Financial titans in DC weigh ‘very dangerous world’

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QUICK FIX

Geopolitical turmoil is set to dominate this week’s IMF-World Bank spring meetings in Washington. Iran’s drone and missile attack on Israel is top of mind, but it’s not the only global conflict that finance ministers, central bankers and Wall Street leaders are having to navigate.

Historic violence in the Middle East, the Russia-Ukraine war, U.S.-China tensions and the potential upheaval of American policy come November are set to permeate discussions.

“Even if geopolitics is the last thing the ministers want to be discussing, they may not have a choice,” Atlantic Council GeoEconomics Center senior director Josh Lipsky wrote Sunday.

As Institute of International Finance President and CEO Tim Adams put it to MM, what were once “pretty quiet” meetings have taken on a new level of activity and buzz. Leaders are trying to figure out whether the world is “at an inflection point from a historical perspective.”

“When people call me over the months and say, hey, during the spring meetings, can you set up a lunch or dinner or a roundtable on X, it would have been about flexible exchange rates,” said Adams, a former Treasury undersecretary for international affairs in the George W. Bush administration.

The ask now? “Help us think about a very dangerous world. How dangerous is it, and how do we prepare for it?”

But it’s not as if traditional economic concerns don’t pose their own huge challenges.

The post-Covid economy continues to surprise markets and policymakers. U.S. economic strength is defying expectations, but the outlook isn’t as bright for other economies, including Europe.

IMF managing director Kristalina Georgieva set the stage for this week’s meetings with a speech warning about a decade of “tepid” growth and global risks including inflation, depleted fiscal buffers and growing debt.

A potential divergence of U.S. and European monetary policy is poised to unfurl in the months ahead, thanks to America’s stickier inflation.

“It could be the Fed is going to be on hold for a lot longer than thought,” said Mark Sobel, U.S. chair at the Official Monetary and Financial Institutions Forum and a former U.S. representative to the IMF. “This no-landing scenario is looking increasingly possible, while the situation in Europe will augur for cuts starting in the summer. You could get kind of a de-synchronization or divergence in the relative postures of the U.S. and Europe. That could have knock-on effects for financial markets and volatility.”

Goldman Sachs’ Geoffrey Okamoto, who previously served as the IMF’s first deputy managing director and Treasury’s acting assistant secretary for international affairs, told MM that “the macroeconomic backdrop matters going into these meetings.”

“A year ago, the conversation was very much on regional bank issues and the rescue of Credit Suisse,” he said. “Now, there’s more of a stocktaking of where we are in the broader macro setting. We’re living in a higher interest rate world with central banks contemplating when to begin cutting. We’re also living in a more indebted world ... both in advanced economies but also in emerging markets and low-income countries.”

Okamoto said it raises fundamental questions about “what do you want to do when the primary instruments or tools of the IMF and the World Bank are lending instruments.”

“For a country to take on more loans from the IMF, the bar for growth-oriented reforms necessarily has to be higher in a higher-rate world and if you’re more indebted,” he said. “For a country to take on more World Bank loans, the bar for the growth orientation of the project and the accompanying reform needs to be similarly raised.”

One storyline playing out amid the chaos is the very-much expected re-appointment of Georgieva to a second term as the IMF’s leader. The Bulgarian economist ran unopposed, and the IMF’s executive board signed off Friday. House Republicans have spoken out against her returning to the role, raising fresh questions about how the IMF would interact with the U.S. if there were a Trump administration 2.0.

“I don’t think it matters too much which administration it is so much as it matters how good the dialogue is between Treasury and Capitol Hill,” said Okamoto, who played a key role in this area at Trump’s Treasury. “Is there trust there? Do the appropriators believe that the administration is negotiating with all their effort on Congress’s policy priorities, whatever they may be? … That’s an art. Some Treasury departments end up doing that better than others.”

What does the U.S. want to get done at this week’s meetings? A Treasury spokesperson said Secretary Janet Yellen will discuss ways to bolster the global economic outlook and try to deepen bilateral economic relationships with allies and partners and emerging markets.

On the geopolitics front, Treasury said Yellen will try to advance U.S. work on holding Russia accountable and try to address the human and economic consequences of fighting in the Middle East.

One relevant issue playing out across town will be potential congressional action on aid for Israel and Ukraine, including new authority to seize Russian assets. How to proceed with tapping Russian assets — a question that’s driving a rift between the U.S. and Europe — will be top of mind for global leaders in Washington this week but is not expected to be resolved.

Want to keep up with the most important intel? Stay tuned to MM and subscribe to this week’s IMF-World Bank editions of Global Playbook, which kicked off Friday.

It’s tax day — MM would love to hear what you’re watching and learning around the IMF-World Bank meetings. Send tips to [email protected].

Driving the Week

Monday ... Treasury Undersecretary for Domestic Finance Nellie Liang will speak on a panel on interactions between central banks and securities markets regulators at the IMF-IOSCO conference at 4:40 p.m.

Tuesday … The IMF holds press briefings on its World Economic Outlook and Global Financial Stability Report … Fed Vice Chair Philip Jefferson discusses monetary policy during uncertainty at the International Research Forum on Monetary Policy at 9 a.m. … U.S. Trade Representative Katherine Tai testifies at House Ways and Means at 10 a.m. ... WTO director-general Ngozi Okonjo-Iweala speaks at the Peterson Institute at 10 a.m. … House Financial Services holds a ransomware hearing at 10 a.m. … Senate Banking has a hearing on preserving housing stock at 10 a.m. … House Small Business has a hearing on the SBA’s SBIC and SBIR programs at 10 a.m. … Paul Atkins, Robert Jackson, Timothy Massad and Jill Sommers speak on a luncheon panel at the Twelfth Annual Executive Branch Review Conference ... Fed Chair Jerome Powell speaks at the Washington Forum on the Canadian Economy at 1:15 p.m. … House Financial Services holds a hearing on CFPB transparency at 2 p.m.

Wednesday … Bank of England Governor Andrew Bailey, Fed Governor Michelle Bowman and White House CEA Chair Jared Bernstein are among the speakers at the IIF’s Global Outlook Forum beginning at 8 a.m. … House Financial Services holds a legislative markup at 10 a.m. … Tai testifies at Senate Finance at 10 a.m. ... European Investment Bank President Nadia Calvino speaks at the Center for Global Development at 10:30 a.m. … The Fed releases its “beige book” report on regional economic conditions at 2 p.m. …

Thursday … The IMF’s Georgieva gives a press briefing on the global policy agenda at 8 a.m. … Bowman gives virtual opening remarks at the New York Fed Regional and Community Banking Conference at 9:05 a.m. … FHFA Director Sandra Thompson and Acting HUD Secretary Adrianne Todman testify at Senate Banking at 10 a.m. … White House chief of staff Jeff Zients speaks at a luncheon hosted by the Economic Club of Washington, D.C.

Friday … BIS general manager Agustín Carstens is among the speakers at a Peterson event on the future financial system at 3 p.m. … Bank of Japan Governor Kazuo Ueda speaks at Peterson at 5 p.m.

Driving the day

Israel-Iran risks contained? — Evercore ISI’s Krishna Guha and Sarah Bianci write that risks to oil and markets from this weekend’s Iranian barrage against Israel “may be a bit less than feared Friday on the eve of the attack.” They see the potential for some kind of “relief rally” in markets today, though they don’t expect a big retracement in the price of oil.

“Still early days but our current assessment is that escalation risks are not as bad some might have feared following the Iran strike on Israel,” they wrote to clients Sunday. “The advance warning, type of force package and geography from which the attacks were launched suggest Iran is trying to re-establish itself as a threat with the goal of further deterring Israel after the strike on Iran’s consulate in Syria but does not want to go all in.”

Per Bloomberg, bitcoin experienced a major slump amid the tensions before recovering, raising questions about its utility as a geopolitical hedge.

First in MM: Warren, Grassley press CFTC on SBF — Sen. Elizabeth Warren and Chuck Grassley are asking CFTC Chair Rostin Behnam for an accounting of all meetings and correspondence between his office and former FTX CEO Sam Bankman-Fried. Behnam has previously told Congress that he repeatedly met with Bankman-Fried and his team in connection with an application the firm had before the agency. The CFTC has pending enforcement litigation against FTX and its leaders.

Warren and Grassley wrote to Behnam as discussions in Congress heat up around legislation to establish new crypto regulations, including expanded authority for the CFTC. Bankman-Fried last month was sentenced to 25 years in prison for fraud. The CFTC confirmed receiving Warren and Grassley’s letter and declined to comment further.

Economists are more bullish — A WSJ survey finds that economists on average believe the economy grew at a 2.2 percent rate in the first quarter, up from a 0.9 percent forecast in January. They’re also lowering the odds of a U.S. recession within the next year to 29 percent, down from 39 percent at the beginning of the year.

Markets

Trump’s next trade war — Gavin Bade reports that economic advisers close to former President Donald Trump are discussing ways to devalue the dollar if he’s re-elected, in a move that could boost U.S. exports but reignite inflation.

U.S., U.K. clamp down on Russian metals — Doug Palmer reports that the U.S. and U.K. will restrict the trading of Russian aluminum, copper and nickel on metal exchanges and in derivatives trading, in a bid to disrupt Russian export revenue.

On the Hill

The post-McHenry money race — House Republicans angling to succeed retiring Rep. Patrick McHenry at the top of the Financial Services Committee have given a peek at their fundraising numbers for the first quarter, per Eleanor Mueller.

Rep. Andy Barr’s campaign committee brought in $699,285, according to numbers due to the FEC today and shared with MM. Rep. Bill Huizenga’s pulled in $604,000, and Rep. French Hill‘s raised $562,603. Rep. Frank Lucas reported $138,195.

Taxes

The cost of the 401(k) — POLITICO’s Benjamin Guggenheim has a must-read investigation into the lobbying muscle behind retirement savings tax breaks, which have put pressure on the deficit and added to income inequality.

The case against trickle-down — The Roosevelt Institute’s Elizabeth Pancotti, who heads the progressive think tank’s tax work, is out with a new paper that details what she sees as the “neoliberal tax code’s path of destruction,” with tax cuts that are skewed toward corporations and the wealthy.

“The upcoming opportunity to reform the tax code should go further than merely addressing [Tax Cuts and Jobs Act] expirations,” she writes. “It should confront the legacy of neoliberalism woven in our tax system and reimagine a progressive tax code that promotes equitable growth, incentivizes investment in workers and innovation, and rebalances economic power.”

On a related note, MM has a first look at the latest move by Democrats to target the so-called carried interest loophole. Sens. Tammy Baldwin, Joe Manchin and Sherrod Brown are introducing legislation that would require carried interest income to be taxed at ordinary wage rates rather than at lower capital gains rates. It’s a reminder for private equity and hedge fund managers that politicians still have knives out for this form of Wall Street compensation. Baldwin in a statement said that it would make the tax code fairer and cut the deficit.

Regulatory Corner

Coinbase seeks appeal — The crypto exchange is trying to escalate its legal battle with the SEC to the Second Circuit Court of Appeals, our Declan Harty reports. Coinbase filed a request for an interlocutory appeal late Friday, warning of an “intolerable cloud of uncertainty” hanging over crypto because of the SEC’s approach. The move came weeks after a federal judge rejected Coinbase’s bid to throw out SEC charges against the company.

Fly Around

Matt Aks has joined Evercore ISI as vice president for policy research, focusing on energy transition, fiscal policy, trade and geopolitics. He was previously a senior adviser in Treasury’s Climate Hub and is also an alum of the Obama CEA and NSC.