any ball is in their court. But they face growing pressure to respond to the debt limit and spending cuts package that House Republicans passed Wednesday.

“With Democrats and Republicans agreeing default is not an option, now is the time for them to come together to find a solution that can pass the House and Senate,” Business Roundtable CEO Josh Bolten said. “We urge both sides to act swiftly to secure a bipartisan agreement that takes default off the table and begins the hard work of dealing with our deficits and debt.”

Treasury will start the clock any day now when it releases its “X-date” projection for when the U.S. won’t have enough cash to pay its bills. From there, the U.S. runs the real risk of seeing its creditworthiness take another hit if markets don’t see movement in Washington.

“If, ahead of the X-date, we were to assess the risk of a default as having become more material, the U.S.’s rating would likely be placed on rating watch negative and further rating action could be considered,” Richard Francis, co-head of Americas sovereigns at Fitch Ratings, told MM.

It’s Friday — A reminder that Zach Warmbrodt and Sam Sutton will be reporting from the Milken conference in Beverly Hills next week. If you’ll be there, please don’t be shy.

Driving the day

The Fed and the FDIC release findings on the failures of SVB and Signature Bank … The FEMA official overseeing the National Flood Insurance Program testifies at House Financial Services at 9 a.m. (more below) …

The Fed’s day of reckoning? We’ll see. — The Fed at 11 a.m. today will release the internal review of the steps it took to supervise Silicon Valley Bank before its collapse. It’s expected to offer recommendations for how it can do better. The FDIC will also release findings on its handling of Signature Bank today.

The Fed’s report will re-focus Washington’s attention on accountability and a potential policy response to the SVB meltdown.

It’s also an important test of the central bank’s credibility. It took a large share of the blame from the right and the left for the banking tumult. Critics are poised to blast anything short of deep soul searching, and they’re demanding details on specific actions that Fed leaders took in the run-up to SVB’s failure — in particular Fed Chair Jerome Powell and Vice Chair for Supervision Michael Barr, who led work on the report.

It’s already been a humbling week for Powell, after it was revealed that he had a call with someone posing as Ukrainian President Volodymyr Zelenskyy. An alleged video of the conversation was shown on Russian state television.

Climate

A flood fight — FEMA is finding itself in Congress’s crosshairs over price hikes in the National Flood Insurance Program triggered by a recent overhaul of how the agency assesses flood risks.

House Oversight Chair James Comer and Majority Leader Steve Scalise this week have been gathering signatures for a letter to FEMA demanding documents and a staff briefing on the changes, known as Risk Rating 2.0. It comes after the agency released new data on flood insurance costs for single-family homes.

David Maurstad, the FEMA official who oversaw implementation of Risk Rating 2.0, will testify at the House Financial Services Committee this morning. He’ll urge Congress to reauthorize the NFIP on a long-term basis — it’s had 25 short-term extensions and three brief lapses since 2017 — and to also pass affordability measures to ensure that more Americans can buy flood insurance.

Crypto

Truth in advertising — Sens. Kyrsten Sinema (I-Ariz.) and Cynthia Lummis (R-Wyo.) are introducing a bill to set advertising standards for crypto businesses, Sinema’s office told MM. The bill would aim to ensure “accurate advertising and clear disclosures on crypto products so Arizonans can make the best decisions about their futures,” Sinema said in a statement.

McHenry’s next steps — House Financial Services Chair Patrick McHenry (R-N.C.) told our Eleanor Mueller Thursday that he hopes to split jurisdiction over crypto between the SEC and the CFTC with a market structure bill he’s working out with House Agriculture Chair G.T. Thompson (R-Pa.).

“You have to keep what the SEC does best for capital formation and consumer protection, and keep what the CFTC does that is best for market function and consumer protection,” he said.

Democrats insisted at a Financial Services hearing Thursday that the SEC should keep playing a major role, despite industry and Republican complaints about its aggressive policing of crypto. McHenry said it was fair for Democrats to acknowledge that “we don’t need to reinvent the wheel.”

Later today, committee leadership will host a member roundtable on the issue, digital assets subcommittee Chair French Hill (R-Ark.) told Eleanor. The Financial Services and Agriculture committees will hold a joint crypto hearing next month on sorting out the roles of the SEC and CFTC.

Regulatory Corner

Corporate America warns Biden officials about merger crackdown — Sam and Josh Sisco report that Wall Street dealmakers are ratcheting up complaints to the White House about the administration’s antitrust push. That may be good news to Biden’s team, with one senior administration official saying the objections are a sign that the president’s competition policy and staffing choices are working.

Credit bureaus face pressure to drop medical debt — Senate Democrats at a hearing Thursday urged CEOs of the top three credit reporting companies to remove medical debt from consumer reports because it doesn’t predict creditworthiness, Katy O’Donnell reports. The executives from Equifax, Experian and TransUnion said they would do so if the CFPB directed them to.