Editor’s note: Morning Money is a free version of POLITICO Pro Financial Services morning newsletter, which is delivered to our subscribers each morning at 5:15 a.m. The POLITICO Pro platform combines the news you need with tools you can use to take action on the day’s biggest stories. Act on the news with POLITICO Pro. Before we get to the results of the big bank stress tests, let’s take a moment to unpack what Federal Reserve Chair Jerome Powell said about Fed rates and inflation while on a panel with other central bankers in Sintra, Portugal, on Wednesday. “We’ve got a labor market where jobs are being created. There are strong wage gains,” Powell said. That’s driving “real incomes, and driving spending, which is driving more demand and continuing to drive labor markets. The labor market is really pulling the economy.” In other words, inflation won’t improve until the backbone of “Bidenomics” — the labor market — starts to slip a disk. “You want to make sure you’re growing slower but not contracting,” Skanda Amarnath, executive director of worker advocacy group Employ America, told MM. “If unemployment starts going up, it’s hard to stop it in its tracks,” he added. “That’s the thing that worries me, it’s one thing for jobs growth to slow down, it’s another thing to have job loss.” To be clear, Powell’s never gone so far as to claim that unemployment needs to skyrocket to bring inflation under control. But his continued focus on how rising wages and low unemployment are contributing to inflation could come at an inopportune moment for President Joe Biden, whose political future now hinges on a jobs market that has bolstered the middle class holding steady through 2024. (One major Biden policy aiming to benefit that population — a student debt forgiveness program valued at $400 billion — could be nixed by the Supreme Court later today.) “For the Bidenomics theme to really work, it’s important for wage gains to be solid relative to inflation. And inflation is more volatile relative to wage growth,” Amarnath said. And that depends on the Fed tempering on monetary policy before rising borrowing costs push the economy into a recession, pushing up unemployment. Setting aside the Fed’s “hawkish pause” in June, Powell on Wednesday made it clear that he still anticipates another two rate hikes later this year. “The bottom line is that policy hasn’t been restrictive enough for long enough,” he said. So does that mean the market might be in for back-to-back increases at the July and September meetings? “It may work out that way. It may not work out that way. But I would not take moving in consecutive meetings off the table at all,” Powell said. On to the stress tests: Congratulations, Wall Street. Your biggest banks have what it takes to survive a massive writedown on commercial real estate assets, our Victoria Guida reports. The reason may surprise you. From Victoria: “The hypothetical losses were actually smaller than last year’s despite a larger assumed jump in the unemployment rate. That’s because the scenario assumed interest rates would drop, which would lead to unrealized gains for the megabanks, who have to factor swings in market prices into their capital requirements.” As you’ll recall, unrealized losses on securities whose value has declined amid rising rates were a big reason why Silicon Valley Bank and two other regional institutions failed this spring. The banking lobby has already seized on the stress test results as a sign that banking regulators should slow their roll on raising capital requirements as they march to the finish line on Basel III. “Policymakers should keep today’s results front and center before they consider new Basel capital requirements that would only make it harder for banks of all sizes to meet the needs of their customers, clients and communities,” American Bankers Association President Rob Nichols said in a statement. IT’S THURSDAY — Send tips, gossip and suggestions to ssutton@politico.com and to Zach at zwarmbrodt@politico.com.
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