HIKE AND HOPE — Chair Jerome Powell and his Federal Reserve colleagues did exactly as everyone expected they would this week: jack up interest rates by three-quarters of a point for the third time in a row and a total of 3 percent worth of hikes this year. What happens now is completely unknown.
Want to know how unknown? Just look at the scattershot market reaction to the Fed’s official statement and Powell’s subsequent press conference. It’s all over the place. Both stocks and bonds suffered today as central banks around the world followed the Fed in tightening policy, raising the risk of a global slowdown.
While nobody knows what’s going to happen with the U.S. economy, one pretty decent guess is it winds up in recession sometime next year, just in time for the 2024 presidential campaign kickoff featuring incumbent President Joe Biden (or a replacement Democrat) and a GOP nominee whose name might be Donald J. Trump, a politician quite adept at leveraging grievance, economic or otherwise. One assumes Trump would relish running for another term amidst an economic slowdown.
Recession is not a lock. Don’t put any money on it (you may need that money later). What the Fed would like to see happen is for inflation to finally relent from its current annual rate of over 8 percent — the highest since the early 1980s — without economic growth turning consistently negative and unemployment rising sharply from its currently very low 3.7 percent (the basic definitions of recession).
But even a deflated-seeming Powell this week acknowledged that core inflation has not really dropped at all, despite all the rate hikes so far. Gas prices dropped from highs hit after Russia’s invasion of Ukraine, but that’s about it.
Powell tried to sound at least a little upbeat about the economy’s strong points, including continued robust job growth and household savings. And he noted that inflation “expectations,” or what people think inflation will be in the future, remain pretty favorable (this is important, but a story for another time).
But he pretty much dropped the idea that the Fed can beat down inflation closer to its target of around 2 percent without some potentially significant pain. “It would be nice if there was a way to wish it away,” Powell lamented. “But there isn’t.”
And he admitted neither he nor anyone else has any clue what impact the Fed’s rate hike will have beyond — God willing — bringing down inflation. “No one knows whether this process will lead to a recession or, if so, how significant that recession will be,” he said.
Many economists, including Democrats like former Treasury Secretary Larry Summers, argue that inflation will not get back anywhere near reasonable levels without unemployment rising to 6 percent or even higher. “It is looking increasingly likely that economic contraction, and a more meaningful move higher in the unemployment rate, is exactly what will be needed to bring down inflation,” Tiffany Wilding, economist at investment giant PIMCO, wrote in a client note this week.
Thus far, the Fed hikes have mainly hit the housing market, driving average 30-year fixed mortgage rates above 6 percent for the first time since 2008. Hiring, wages and job openings remain strong and the third quarter is likely to show at least modestly positive gross domestic product growth.
But as any Fed wonk will tell you, rate hikes operate with a big lag, meaning higher borrowing costs generally don’t start to tug down consumer and business spending (and thus the economy) for many months. Hikes also tend to drive up the value of the dollar, making our exports more expensive and giving companies less reason to bring cash back to the U.S. from overseas. All of which brings us back to the potential 2024 problem for Democrats from the presidential race on down.
Biden’s approval ratings got a little bump from the drop in gas prices. But they remain very bad, especially on the economy, where he averages just 39 percent. That’s a big problem for Democrats in the midterms. But it would be an even bigger one for the 2024 presidential race if the U.S. — and possibly the world — drops into a serious recession.
Trump’s future amidst all the sprawling investigations remains as unclear as the path of the economy. Perhaps he will be unable to run. But at the moment, the former president already polls fairly close to even with Biden in a hypothetical match-up. Imagine what Trump could do with joblessness hitting new highs and companies laying off millions of workers? Crowds at his rallies would indeed be “yuge.”
Welcome to POLITICO Nightly. Reach out with news, tips and ideas at [email protected]. Or contact tonight’s author at [email protected] or on Twitter at @morningmoneyben. Surgeon General Vivek Murthy today celebrated National Ice Cream Cone Day with a tweet showing him in full uniform holding one … with a twist. “This might be an unpopular opinion, but I love ice cream cones — without the ice cream,” Murthy said.
— Special master calls for help in Trump Mar-a-Lago documents fight: U.S. District Court Judge Raymond Dearie, a Brooklyn-based jurist named by a federal judge in Florida to act as a so-called special master in the review of more than 11,000 documents the FBI confiscated, proposed today that former Magistrate Judge James Orenstein help with the process. Dearie proposed that the former magistrate, who has a top secret clearance, be paid $500 an hour for work on the Trump documents case. The federal judge who named Dearie as special master, Florida-based Aileen Cannon, has previously ruled that Trump must assume all expenses related to the review.
— Senate moves forward to fund government despite snags over Manchin’s energy plan: Congress is poised to approve a short-term government funding package next week that includes billions of dollars for Ukraine, likely thwarting a shutdown even as ongoing hiccups over permitting drag out negotiations. It’s still unclear if the temporary funding fix will include language to speed up the approval of new energy projects. While the notion has bipartisan support, Republicans and Democrats are split on the details, and time is rapidly running out to reach a compromise.
— Mike Braun likely running for Indiana governor in 2024: Indiana Sen. Mike Braun is leaning toward running for governor in 2024, a move that would open up a GOP-held seat in what’s become a reliably red state, according to a person familiar with the matter. Should Braun make the leap, it would almost certainly invite a crowded GOP primary for his Senate seat in 2024. Braun’s term expires then, meaning he’ll have to choose between the governor’s race and his own reelection campaign.
— Biden administration to cover Puerto Rico’s Fiona recovery costs for the next month: Biden announced today that the federal government will pay 100 percent of the costs of Puerto Rico’s recovery from Hurricane Fiona for the next month. The move would expand the federal role just a day after Biden issued a major disaster declaration on Wednesday for Puerto Rico, unlocking additional federal assistance as island residents navigate the aftermath of Fiona. That declaration had made federal funds available to Puerto Rico on a cost-sharing basis for debris removal, emergency protective measures and other services.
— House GOP cuts loose candidate who misled about military service: The House GOP campaign arm is slashing a near-$1 million ad buy meant to target Rep. Marcy Kaptur (D-Ohio) — essentially walking away from what could have been an easy pickup for the party. The move comes a day after an Associated Press report that Kaptur’s opponent, JR Majewski, lied about his resume, including claiming that he deployed to Afghanistan. Majewski beat out two state legislators in a May primary contest for the northwest Ohio district.
TROUBLE ON THE HOME FRONT — Russian police arrested hundreds of people Wednesday night for protesting against President Vladimir Putin’s troop mobilization decree. Reportedly, some of the protesters arrested were immediately served summons to report to military enlistment offices today, the first full day of Putin’s new mobilization effort.
Flights out of Russia have also sky-rocketed in price — and are selling out — following Putin’s address Wednesday in which he called for a partial mobilization of troops to fight in the war against Ukraine, where Russian forces have suffered recent battlefield defeats.
The issue for the Russian president is, “partial mobilization” may not be the answer to his woes, writes Zoya Sheftalovich. Many of Russia’s problems are due to technological gaps with a NATO-armed enemy and morale, not sheer numbers.
Plus, by confessing the need for mobilization — even a so-called partial one — Putin had to pretend that Moscow was fighting an improbably large enemy. In his Wednesday address, the president insisted Russia’s armed forces were “fighting on a line of contact that is over 1,000 kilometers long, fighting … the entire military machine of the collective West.”
The uncomfortable truth underlying his statement was that Russia could actually lose the war.
If things have to go even further and Putin has to recruit the children of prosperous families in Moscow and St. Petersburg to keep throwing men at the fronts, his regime could face serious internal dangers.
PROTESTS SWEEP IRAN — At least nine have been killed during civil unrest in Iran after a 22-year-old woman died in police custody over the weekend.
Mahsa Amini was being held for allegedly violating the strict dress code for women in the country, writes Kelly Garrity. Her death has sparked protests around the country, while Iran’s largest telecom company shut down mobile internet access in an attempt to break up protests and discourage unrest.
Iranian officials claim Amini’s death at Kasra Hospital in northern Tehran three days after her arrest was the result of a heart attack, but hospital officials reported that Amini arrived with severe brain trauma caused by “multiple blows to the head.”
The U.S. Treasury and State departments today announced new sanctions on Iran’s Morality Police and other senior security officials.
PIVOT TO VIDEO — Facebook — now Meta — has had a hell of a time getting its users to pivot to video. YouTube pioneered the concept of “internet television,” and now TikTok has everyone’s attention. But one of the most financially successful companies ever just can’t get people to click on its videos. Why not? And how have its continued efforts hurt its products? Virginia Heffernan, an early internet critic, reports for WIRED.
CLEAN UP IN AISLE 2024 — Speaker Nancy Pelosi’s staff had to do some walking back for her after a press conference this afternoon in which she said, “President Biden is the president of the United States. He did a great service to our country; he defeated Donald Trump. … I’m not going into politics about whether the president should run or not.”
A Pelosi spokesperson later told POLITICO about whether she’d support the president, “Yes. Enthusiastically.”
Pelosi now joins the group of Democrats who have explicitly said they would support Biden if he launches a 2024 bid, writes Nancy Vu. Senate Majority Leader Chuck Schumer said back in August that if Biden decides to run, “I’ll support him,” joining many other Senate Democrats on the matter.
But the tip-toeing points to a lack of clarity amongst even Democratic leadership about whether Biden will run again in 2024.
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