The Fed’s calculated risk

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The risk of doing too little is greater than the risk of doing too much.

Sound familiar? It’s what Fed Chair Jay Powell essentially said in October 2020, about the prospect of more government spending to bolster the U.S. economy.

But it sounds an awful lot like the message Powell & Co. are sending now about their efforts to cool the economy down.

Risk management — Powell has twice said that allowing inflation to become entrenched may be worse than a recession, suggesting officials have a high threshold for the kind of economic pain it may take to tamp down price pressures.

Minutes from the Fed’s June 14-15 policy meeting released Wednesday reiterated that view. Officials fretted about the impact of persistently higher prices on low- and moderate-income Americans, and on future inflation expectations.

“These participants noted that, if inflation expectations were to become unanchored, it would be more costly to bring inflation back down to the Committee’s objective,” the minutes said.

Officials also “recognized that policy firming could slow the pace of economic growth for a time, but they saw the return of inflation to 2 percent as critical to achieving maximum employment on a sustained basis.”

Hawkish and then some — Those concerns prompted officials to raise rates by three quarters of a percentage point at their June meeting, a move they are expected to repeat this month. The minutes also made clear officials thought rates needed to rise high enough to slow the economy — and maybe even higher still.

“Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes said.

When will they back off? — The Powell Fed in 2020 committed to raising rates only when faced with convincing evidence of sustained price pressures, rather than simply a forecast that inflation would rise. The 2022 Powell Fed is now waiting for real evidence that prices are ebbing before officials ease up on rate increases.

That could be risky.

Bill Nelson, chief economist at the Bank Policy Institute and a former senior Fed economist, said now is precisely the time when officials need to base decisions on forward-looking forecasts.

“They have to be able to see through the transitory part of inflation, and assess the part of inflation which is attributable to aggregate demand and supply, the part that they can influence, and figure out the extent to which the two of those things are passing through and becoming embedded in the behavior of households and businesses,” Nelson said. “If they just look outside the window and base policy on where they are, they could easily make a mistake on either side.”

IT’S THURSDAY — We’re gearing up for Jobs Day tomorrow over here. Stretching. Deep breathing. Eating some pasta. The usual.

Have a tip or story idea? Let us know: [email protected], [email protected], or on Twitter @katedavidson or @aubreeeweaver.

St. Louis Fed President Jim Bullard speaks at 1 p.m. … Fed Governor Chris Waller speaks at a National Association of Business Economics event at 1 p.m.

MEANWHILE, OVER AT THE WHITE HOUSE — Runaway inflation is crushing President Joe Biden’s approval ratings and threatens to swamp Democrats in the midterm elections. But many progressives, including some within the administration itself, say the all-out messaging war against inflation is making matters even worse, our Ben White reports.

“They fear that the administration’s unswerving support for the Federal Reserve’s campaign to choke off inflation will slam the brakes on the economy and undercut the few things the White House has moving in its favor. Among them: a strong labor market, solid wage gains and ambitious spending proposals in areas like child care and prescription drug costs that are popular with voters.”

HOW REPUBLICAN-LED STATES ARE TARGETING WALL STREET WITH ‘ANTI-WOKE’ LAWS — Reuters’ Pete Schroeder: “Republican-led states have unleashed a policy push to punish Wall Street for taking stances on gun control, climate change, diversity and other social issues, in a warning for companies that have waded in to fractious social debates. Abortion rights are poised to be the next frontier.

“This year there are at least 44 bills or new laws in 17 conservative-led states penalizing such company policies, compared with roughly a dozen such measures in 2021, according to a Reuters analysis of state legislative agendas, public documents and statements.”

US, ALLIES DISCUSSING $40-$60 PRICE CAP ON RUSSIAN OIL — Bloomberg’s Alberto Nardelli, Jennifer Jacobs and Annmarie Hordern: “The US and its allies have discussed trying to cap the price on Russian oil between $40 and about $60 a barrel, according to people familiar with the matter. … The range spans from what is believed to be Russia’s marginal cost of production and the price of its oil before the Feb. 24 invasion of Ukraine, the people said. The Biden administration considers a cap of $40 to be too low, two of the people said.”

CONSUMERS SAY 2022 IS THE WORST ECNOMY EVER — WSJ’s James Mackintosh: “One of the biggest threats to markets fails a basic sanity check. The threat is that households are the most depressed they have been since the University of Michigan began its long-running Consumer Sentiment index in the 1950s. …

“Really? Worse than when lines of cars waited for hours for fuel in a deep recession in 1974, if it was even available? Worse than when unemployment was almost double the current level and inflation in double digits in 1980, with interest rates at 14.5 percent? Worse than after the 9/11 attacks, or when the global banking system was on the brink of failure in 2008? Come on. There is good news and bad news. The good news is that consumers don’t seem to be slashing spending in line with what they tell the Michigan statisticians. The bad news is that it might be on the way.”

— The inflation index Powell watches is set to show a big jump when it’s published later this month, Bloomberg’s Rich Miller reported.

— IMF Managing Director Kristalina Georgieva on Wednesday said the outlook for the global economy had “darkened significantly” since April and she could not rule out a possible global recession next year given the elevated risks, Reuters’ Andrea Shalal reported.

— Employers became slightly less desperate for workers in May as job openings declined for the second straight month from a record high in March, NYT’s Lydia DePillis reported.

CARBON MARKET CRYPTO — Our Sam Sutton writes: “Freshman Rep. Ritchie Torres is wading into the fight over tokenized carbon offset credits.

“At the urging of Web3 companies who’ve built blockchain-based businesses on the backs of carbon credits, the New York Democrat fired off a letter to the standard-setting organization Verra and the American Carbon Registry urging them to lift their respective decisions to halt tokenized offsets.

“’Blockchain is a technology with immense potential, and it strikes me as unwise for any regulator to stifle the use of blockchain to facilitate the exchange of carbon credits. Registries should strive to be even-handed and technology-agnostic when applying the rules,’ Torres said in a statement.

“Verra said it would halt tokenized credits until it could finish internal deliberations and a public comment period in May. ACR took a similar approach over concerns that the sudden emergence of well-funded startups — including a group backed by Adam Neumann, the notorious former founder and CEO of WeWork — reliant on unregulated cryptocurrency offerings might pose “a reputational vulnerability that could jeopardize confidence in carbon markets,” Executive Director Mary Grady said at the time.”

BROKEN ARROWS — Also from Sam: “Less than a week after freezing its customers’ assets, troubled crypto brokerage and lending platform Voyager Digital filed for bankruptcy on Wednesday. The company’s bankruptcy plan, which requires court approval, makes clear that its customers are unlikely to be made whole. Instead, they’ll have to settle for a combination of the remaining crypto in their accounts and whatever proceeds are generated from the forced liquidation of failed hedge fund Three Arrows Capital – which defaulted on a $650 million-plus loan from Voyager. They’d also be entitled to common shares in a newly reorganized Voyager as well as Voyager tokens – a native digital asset to the platform that’s lost nearly 90 percent of its value over the last three months.”

— Another major crypto lender is also reeling from losses linked to Three Arrows. Genesis CEO Michael Moro on Wednesday tweeted that his firm had sustained significant losses after the hedge fund defaulted. The lender’s parent company, Digital Currency Group, is also the parent company of Grayscale Investments – whose bid to convert its Bitcoin trust into an exchange-traded fund was recently rejected by the SEC – as well as the crypto mining business Foundry and the crypto-native publication Coindesk.

While the U.S. economic system is up for the geopolitical contest with China, it’s an open question whether its political system is. — WSJ’s Greg Ip

Commodities prices are tumbling from historic highs, as investors reverse bullish bets on everything from corn to copper and oil in the latest sign of recession fears gripping financial markets. — FT’s Emiko Terazono, Neil Hume, Laurence Fletcher and David Sheppard

U.S. boardrooms have become more Republican and more partisan over the past decade, according to a new study published by the National Bureau of Economic Research. — WaPo’s Taylor Telford