Powell shoots for 2

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Inflation is cooling, but the Federal Reserve isn’t going away.

How Fed chief Jay Powell messages those two ideas simultaneously will be center stage on Wednesday when he holds a press conference after central bank policymakers meet. Two words you might hear a lot from him: 2 percent.

The Fed has shied away from relying too heavily on forecasting in its battle against inflation, given how confusing the data has been during the pandemic. Models have been suggesting for months that price spikes will be steadily slowing from here. And it’s good news that those projections are finally starting to play out in the actual topline numbers as they did on Tuesday, when the government said inflation in November slowed sharply to 7.1 percent from the previous year. But Powell wants to see the number coming back to 2 percent, and we’re nowhere close to that.

Convincing financial markets that the Fed won’t call it a day soon on hiking interest rates has been tricky for officials this year because investors have also been seeing reasons to expect inflation to come down in their projections.

Matt Luzzetti, chief U.S. economist at Deutsche Bank, said markets are notably optimistic about the outlook for inflation — somewhat ironically because they still expect a high chance of recession, which would likely mean a significant rise in the unemployment rate. Powell himself has pointed to accelerating wage growth as the biggest remaining barrier to getting inflation all the way down, and a recession would be expected to reverse that trend.

In general, though, the market exuberance is unhelpful, Luzzetti said. “I don’t think we’ve seen a tightening of financial conditions that would tell me that the Fed has done enough to get inflation down to target over time,” he said. “Without that happening it’s hard to see the outcome that markets have priced for inflation next year.”

Of course, Fed policymakers will be releasing their own projections, and Powell could also face the tricky task of explaining any evidence that his fellow rate-setters expect rate cuts next year.

After four straight meetings where they raised interest rates by three-quarters of a percentage point, Fed policymakers are set to slow to half a percentage point. That’s the carrot. The stick is that the central bank still plans to keep raising rates into next year. But how high?

MM checked in with Ellen Meade, a former senior Fed economist who worked on the central bank’s communications. She said she expects changes to its post-meeting statement that suggests they need to tighten their grip on the economy further, but in a way that’s vague about how exactly that will happen.

“In addressing risk management, [Powell] should continue to say that the risks associated with doing too little are larger than the risks of doing too much,” said Meade, now a research professor in the economics department at Duke.

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Driving the Day

Wednesday … CFPB Chair Rohit Chopra testifies in front of House Financial Services at 10 a.m. … Senate Banking holds a hearing on FTX at 10 a.m. … The SEC meets at 11 a.m. to consider major market structure reforms … The Fed will announce rates at 2 p.m. followed by Chair Jerome Powell’s press conference … The International Finance Corp. kicks off its two-day management practices conference

IT’S ALL EFFED AT FTX — From Declan and Sam: “Federal prosecutors on Tuesday charged FTX founder Sam Bankman-Fried with multiple counts of fraud, money laundering and campaign finance violations, an explosive set of allegations that has shaken up long-running Washington policy battles over the future of cryptocurrency regulation …

— “Regulators and law enforcement agencies had been circling FTX and Bankman-Fried for weeks. But his stunning arrest by Bahamian authorities on Monday at the direction of federal prosecutors — the night before he was scheduled to testify in front of the House Financial Services Committee — sent lawmakers scrambling to assign blame to Washington, Wall Street and Silicon Valley institutions that failed to stand up to the 30-year-old former billionaire’s wide-reaching influence campaign.”

— Watch this space: The former campaign megadonor is also accused of using stolen funds to pump ‘tens of millions of dollars’ into political committees, [Damian Williams, the U.S. attorney for the Southern District of New York] said. Bankman-Fried disguised the source of his funds to back both Democrats and Republicans, he said. ‘This investigation is very much ongoing, and it is moving very quickly,’ Williams said.”

LET’S MAKE A DEAL — Our Caitlin Emma and Marianne Levine: “Top appropriators struck a deal Tuesday night on a government funding framework critical to finalizing a mammoth year-end spending package. In a statement, retiring Senate Appropriations Chair Patrick Leahy (D-Vt.) said appropriators have ‘reached a bipartisan, bicameral framework that should allow us to finish an omnibus appropriations bill that can pass the House and Senate and be signed into law by the president.’”

MORE FTX NEWS INCOMING — Senate Banking Chair Sherrod Brown (D-Ohio) will use today’s committee hearing on FTX lean into how existing regulations can be applied to crypto. “If we are going to learn from FTX’s meltdown, we must look closely at the risks from conflicts at crypto platforms that combine multiple functions,” according to excerpts of his opening statement shared with MM. “It means thinking about the kinds of disclosure that consumers and investors really need to understand how a token or crypto platform works. We don’t need to reinvent the wheel. We can look to banking and securities laws for time-tested approaches to oversee and examine entities that want Americans to trust them with their money.”

FDIC NOMS GET THE GO-AHEAD — Also from Victoria: “The Senate Banking Committee on Tuesday advanced the selection of three nominees to the Federal Deposit Insurance Corp., including acting Chair Martin Gruenberg, setting them up for confirmation as soon as this month.”

CHILD TAX CREDIT NIXED — Our Brian Faler: “The Senate’s No. 2 Republican said Tuesday that he doesn’t expect lawmakers to include any tax provisions in a must-pass spending bill lawmakers hope to move before quitting for the year. That would dash the hopes of Democrats still trying to squeeze through at least a piecemeal expansion of the Child Tax Credit.”

Housing

HOW HIGH’S THE WATER? — Tuesday’s inflation report showed prices cooling across a broad range of sectors, with one big exception. The single biggest driver of higher prices — the cost of housing — is still rising, writes Katy O’Donnell.

While the increase in consumer prices softened last month to the slowest pace in a year, shelter costs rose 0.6 percent – “by far the largest contributor” to the monthly increase in the CPI, according to the Bureau of Labor Statistics.

But economists say that could change soon.

Many expect declines in housing and rental prices to start showing up in the official inflation gauge. Even as the rent index rose 0.8 percent in November, rental prices are starting to cool around the country. Why? The index used to calculate inflation lags rental prices by as much as a year, writes Katy.

“When you strip out the rental component of inflation and put in more of a real-time index of where rental prices are today you actually get a decrease in inflation,” said Taylor Marr, deputy chief economist at Redfin.

Despite the lag, “it does feel like we’ve peaked in this cycle” in terms of housing aggravating inflation, said Rick Sharga, executive vice president of market intelligence at the real estate data firm Attom.

“If rent prices continue to drop a bit on a year-over-year basis — and it’s likely we’ll see home prices fall a bit in 2023 at some point -- you could actually see shelter costs start to mitigate inflation,” Sharga said. “I would not be surprised if we start to see it be part of the solution instead of part of the problem.”

Crypto

BINANCE — Reuters’s Tom Wilson and Elizabeth Howcroft: “Binance has registered $1.9 billion of withdrawals in the past 24 hours, blockchain data firm Nansen said on Tuesday, as the world’s biggest crypto exchange said it had ‘temporarily paused’ withdrawals of the USDC stablecoin.”

— CoinDesk’s Krisztian Sandor: “Just before noon ET (17:00 UTC), Binance tweeted that the ‘$USDC withdrawals are back online.’”

UH-OH AT THE MAGISTRATE – Bloomberg’s Katanga Johnson: “An attorney for FTX Co-founder Sam Bankman-Fried proposed that his client pay $250,000 cash bail and wear an ankle bracelet to be allowed to leave his Bahamas jail cell … Dressed in a blue suit and white shirt for the arraignment proceedings, Bankman-Fried at times appeared shaky and fidgety. His parents were present in the courtroom as their 30-year-old son was frequently referred to as a ‘fugitive.’”

Fed File

A DEFLATIONARY BRADY — Bloomberg’s Michael Sasso and Alexandre Tanzi: “Inflation fell below 10% in hotspot Tampa last month, perhaps the strongest sign yet that the worst may be over for US consumers.”

KEEP AN EYE ON THE TREASURIES — WSJ’s Sam Godlfarb: “Fed officials have already sent clear signals that they plan to raise their benchmark federal-funds rate by 0.5 percentage point when they conclude their two-day meeting on Wednesday. What happens to the 10-year Treasury yield, though, is far less certain—especially in light of its surprising recent declines.”

Regulatory Corner

BANKS GET THE WEDNESDAY SCARIES — FT: “Banks, trading firms and brokers are bracing for the biggest overhaul of US stock trading in almost two decades with the release on Wednesday of plans designed primarily to lower costs for small investors.’

NEW KID ON THE FSOC — New York State Department of Financial Services Superintendent Adrienne Harris is the new state banking representative on the Financial Stability Oversight Council.

CONFIRMATION — The Senate confirmed Jay Curtis Shambaugh to be an Under Secretary of the Treasury by a vote of 70-27.

Fly Around

The European Union reached an agreement to impose a tax on imports based on the greenhouse gasses emitted to make them, inserting climate-change regulation for the first time into the rules of global trade. — WSJ’s Matthew Dalton and Kim Mackrael

Ghana on Tuesday reached a $3 billion bailout deal with the International Monetary Fund that sets the stage for debt-relief negotiations with the West African country’s foreign bondholders and government creditors. — WSJ’s Gabriele Steinhauser and Chelsey Dulaney

Ed Skyler was promoted to executive vice president of enterprise services and public affairs at Citi.