Overnight Finance: Inside Powell’s first hearing as Fed chair | Markets retreat | Bank profits fall in fourth quarter | Report raises new concerns about Kushner’s business ties

by Sylvan Lane - 02/27/18 6:00 PM ET

Happy Tuesday and welcome back to Overnight Finance, where we haven’t lost our top secret security clearance just yet. I’m Sylvan Lane, and here’s your nightly guide to everything affecting your bills, bank account and bottom line.

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THE BIG DEAL: Federal Reserve Chairman Jay Powell testified before Congress for the first time since taking the reins of the central bank. You can read my full recap of his testimony before the House Financial Services Committee here, but I’ll give you a quick rundown of the highlights.

Some Fed officials could project more rate hikes next month: Powell said that rising wage growth, business investment and pressures on inflation could push officials toward a quicker path for interest rate increases. He said that Fed officials are currently forming their economic outlooks for the bank’s March meeting, but wouldn’t assume how they’d change.

“What we’ve seen is incoming data that suggests a strengthening of the economy,” Powell told the House Financial Services Committee on Tuesday.

“Each of us is going to be taking the developments since the December meeting into account,” Powell said. “I don’t want to prejudge that projection.”

The Fed is currently projecting three rate hikes in 2018, the first of which almost certainly happening in March. A prediction of additional rate hikes could rattle a stock market experiencing its most volatile stretch in years.

The Fed sees inflation rising: Powell said the Fed will “continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis.”

Fed officials have largely predicted that inflation will rise as the economy continues to grow and low unemployment pushes wages higher. The central bank also expects the economy to expand at a greater pace due to the $1.5-trillion tax cut passed at the end of 2017.

Powell said that the U.S. is enjoying “solid growth and a strong labor market,” and pointed to increases in consumer spending, wage growth, demand for U.S. exports and business investment.

He promised lawmakers that the Fed will keep a careful eye on inflation as the bank prepares to hike interest rates in a strengthening economy.

Powell holds back on GOP tax bill: Republicans pressed Powell to confirm that their tax plan, which dropped the corporate income tax rate from 35 to 21 percent, would boost wages and economic growth. Powell said that tax cuts should lead to wage growth through a boost to labor productivity but that it’s hard to put a number on the impact.

Powell also avoided taking a hard position on how the GOP tax plan would impact the debt but warned about the general dangers posed by consistent federal deficits.

Steady on financial regulations: Powell reiterated his support for raising the asset threshold at which a bank is deemed systemically important, clarifying the Volcker Rule, loosening the supplemental leverage ratio and other general efforts to relieve regulatory burdens on small and mid-size banks.

No big shocks: Powell avoided dropping bombshells or making news, two of a Fed chair’s worst nightmares. He treaded carefully when discussing the Fed’s plans on interest rates, didn’t wade into testy political waters, and was fairly straightforward. Republicans appeared satisfied with most of his answers on monetary policy, while Democrats were disappointed he didn’t commit to tackling issues of economic inequality that go deeper than the Fed’s general mandate.

What comes next: Powell will testify before the Senate Banking Committee on Thursday, covering the same pantheon of issues.

LEADING THE DAY

They went to Jared: Foreign officials have discussed how to use White House senior adviser Jared Kushner’s business interests and lack of foreign policy experience to their advantage, raising concerns among some officials in the administration, The Washington Post reported Tuesday.
Officials in the United Arab Emirates, China, Israel and Mexico are reportedly among those who have privately talked about how they could gain leverage against President Trump’s son-in-law.

Higher and higher: Expectations for U.S. growth this year are getting a boost from the newly implemented tax cuts, according to a February analysis.

The economy is expected to expand at a 2.7 percent pace in 2018, an increase from a November forecast of 2.3 percent, Moody’s Investors Service said on Tuesday in its latest update.

Yet even the faster rate of growth falls short of the 3 percent target the White House Council of Economic Advisers forecasting for 2018 and several years beyond in a report released last week.

The forecast also expects faster global economic growth, which will peak in 2018, driven by improvement in advanced economies. The Hill’s Vicki Needham tells us how the U.S. will stack up to other countries.

Don’t stop ’til we get enough: Top conservatives have a message for GOP leadership: Tax cuts alone won’t stave off a Democratic wave in November.

While they have disagreements about what should come next on the 2018 agenda, conservatives say Republicans need to keep their foot on the gas pedal. That means continuing to push “bold” new legislation — on things like infrastructure, criminal-justice reform and pharmaceutical reform — while also selling their historic tax overhaul that Trump signed into law in December. The Hill’s Scott Wong explains.

Bank profits fall in fourth quarter: U.S. bank profits dropped 3.5 percent in the fourth quarter of 2017, in part due to one-time changes to the tax code, the Federal Deposit Insurance Corporation (FDIC) reported Tuesday.

The 5,670 FDIC-insured U.S banks made $25.5 billion in net income, 40.9 percent less than a year before, in the final quarter of 2017, thanks to a reduction in deferred tax assets cemented in the GOP tax-overhaul bill. Higher noninterest expenses and set-asides to cover loans likely to default also bit into banking profits.

Even without the tax changes, bank profits would have sunk to $42.2 billion, down 2.3 percent from a year ago.

Reactions:

“Notwithstanding the one-time impact of the new tax law, the overall performance of the industry continued to be positive.” — FDIC Chairman Martin Gruenberg.

“Banks were a driving force behind steady economic growth in 2017, with loans growing across nearly every category as businesses expanded and consumer confidence increased.” — American Bankers Association chief economist James Chessen.

MARKET CHECK: Skittish. All three major U.S. stock indexes dropped Tuesday after Powell hinted at a possible increase in the Fed rate hike forecast. The Dow Jones industrial index fell nearly 300 points for a 1.2 percent drop, while the Nasdaq and S&P 500 also suffered 1.2 and 1.3 percent losses each.

Tough crowd: “Amidst protests and hisses, Treasury Secretary Steven Mnuchin briefly lectured students and visitors at the UCLA Burkle Center for International Relations in Los Angeles,” reports Marketplace.

GOOD TO KNOW

Conservative groups are urging Congress to oppose online sales tax bill.

PayPal reached a settlement with the Federal Trade Commission (FTC) on Tuesday over charges that its subsidiary Venmo had deceived customers about access to funds, privacy settings and data security.

Goldman Sachs is expanding its services from Wall Street to Main Street, according to The Wall Street Journal.

Americans are coming back to Macy’s to shop for clothes, reports The Washington Post.

Steel manufacturers called on President Trump in a new ad on Tuesday to keep his promise to restrict steel imports.

Comcast offered a $31-billion bid for Sky, vying with Disney and Fox
Former Trump aide Dina Powell is returning to Goldman Sachs. Axios’ Jonathan Swan has more here.

ODDS AND ENDS