Fed's Barr Wants More Buffer for Big Banks; Mester and Daly Urge Tighter Policy

Fed's Barr Wants More Buffer for Big Banks; Mester and Daly Urge Tighter Policy By James Christie

Good day. Michael Barr, the Federal Reserve's vice chair for supervision, said Monday that big banks will need to add capital to absorb potential losses. The biggest increases are expected to be reserved for the largest, most complex U.S. megabanks, Barr said. Banks should also expect more difficult stress tests to gauge their ability to weather a hypothetical recession, he said, noting banks need to be "resilient to both familiar and unanticipated risks." Also on Monday, two regional Fed bank presidents, Loretta Mester of the Cleveland Fed and Mary Daly of the San Francisco Fed, pointed to the need for tighter monetary policy in light of inflation remaining too high for the central bank. "Influencing my view is that inflation has surprised us on the upside for some time," Mester said. Daly said "we're likely to need a couple more rate hikes over the course of this year to really bring inflation back into a longer, sustainable 2% path."

Now on to today's news and analysis.

Top News America's Biggest Banks Are Going to Need More Capital

The Federal Reserve's regulatory chief outlined steps to strengthen the financial cushions for larger banks, which he said would help boost the resilience of the system after a spate of midsize bank failures this year.

"Events over the past few months have only reinforced the need for humility and skepticism, and for an approach that makes banks resilient to both familiar and unanticipated risks," Michael Barr, the Fed's vice chair for supervision, said in a speech Monday.

Cleveland Fed's Mester Sees Need for Tighter Monetary Policy

Loretta Mester, president of the Federal Reserve Bank of Cleveland, said inflation in core goods and services remains high and tighter monetary policy will be needed to bring inflation down to the central bank's 2% target.

Historic Rate Increases Leave Some on Wall Street Wanting More

The Fed has raised interest rates at the fastest pace since the 1980s. Some on Wall Street think there's still further to go . One popular Wall Street gauge, published by Goldman Sachs, suggests that financial conditions are doing less to cool the economy than they were earlier this year. Goldman economists argue that an economic index newly published by the Fed overestimates how much previous rate increases will start to pull down growth in the months ahead.

U.S. Economy Biden Takes On Nightmare Government Paperwork

Government forms have gotten so awful the White House is overhauling applications for a range of federal benefits and services-a bid to remake a stubborn bureaucratic system that has exasperated Americans for generations.

Wave of Rental Resets to Further Deplete Affordable Housing

The U.S. risks losing nearly 200,000 affordable housing units over the next five years , as government protections end at hundreds of rental properties and landlords become free to set their own rents.

Key Developments Around the World Europe's Defense Dilemma: To Buy, or Not to Buy American

As defense budgets increase across Europe, capitals across the continent face a difficult choice : whether to spend the money on weapons developed at home or continue buying American hardware.

Biden's Reluctance to Let Ukraine Join NATO Tests Alliance's Unity

President Biden has emerged as the leading opponent to granting Ukraine speedy membership to the North Atlantic Treaty Organization, putting him at odds with several key U.S. allies.

In China, the Era of Western Carmakers Is Over

Sales of homegrown passenger-car brands in China are consistently eclipsing those of their Western rivals, signaling the growing influence of the country's electric-vehicle makers-and a triumph for Beijing's industrial policy .

Financial Regulation Roundup SVB's Former Parent Sues FDIC Over $2 Billion in Deposits

Silicon Valley Bank's former parent company, SVB Financial, is suing the Federal Deposit Insurance Corp., seeking the return of about $2 billion that SVB Financial deposited at the bank and that the regulator seized after its collapse .

Bitcoin, Coinbase Soaring Despite Obstacles for Spot Bitcoin ETFs

Bitcoin and crypto stock Coinbase Global have soared on hopes that an exchange-traded fund that holds the digital currency will soon be approved by U.S. regulators, but analysts say that outcome faces long odds .

Forward Guidance Tuesday (all times ET)

11 a.m.: New York Fed's William in moderated discussion, Economic Club of New York webinar

Wednesday

2 a.m.: Bank of England Financial Stability Report

8:30 a.m.: U.S. consumer-price index for June

9:45 a.m.: Minneapolis Fed's Kashkari speaks at National Bureau of Economic Research Summer Institute 2023; ECB's Lane on panel at National Bureau of Economic Research Summer Institute 2023

10 a.m.: Bank of Canada interest rate decision

11 a.m.: Bank of Canada monetary policy report press conference

1 p.m.: Atlanta Fed's Bostic in armchair conversation at Atlanta Fed's 2023 Payments Inclusion Forum: Breaking Barriers

2 p.m.: Federal Reserve Beige Book

2:30 p.m.: New York Fed Underlying Inflation Gauge

4 p.m.: Cleveland Fed's Mester speaks to National Bureau of Economic Research Summer Institute 2023

Research Overtightening by Central Banks Seen as Risk

Recession remains the base case scenario for J.P. Morgan Asset Management, but it has lowered the probability from 60% to 55%, while overtightening by central banks is a risk, the asset manager's global fixed income, currency and commodities team says. "The chief risk to our forecast is that central banks lose patience in waiting for monetary policy to take hold, and tighten policy well beyond market expectations, " the team says. The single-minded focus on bringing inflation to 2% ignores that growing volume of data suggesting the global economy is already in or rapidly approaching recession, according to JPM AM. It adds that, "Overtightening policy runs the risk of not only bursting the unsustainable excesses that had formed...but also unleashing a range of unintended consequences."

-Emese Bartha

Pandemic Savings in U.S. Running Out

Savings accumulated during the pandemic by consumers are already depleted for most U.S. households, BNP Paribas economists write in a report. They estimate excess savings peaked at $2.2 trillion in August 2021, allowing consumers to spend "at an above-trend pace over the last couple years." Now this dynamic is fading "and looks set to end soon, with excess household savings likely to be depleted by year-end." Without this cushion, the economists write that they expect consumers "to become increasingly sensitive to labor market dynamics." They also expect unemployment to rise, which "should translate to slower spending growth and higher consumer delinquency rates."

-Paulo Trevisani

U.K. Wage Growth Frustrates Inflation Efforts

The U.K. government and the Bank of England will be chilled by signs of rapid wage growth as they struggle to bring down stubbornly high inflation, Danni Hewson, financial analyst at AJ Bell, says in a note. Average wages rose 7.3% in the three months to April and again in the three months to May, according to new figures. With the chancellor and the BoE both calling for wage restraint in order to tame inflation, the numbers are bad news, though there are signs of the labor market easing, Hewson notes. "The U.K. economy has been resilient and high employment has played a huge part in fostering that resilience," she says. "But if recession is really necessary to stamp out inflation's smoldering embers, there are signs that it is creeping closer."

-Joshua Kirby

Commentary Despite Yellen, U.S.-China Decoupling Has Momentum of Its Own

It may take some incident in the South China Sea or Taiwan Strait to focus minds in Washington and Beijing on the real downsides of a further deterioration in their relations, Nathaniel Taplin writes.

Is China Mired in a 'Balance Sheet Recession'?

After a rebound at the beginning of the year in the wake of China's reopening, the country's property market has resumed its downward trend : Both sales and prices have started to fall again, writes Jacky Wong.

Basis Points Total U.S. consumer credit rose $7.2 billion in May, compared with a revised $20.3 billion gain in the prior month, the Federal Reserve said Monday. That translates into a 1.8% annual rate, down from a revised 5% gain in April. (MarketWatch) The Conference Board's Employment Trends Index, which gauges U.S. employment trends, fell from a downwardly revised 115.53 in May to 114.31 in June, signaling slower job growth in the coming months. (Dow Jones Newswires) New York City's luxury residential market is gaining momentum after stumbling early in the year, another sign that pockets of the U.S. housing market are stirring to life despite high mortgage rates. Brazil economists trimmed forecasts for consumer price increases for 2023 last week, according to the Central Bank of Brazil's weekly survey. The median forecast of 154 economists for inflation in 2023 fell to 4.95%, from 4.98% the previous week, the eighth consecutive weekly decline, the bank said. The forecast for the bank's benchmark interest rate at the end of this year was unchanged at 12.0%. (DJN) Australian consumer confidence slipped again last week even as the country's central bank's decision to hold interest rates gave homeowners some respite from rising borrowing costs. (DJN) Germany's economic outlook worsened in July by more than expected, as rising interest rates continue to add to a bleak outlook for the eurozone's largest economy. (DJN) The U.K.'s jobless rate rose in the three months to May, while pay growth increased more than previously estimated. (DJN) Turkey's current-account deficit widened in May compared with the previous month, data from the country's central bank showed Tuesday. The current-account deficit was $7.93 billion in the fifth month of 2023 compared with a $5.40 billion deficit in April. (DJN) Feedback Loop

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07-11-23 0716ET