Will the Fed Slam on the Brakes After Bank Failures?

Plus: Republicans push for tighter SNAP work requirements ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ [The Fisc](   By Yuval Rosenberg and Michael Rainey It was a tumultuous Monday for the U.S. banking sector. President Joe Biden, the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corporation have all sought to shore up confidence in the financial system in recent days after the collapse of Silicon Valley Bank and Signature Bank. Among the questions raised by the bank failures: What now for the Fed? Here’s what we’re watching. President Biden on Monday (Reuters) Will the Fed Slam on the Brakes After Bank Failures? After the sudden implosion of Silicon Valley Bank on Friday and the shuttering of Signature Bank on Sunday, President Joe Biden stepped in front of television cameras Monday morning seeking to reassure the American public that the banking system and their deposits were not in jeopardy. “Today, thanks to the quick action of my administration over the past few days, Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Biden said. Officials had announced a series of steps they were taking to protect depositors and prevent the banking system — or public confidence in it — from wobbling. The FDIC took over the assets of both Silicon Valley Bank and Signature Bank and, along with the Treasury Department and Federal Reserve, announced that depositors at the banks would be fully protected and have access to their money as of today. The Federal Reserve also said it would offer a new [loan program]( to help ensure that banks can satisfy potential withdrawals from depositors. The White House insists this is not a bailout (but the fund being used is guaranteed by the Treasury Department). “No losses will be — this is an important point — no losses will be borne by the taxpayers,” Biden said. “Let me repeat that: No losses will be borne by the taxpayers. Instead, the money will come from the fees that banks pay into the Deposit Insurance Fund.” Biden added that the management of the collapsed banks will be fired and that investors in the banks will not be protected from losses. “They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works,” he said. Biden also said he wanted a full accounting of how these banks ran into trouble and how similar problems can be prevented in the future. “I’m going to ask Congress and the banking regulators to strengthen the rules for banks to make it less likely that this kind of bank failure will happen again and to protect American jobs and small businesses,” he said, pointing out that some regulations had been rolled back under the previous administration. Implications for interest rates: The Federal Reserve’s rate-setting Federal Open Market Committee (FOMC) is scheduled to meet next week and the bank turmoil may affect its decision. Silicon Valley Bank’s problem reportedly arose in large part because the bank failed to properly hedge against rapidly rising interest rates. The Federal Reserve has raised its key rate by 4.5 percentage points over the past year as it seeks to combat inflation that reached a four-decade high. Analysts and investors expected the bank to raise rates next week by another half a percentage point, reaccelerating its tightening efforts after a 0.25 percentage point increase in February. Anxiety about the health of the financial sector may have changed those plans, making Fed officials wary of injecting further risk into the system. “We now expect the FOMC to pause at its March 21-22 meeting because we think that Fed officials will worry that another interest rate hike could be counterproductive to efforts by US policymakers to shore up the financial system,” Goldman Sachs economists told their clients. “While we agree that more tightening will likely be needed to address the inflation problem if financial stability concerns abate, we think Fed officials are likely to prioritize financial stability for now, viewing it as the immediate problem and high inflation as a medium-term problem.” J.P. Morgan economist Michael Feroli said he continues to look for the Fed to raise rates by 25 basis points. “Even before the problems flared up in the banking sector, we thought a 50bp move would be ill-advised, and we still think that is the case,” he wrote. The bottom line: The banking sector faces increased uncertainty now — and the Federal Reserve’s job, which involves both fighting inflation and ensuring financial stability — just got a whole lot tougher. “It’s the first time in this cycle where they’ve had a conflict within their mandate,” Marc Sumerlin, founder of Evenflow Macro in Washington, told [Bloomberg News](. “The central bank was set up for financial stability and they clearly react to it so they now face themselves with financial stability telling them to stop and inflation telling them to tighten further.” Chart of the Day The Department of Defense released its [2024 budget request]( on Monday, detailing how it proposes to spend $842 billion next year. This chart shows just how large defense spending is relative to other discretionary parts of the budget. And it’s only getting bigger. Pentagon comptroller Michael McCord told reporters Monday that “the budget will hit a trillion dollars,” probably within the next five years. “Maybe that’s going to be a psychological, big watershed moment for many of us, or some of us, but it is inevitable,” McCord [said](. Republicans Push for Tighter Work Requirements for Food Stamps A group of Republicans in the House plan to release a bill Tuesday that would make it harder for some adults to claim benefits from the Supplemental Nutrition Assistance Program, commonly known as food stamps. Participation in the program jumped significantly during the Covid-19 pandemic, though the emergency measures put in place in 2020 have recently come to an end. The GOP bill would expand the age range for those who are considered able-bodied adults without dependents, and thus subject to work requirements. Currently, the rules require childless adults aged 18 to 49 to work or be involved with training or education at least 80 hours a month in order to qualify for benefits; the bill would raise the upper end of the age range for that group to 65, subjecting more people to work requirements and thereby reducing overall participation. The bill would also make it harder for states to waive work requirements for SNAP beneficiaries — a loophole that Republicans say is being abused in some states. Rep. Dusty Johnson (R-SD), the member of the House Agriculture Committee who will introduce the bill, told [Politico]( that he wants to encourage more people to work. “We know that work is the only path out of poverty,” he said. Democrats, who point out that most SNAP participants are already working, are expected to resist the effort to clamp down on the nutrition assistance program, but reportedly have not yet settled on a strategy. “We need to be prepared for a showdown on food security — and right now, we’re not ready,” one House Democrat told Politico. The bottom line: Nutritional aid could become a bargaining chip in the expected showdown over raising the federal debt limit and the budget battles ahead. Johnson’s bill is expected to be the first in a series from GOP lawmakers who are seeking to rework the food assistance program within the next farm bill, part of a larger effort to slash federal spending by reducing support for low-income households. New IRS Commissioner Starts at the Tax Agency Danny Werfel, who was confirmed by the Senate on March 9 as the next commissioner of the Internal Revenue Service, started on the job today. Werfel has spent more than 15 years in government, including stints at the Office of Management and Budget and as acting commissioner of the IRS. On Monday, he highlighted the chance he sees to make the IRS better. “Following the passage of the Inflation Reduction Act, we have a unique opportunity to make improvements for the IRS and the nation,” he wrote to agency employees. John Oliver’s Scathing Look at Welfare Cheats In his [HBO show]( that aired this past weekend, comedian John Oliver highlighted the misuse of government funds in the main federal welfare program, known as Temporary Assistance for Needy Families, or TANF. But the waste, fraud and abuse of federal aid explored in the show involves a different set of actors than you may be used to seeing — namely, rich and powerful elites in states that use TANF funds as piggy banks for pet projects. Oliver’s most shocking tale of abuse may be in Mississippi, where in 2019 football star Brett Favre successfully lobbied state officials, including Republican Gov. Phil Bryant, to spend about $5 million in TANF funds on building a volleyball arena at the University of Southern Mississippi, where his daughter played the sport. Favre also sought to have $2 million in welfare funds routed into a pharmaceutical company in which he had invested. Oliver said the Favre case is just the tip of the iceberg, and one that was enabled by the transformation of federal welfare spending into block grants in the 1990s, which gave state officials enormous power over how the funds are spent. From 2016 to 2019, about $77 million in federal welfare money was misspent or stolen in Mississippi, Oliver said, with the majority of children living in poverty going without aid. In other states, TANF money has been used to fund everything from religious summer camps to anti-abortion crisis pregnancy centers. According to the [Center on Budget and Policy Priorities]( states spend just 22 cents of their TANF dollars on basic assistance for families with children. “The wild thing here is that our current system was created under the assumption that poor families simply couldn’t be trusted to collect welfare honestly but the past couple of decades have proven that it’s actually politicians and government officials who have been relentlessly abusing this system,” Oliver said. News - [Fed’s Battle Plan for Inflation Shredded by Financial Turmoil]( – Bloomberg - [How Bank Failures May Upend the Fed’s War on Inflation]( – Politico - [Something Broke, but the Fed Is Still Expected to Go Through With Rate Hikes]( – CNBC - [Here's How the Government Can Guarantee Customer Deposits Without Using Taxpayer Money]( – CNN - [Every Part of Treasury Curve Is Now Flashing Recession Warnings]( – Bloomberg - [Republicans Launch Opening Salvo Against SNAP]( – Politico - [The Ukraine War Is Changing How the Pentagon Buys Weapons]( – Politico - [Pentagon Budget Puts Focus on Munitions Production as War in Ukraine Hits Stockpiles]( – The Hill - [New York Risks Billions in Extra Costs If Fewer Leave Medicaid]( – Bloomberg - [Americans Want Feds to Be Ready for the Next Covid]( – Politico - [Biden Administration Approves Huge Alaska Oil Project]( – New York Times Views and Analysis - [Bring Back the Budget Process. It’s Boring, but It Works.]( – Karen Tumulty, Washington Post - [Is Cutting the Deficit by $3 Trillion Enough? Not Even Close]( – Maya MacGuineas, CNN - [Biden’s Budget Shows How Painful Serious Deficit Reduction Will Be]( – Henry Olsen, Washington Post - [Medicare Needs Saving — Just Not From Republicans]( – Megan McArdle, Washington Post - [Why Poverty Persists in America]( – Matthew Desmond, New York Times - [Nikki Haley Touches ‘Third Rail’]( – Richard Galant, CNN - [Silicon Valley Bank Is Gone. We Know Who Is Responsible.]( – Sen. Elizabeth Warren (D-MA), New York Times - [Fed Rate Pivot Is Back in Play]( – John Authers, Bloomberg - [What Old and Young Americans Owe One Another]( – Yuval Levin, New York Times - [Stock Buyback Excise Taxes: What We Know And Don’t Know]( – Steven M. Rosenthal and Thomas Brosy, Tax Policy Center - [What Really Controls Our Global Economy]( – Quinn Slobodian, New York Times - [What if the Next Pandemic Happens Tomorrow?]( – New York Times Copyright © 2023 The Fiscal Times, All rights reserved. You are receiving this newsletter because you subscribed at our website or through Facebook. The Fiscal Times, 399 Park Avenue, 14th Floor, New York, NY 10022, United States Want to change how you receive these emails? [Update your preferences]( or [unsubscribe](