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Banks notch a long-fought win — After a years-long push for regulations to be tailored to their business model rather than just their size, regional banks will finally get their wish today. The Federal Reserve is set to finalize its new framework for domestic and foreign banks, which (under the proposed version) would free almost all domestic banks with between $100 billion and $250 billion in assets from enhanced capital and liquidity rules. And they would only have to participate in the Fed’s annual stress testing every two years, rather than annually.
This is the crown jewel of last year’s bank deregulation law, but today’s move will benefit even bigger lenders too: Capital and liquidity rules will also be relaxed for U.S. Bancorp, PNC Financial, Capital One and Charles Schwab — the law called for tailoring regulations for institutions with above $250 billion in assets — giving those banks more or less what they wanted. The picture is a bit more mixed for foreign banks, but bigger lenders like Deutsche Bank and Credit Suisse will be required to file “living wills” — the laborious process under which they must lay out plans for how they would break up in the event of insolvency — much less often.
Is the rosy labor market at risk? — Fed officials at their policy meeting last month saw rising risks of recession and looming threats to employment as they decided to cut interest rates for the second time this year, our Zach Warmbrodt reports. Keep in mind that the 3.5 percent unemployment rate is still the lowest in 50 years, and the jobs numbers aren’t anything to freak out about, but Fed officials have started to worry that weakness in business investment and manufacturing might feed through to workers.
Recession risk? — MM has extensively covered the potential political risks to President Donald Trump if a recession were to arrive before the 2020 election, but no one can predict one with any certainty, and a slowdown doesn’t automatically mean a recession. In recent decades, recessions have tended to be caused by either the Fed hiking rates to combat runaway inflation or, more recently, financial crises. But economists forecasting a potential recession generally aren’t expecting bubble bursts — they’re most worried about the effect of trade tensions. This underscores the strangeness of our current economic situation. More on this below.
IT’S THURSDAY! — I’ll be your host again tomorrow, and Ben White will be back next week. Send tips to me at email@example.com and @vtg2, and to Aubree Weaver at firstname.lastname@example.org and @AubreeEWeaver. And you can reach Ben at email@example.com and @morningmoneyben.
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Mnuchin will join the group welcoming Chinese Vice Premier Liu He and his delegation to D.C. for continued trade talks … 9:30 a.m. CFTC Chairman Heath Tarbert speaks at Yahoo Finance event, expected to make news on crypto … 2 p.m. The Federal Reserve board will hold an open meeting to vote on a new regulatory framework for domestic and foreign banks.
TRUMP’S SWING-STATE TROUBLE — Our Ben White: “Donald Trump shocked the world and won the White House in 2016 on bold promises to bring greatness back to the industrial Midwest. But his promise now faces a brutal reality: The U.S. manufacturing sector is spiraling into recession, victimized by Trump’s trade wars and sagging confidence among corporate executives who have little idea how to plan for an uncertain economic future.
“Unless Trump can ram his revised North American Free Trade Agreement through Congress and cut a deal with the Chinese to erase historically high tariffs, he may find it difficult to repeat wins in states like Michigan, Wisconsin and Pennsylvania that drove him into office in 2016 by the narrowest of margins.”
MORE ON RECESSION RISK — Deutsche Bank Securities’ Torsten Slok: “Normally, slowdowns and recessions are caused by, in very high-flying terms, some endogenous problem that suddenly appears in the economy — the housing market is too overheated, you had too much [business investment] in the 1990s … — that is not the case here. Here, the source of the problem is really the trade war between the U.S. and China, and the U.S. and Mexico and Canada, and the U.S. and Europe. … This is essentially politically created, and that’s not to say this is a good or bad idea, but if this is politically created, it can also be undone politically very quickly.”
MM sidebar: This raises the question of how much damage can be reversed if, say, the U.S. and China reach some kind of detente and the updated trade deal with Mexico and Canada passes Congress. For policy purposes, it’s also relevant what Fed officials think is the answer and they don’t seem to have a consensus view on that front. If you think the economy can pick back up with some easing of trade tensions, then you don’t want to rush to cut a bunch. But if you think that damage is longer lasting, you might be more inclined to cut more upfront.
More from Nellie Liang, a former top Fed staffer, on recession risk and the central bank’s assessment that financial stability risks are moderate: “While asset valuations are stretched and debt ratios for lower-rated corporations are at a record high, the biggest banks have more capital and funding risks are low. …
“This judgment bears on recession risk in two ways: first, because financial vulnerabilities are generally not high, they are less likely to be a trigger — a source for a shock — that could on its own raise the risk of a recession. Second, for any shock that harms growth, financial imbalances are less likely to amplify the shock and cause a recession, if it were to happen, to be harsher. … But that doesn’t mean that an escalation in the trade war that causes uncertainty to increase even more won’t raise the risk of a recession.”
FALLING JOB OPENINGS POINTS TO SLOWING LABOR MARKET — Reuters’ Lucia Mutikani: “U.S. job openings fell to a 1-1/2-year low in August and hiring declined, suggesting employment growth was slowing largely because of ebbing demand for labor as the economy loses momentum. Despite the third straight monthly drop in vacancies reported by the Labor Department on Wednesday, job openings are still plenty enough to ease financial market fears of a looming recession.”
ZUCKERBERG TO FACE LAWMAKERS ON LIBRA — Our Steven Overly and Zach Warmbrodt: “Facebook CEO Mark Zuckerberg will testify this month before the House Financial Services Committee as the social networking giant tries to ease concerns from lawmakers and regulators about its embattled cryptocurrency project Libra, the committee confirmed Wednesday.
“The hearing, which is also expected to focus on Facebook’s impact on financial services and housing, is scheduled for Oct. 23. POLITICO first reported Zuckerberg’s scheduled appearance.”
ANOTHER STEP IN THE WAR ON GUIDANCE — Our Alex Guillén and Rebecca Rainey: “President Donald Trump on Wednesday ripped into the Obama administration’s use of nonbinding ‘guidance’ documents to impose policy changes on regulations — even as he admitted his administration has done the same thing. Trump, who signed two executive orders … amplified the criticism of conservatives, … calling them ‘a pernicious kind of regulation imposed by unaccountable bureaucrats.’
“ … Trump’s two orders do not call for federal agencies to directly curb the use of guidance, which can be issued through memos, letters or other communications. Instead, the orders directed agencies to make all guidance publicly available and to conduct educational outreach to industry when policy changes are made.”
CRYPTO INVESTORS GET NEW IRS INCOME-REPORTING RULES — Bloomberg’s Laura Davison and Allyson Versprille: “Cryptocurrency holders know more about what the Internal Revenue Service expects to see on their tax returns, thanks to new guidance from the agency. The IRS released a ruling and a question-and-answer document Wednesday that tell virtual currency investors and their tax advisers how the agency expects them to report income from their holdings. The guidance is the first since 2014 and comes as tax auditors are increasingly focusing on examining individuals with cryptocurrency investments.”
PEIRCE NOT A CAT PERSON — SEC Commissioner Hester Peirce in RealClearPolitics: “Imagine that every time you went to the grocery store, convenience store, bookstore, or hardware store, those stores — under government orders — sent a complete, itemized list of what you bought and when you bought it to the government and organizations working on its behalf that could challenge you to explain any purchase that catches their interest. … Just that sort of Big Brother scenario is on its way to your local broker courtesy of my agency, the Securities and Exchange Commission.”
RUBIO URGES U.S. PROBE ON CHINESE-OWNED TIKTOK — Our Sabrina Rodriguez: “Sen. Marco Rubio (R-Fla.) on Wednesday urged the Trump administration to open an investigation into Chinese-owned TikTok, a popular social media video app, over concerns of censorship. In a letter to Treasury Secretary Steven Mnuchin, Rubio asked the Committee on Foreign Investment in the United States, known as CFIUS, which screens certain foreign investment in the U.S., to launch a review of the ‘national security implications’ of TikTok’s acquisition of another app, Musical.ly.”
A $40B PILE OF LEVERAGE LOANS BATTERED — Bloomberg’s Katherine Doherty: “Barely noticed in a corner of the financial markets, leveraged loans originally worth about $40 billion are staging their own private meltdown. Loans tied to more than 50 companies have lost at least 10 percentage points of face value in just three months, according to data compiled by Bloomberg. Some have dropped a lot more, with lenders lucky to get back just two-thirds of their investment if they tried to sell.”
TRUMP TWEETING LESS ABOUT CHINA IS GOOD FOR STOCKS — Bloomberg’s Eddie van der Walt: “In the history of Donald Trump’s presidency, tweets mentioning China have tended to be bad news for the S&P 500. The good news is, he’s been tweeting about it less. Data compiled by Bloomberg News showed that since the start of 2017, the U.S. president’s tweets included the word ‘China’ or ‘trade’ on 208 days when U.S. stock markets were open. … The losses were bigger than the gains. There were 17 days that saw a fall of more than 1.5 percent, and only five days of advances bigger than 1.5 percent.”