On The Money: Fed chief warns Congress on deficits | Trump blames Powell after Dow dips slightly | Trump withdraws nomination of former US attorney for Treasury post

Happy Tuesday and welcome back to On The Money, where we’re wondering how to get invited to parties with Jay Powell and Jeff Bezos. 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–Fed chief issues stark warning to Congress on deficits: Federal Reserve Chairman Jerome Powell called on Congress to reduce the U.S. federal budget deficit to ensure the central bank could adequately respond to a financial crisis or recession.

Powell told a House committee Tuesday that lawmakers should curb federal spending while the economy is running strong before a downturn forces Congress or the Fed to pump stimulus spending into the U.S.

“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” Powell said Tuesday before the House Financial Services Committee.

“A more sustainable federal budget could also support the economy’s growth over the long term.”

 

The background: Powell’s comments come one day after President Trump proposed a budget for fiscal 2021 with a $1 trillion deficit that puts the U.S. on track to balance its spending in 15 years. Those projections assume the economy growing at a far faster rate than predicted by most economists.

 

Why Powell is weighing in: The Fed chief is among several policymakers and economists concerned about how a combination of low interest rates and high debt could hamstring policymakers if the economy slows down.

• The Fed has historically responded to economic downturns with drastic interest rate cuts, reducing the cost of borrowing to stimulate the economy.

• The bank reduced interest rates to zero percent after the 2007 financial crisis and gradually raised them to a baseline range of 2.25 percent to 2.5 percent by December 2018. But a global economic slump forced the Fed to reverse course last year, cutting rates to a 1.5 percent to 1.75 percent range. 

• With rates well below the historic average of 5 percent, some economists fear that interest rates are currently too low for a swift rate cut to stave off a recession. 

That would likely boost pressure on Congress to pass a massive stimulus bill akin to the 2009 measure enacted by former President Obama.

 

Here’s the thing: Despite Powell’s warning, the U.S. economy is doing pretty well right now, a recession doesn’t seem to be imminent and the financial sector appears to be stable. 

Powell at the hearing painted an optimistic picture of a sturdy economy that is likely to hold steady amid a series of global threats but could be hampered by fallout from the lethal coronavirus.

But that wasn’t enough to stop Trump from sounding off.

 

Trump blames Powell after Dow falls slightly: Trump bashed Powell on Twitter in the middle of his testimony, blaming the Fed chief for a slight dip in the Dow Jones Industrial Average that began during his House appearance. 

“When Jerome Powell started his testimony today, the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual, and is now at -15. Germany & other countries get paid to borrow money. We are more prime, but Fed Rate is too high, Dollar tough on exports,” Trump tweeted.

While stocks are historically sensitive to commentary from Fed chiefs, it’s unclear what role Powell’s testimony actually played in the Dow’s minuscule loss.

The Dow closed for the day down less than 1 point.

 

ON TAP TOMORROW

• Federal Reserve Chairman Jerome Powell testifies before the Senate Banking Committee, 10 a.m.
• The House Budget Committee holds a hearing on President Trump’s fiscal 2021 budget with Acting Office of Management and Budget (OMB) Director Russell Vought, 10 a.m.
• A House Financial Services subcommittee holds a hearing on diversity and inclusion at major U.S. banks, 10 a.m.
• Treasury Secretary Steven Mnuchin testifies before the Senate Finance Committee on President Trump’s fiscal 2021 budget request for the Treasury Department.
• The House Financial Services Task Force on Artificial Intelligence holds a hearing on reducing algorithmic bias in the financial industry, 2 p.m.

 

Building the Dream: Charlotte 

The Hill is hitting the road to Charlotte, N.C. on Thursday, February 20th to host the second installment of the Building the Dream series. Our editors will sit down with Charlotte Mayor Vi Lyles, Rep. Alma Adams (D-N.C.), state Sen. Paul Newton (R) and many more to discuss financial hurdles to homeownership. Join us live in Charlotte or join the livestream.

 

LEADING THE DAY

Trump withdraws nomination of former US attorney for Treasury post: report: President Trump is withdrawing his nomination for the Treasury Department’s undersecretary for terrorism and financial crimes, according to Axios.

Jessie Liu, a former U.S. attorney for D.C., left her post on Jan. 31 after the president nominated her for the Treasury position in December.

Liu oversaw various high-profile cases, including the case against former Trump campaign adviser Roger Stone. The Axios report comes shortly after all four prosecutors quit Stone’s case Tuesday after the Department of Justice asked for a lighter sentence than what they recommended.

Liu was set to testify before the Senate Banking Committee on Thursday for her confirmation hearing.

 

Trump Fed nominee stirs controversy ahead of hearing: Thursday’s hearing was already set to be dramatic before Liu’s nomination was pulled.

President Trump’s latest effort to reshape the Federal Reserve faces a crucial test this week as senators grill a controversial pick for the bank’s board of governors.

Judy Shelton, a former Trump campaign adviser, will face questions from the Senate Banking Committee during a Thursday hearing where lawmakers will look to decide if her unconventional views on a number of issues should disqualify her nomination to the board.

Shelton is considered Trump’s most viable chance to place an ally within the Fed after Senate Republicans rejected his past two picks, economist Stephen Moore and Herman Cain, who were both seen as sharp critics of the bank.

Shelton can expect similarly tough scrutiny. I explain why here.

• Like Trump, she blasted the Fed during the Obama administration for keeping low interest rates but reversed course soon after the 2016 election. But over the past year, she has echoed Trump’s calls for near-zero interest rates and questioned the central bank’s independence as the president wages an unprecedented pressure campaign to cut rates.
• Shelton’s advocacy for gold-linked currency and fixed exchange rates are well beyond the current economic mainstream in either party. 

Brandon Barford, a former Senate Banking Committee aide, recalled receiving letters from Shelton’s Sound Money Project that fell flat among the GOP staff.

“No one was sending us anything like that, and the idea of even calling her as a witness for something was beyond the pale,” Barford said.

 

Democrats, GOP spar over Treasury rules on Trump tax law: Lawmakers at a hearing on Tuesday debated regulations meant to implement provisions for businesses in President Trump’s 2017 tax-cut law, the latest round in the messaging battle between Democrats and Republicans over the president’s signature legislative accomplishment.

Democrats argued that Treasury Department regulations were overly favorable to businesses as a result of lobbying from corporations. Republicans, however, defended the Treasury Department’s rule-making process and pushed back against the idea that the regulations will lead to additional increases in the deficit.

 

The Hill’s Naomi Jagoda walks us through the battle here.

 

GOOD TO KNOW 

• A group of Senate Democrats on Tuesday urged Senate Finance Committee Chairman Chuck Grassley (R-Iowa) to schedule committee action on energy tax proposals, in an effort to help address climate change
• The top watchdog at the United States Department of Agriculture (USDA) took heat Tuesday from Democrats who are demanding an internal probe into trade-related aid payments to the subsidiary of a Brazilian corporation under criminal investigation.
• The spread of coronavirus will reduce U.S. gross domestic product (GDP) growth in the first quarter to just 1 percent, down from a previous forecast of 2.2 percent, according to an S&P Global analysis.
• Rep. Hakeem Jeffries (D-N.Y.) slammed President Trump’s proposed federal budget Tuesday, dubbing it a “declaration of war on the American dream.”

 

ODDS AND ENDS

• The website for Ronald Reagan’s boyhood home proudly says it does not receive any federal funding, but President Trump is seeking to change that with his latest budget proposal.
• Senators pressed the NCAA to move quickly on rules for compensating college athletes during a hearing on Tuesday.