Raphael Stevens

Fed Governor Christopher Waller said he expects to raise the central bank’s benchmark interest rate 75 basis points this month but that he’s open to a larger move depending on incoming data.
He specifically cited retail sales and housing as two key metrics.
Markets are pricing in a high probability of a 100 basis point, or full percentage point, increase. Waller said the market is “getting ahead of itself.”

Christopher Waller, U.S. President Donald Trump’s nominee for governor of the Federal Reserve, speaks during a Senate Banking Committee confirmation hearing in Washington, D.C., U.S, on Thursday, Feb. 13, 2020.
Andrew Harrer | Bloomberg | Getty Images

Federal Reserve Governor Christopher Waller said he’s willing to consider what would be the most aggressive interest rate hike in decades at the central bank’s meeting later this month.
Waller said he supports a 75 basis point hike at the July 26-27 meeting. But he will be watching data and keeping an open mind about what the Fed should do to control inflation, which is running at its fastest pace since 1981.

The rate-setting Federal Open Market Committee approved a 75 basis point move in June, the largest one-month increase since 1994.
“I support another 75-basis point increase” at the next FOMC meeting, Waller said in remarks at an event in Victor, Idaho.

“However, my base case for July depends on incoming data,” he added. “We have important data releases on retail sales and housing coming in before the July meeting. If that data comes in materially stronger than expected, it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down.”
Following Wednesday’s consumer price index data showing 12-month inflation at 9.1%, markets started pricing in a full percentage point, or 100 basis point, increase in the Fed’s benchmark short-term borrowing rate. The probability for that outcome stood at nearly 80% on Thursday morning but receded to 44% in the afternoon, according to CME Group data. Though he said he’s open to the larger hike, Waller said the earlier aggressive market pricing was “kind of getting ahead of itself.”
Retail sales data will be released Friday and is expected to reflect a spending increase of 0.9% in June, a month when the CPI rose 1.1%. The figures are not adjusted for inflation.

Numbers on housing starts and building permits are due July 19; starts tumbled 14.4% in May, while permits fell 7%. Permits for June are expected to edge lower, while starts are expected to go higher, according to FactSet estimates.
“If I see the incoming data the next two weeks coming in and showing me that demand is still really strong and robust, then I’m going to lean into a higher rate hike,” Waller said.
If the Fed takes the 100 basis point route, it would mark the biggest one-month increase since the early 1980s, when the central bank was trying to control runaway inflation.
Getting prices down is the paramount mission of the Fed now, said Waller, who expects still more rate hikes even after this month’s.
“I think we need to move swiftly and decisively to get inflation falling in a sustained way, and then consider what further tightening will be needed to achieve our dual mandate,” he said.
While he expressed strong concern about inflation, Waller was more optimistic about the economy.
Worries are mounting that the U.S. is headed for or already in a recession, but Waller said the strength of the jobs market has him “feeling fairly confident that the U.S. economy did not enter a recession in the first half of 2022 and that the economic expansion will continue.”
Even with the Fed tightening, he said he thinks the economy can achieve a “soft landing” that won’t include a recession. U.S. GDP contracted 1.6% in the first quarter, and the Atlanta Fed’s GDPNow tracker is indicating a 1.2% decline in Q2, meeting the rule-of-thumb definition of a recession.

WATCH LIVEWATCH IN THE APP More

Fed Chair Jerome Powell and former Vice Chair Richard Clarida didn’t break any rules or laws while trading securities, the Fed’s inspector general said Thursday.
While the report cleared Powell and Clarida, Bialek said evaluations of trades from other top Fed officials are ongoing.

Controversial trading activities from Federal Reserve Chairman Jerome Powell and former Vice Chairman Richard Clarida didn’t break any rules or laws, the central bank’s Office of Inspector General ruled Thursday.
The report covered a period from 2019-21 when the two top-ranking officials traded stocks and funds while the central bank used monetary policy to influence financial markets.

The period included the weeks before the Covid-19 pandemic declaration as the Fed was slashing interest rates and instituting other market supports, moves that would intensify following the pandemic declaration.
“We did not find evidence to substantiate the allegations that former Vice Chair Clarida or you violated laws, rules, regulations, or policies related to trading activities as investigated by our office,” Inspector General Mark Bialek told Powell in a letter. “Based on our findings, we are closing our investigation into the trading activities of former Vice Chair Clarida and you.”

Federal Reserve Board Chairman Jerome Powell speaks to reporters after the Federal Reserve raised its target interest rate by three-quarters of a percentage point to stem a disruptive surge in inflation, during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, U.S., June 15, 2022. 
Elizabeth Frantz | Reuters

While the report cleared Powell and Clarida, Bialek said evaluations of trades from other top Fed officials are ongoing.
Former regional presidents Robert Kaplan of Dallas and Eric Rosengren of Boston retired following disclosures of their investment portfolio activities. Clarida also left, stepping down in January just before assuming a teaching job at Columbia University.
The OIG found “that I went above and beyond financial ethics and disclosure requirements during my tenure as Vice Chair,” Clarida said in a statement.

“I have always been committed to conducting myself with integrity and respect for the obligations of public service, and this report reaffirms that lifelong commitment to exceeding ethical standards,” he added.
Earlier this year, the Fed adopted a stringent set of new rules that prohibit officials from trading individual stocks and bonds as well as cryptocurrencies.

WATCH LIVEWATCH IN THE APP More

Asked by veteran banking analyst Betsy Graseck of Morgan Stanley on Thursday about the Federal Reserve’s recent stress test, Dimon unleashed a series of critiques about the annual exercise, which was implemented after the 2008 financial crisis nearly capsized the world’s economy.
JPMorgan is scrambling to generate more capital to help it comply with the results of the Fed test, including by halting its share repurchases.
Other steps the bank has been forced to take: JPMorgan is pulling back on “risk-weighted assets,” which broadly means anything on the bank’s balance sheet that requires capital to be held against it. As one example, JPMorgan is planning to dump mortgages held in its portfolio, Dimon said.

Jamie Dimon, CEO of JP Morgan Chase, speaking at the Business Roundtable CEO Innovation Summit in Washington, D.C. on Dec. 6th, 2018. 
Janvhi Bhojwani | CNBC

JPMorgan Chase CEO Jamie Dimon didn’t mince words when it came to the regulatory process that forced his bank to suspend its stock buybacks.
Asked by veteran banking analyst Betsy Graseck of Morgan Stanley on Thursday about the Federal Reserve’s recent stress test, Dimon unleashed a series of critiques about the annual exercise, which was implemented after the 2008 financial crisis nearly capsized the world’s economy.

“We don’t agree with the stress test,” Dimon said. “It’s inconsistent. It’s not transparent. It’s too volatile. It’s basically capricious, arbitrary.”

JPMorgan, the biggest U.S. bank by assets, is scrambling to generate more capital to help it comply with the results of the Fed test. Last month, steadily increasing capital requirements within the test hit the biggest global financial institutions, forcing the New York-based bank to freeze its dividend. While Citigroup made a similar announcement, rivals including Goldman Sachs and Wells Fargo boosted investor payouts.
Under the exam’s hypothetical scenario, JPMorgan was expected to lose around $44 billion as markets crashed and unemployment surged, Dimon said. He essentially called that figure bunk on Thursday, asserting that his bank would continue to earn money during a downturn.
After JPMorgan released second-quarter results, it disclosed a raft of other measures it is taking to husband capital, including by temporarily halting share repurchases. That move, in particular, wasn’t welcomed by investors, as the stock hasn’t been this cheap in years.
Shares of the bank fell as much as 5%, hitting a fresh 52-week low.

Big changes

CFO Jeremy Barnum added to the conversation, saying that while regulators give plenty of information about the contours of the annual exam, a key element of the so-called stress capital buffer doesn’t get released to banks, making it “really very hard at any given moment to understand what’s actually driving it.”
“We feel very good about building [capital] quickly enough to meet the higher requirements,” Barnum said. “But they’re pretty big changes that come into effect fairly quickly for banks, and I think that’s probably not healthy.”
Other steps the bank has been forced to take: JPMorgan is pulling back on “risk-weighted assets,” which broadly means anything on the bank’s balance sheet that requires capital to be held against it. As one example, JPMorgan is planning to dump mortgages held in its portfolio, Dimon said.
A consequence of these moves is that JPMorgan, a massive institution with a $3.8 trillion balance sheet, is forced to withdraw credit from the financial system just as storm clouds gather on the world’s biggest economy.
The actions happen to coincide with the Fed’s so-called quantitative tightening plans, which call for a reversal of the central bank’s bond-purchasing efforts, including for mortgages, which could further roil the market and drive up borrowing costs.

‘Making it worse’

The upshot is that the bank has to act at “precisely the wrong time reducing credit to the marketplace,” Dimon said.
The moves will ultimately impact ordinary Americans, particularly lower-income minorities who typically have the hardest time obtaining loans to begin with, he said.
“It’s not good for the United States economy and in particular, it’s bad for lower-income mortgages,” Dimon said. “You haven’t fixed the mortgage business and then we’re making it worse.”
During a media call Thursday, Dimon told reporters that while JPMorgan isn’t exiting the business, the capital rules could force other banks to recede from home loans entirely. Wells Fargo has said it would shrink the business after surging interest rates caused a steep drop in volume.
Instead, JPMorgan will originate mortgages, then immediately offload them, he said.
“It’s a terrible way to run a financial system,” Dimon said. “It just causes huge confusion about what you should be doing with your capital.”

WATCH LIVEWATCH IN THE APP More

On the one hand, Dimon said the U.S. “economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy.”
“But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity … are very likely to have negative consequences on the global economy sometime down the road,” he warned.

Jamie Dimon, chief executive officer of JPMorgan Chase & Co.
Christophe Morin | Bloomberg | Getty Images

JPMorgan Chase CEO Jamie Dimon on Thursday summarized the state of the U.S. economy in one paragraph, and it’s not all good.
On the one hand, Dimon said the U.S. “economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy.”

He then rattled off a number of warning signs, saying: “But geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”
Dimon’s comments, which were made in JPMorgan Chase’s latest quarterly release, come as investors and economists try to make out whether the economy is headed for a recession — and the recent spate of economic data isn’t providing much clarity.

The good

For the moment, there aren’t any signs the U.S. economy is entering a recession, according to comments JPMorgan executives made on their earnings call.
As Dimon said, the labor market seems to be in solid footing. Last month, the U.S. economy added 372,000 jobs, topping a Dow Jones estimate of 250,000. Meanwhile, average hourly wages grew last month at 5.1% year-over-year pace.

Consumer spending also seems to be chugging along, albeit at a subdued pace. Spending in May rose 0.2%, below a Reuters estimate for a 0.4% gain.

Even within JPMorgan’s own business there were signs of consumer strength. Consumers are still spending on discretionary areas like travel and dining. At its consumer and community banking division, combined debit and credit card spending was up 15% in the second quarter. Card loans were up 16% with continued strong new account originations.
However, the good news may end there.

The bad

The consumer price index — a widely followed measure of inflation — rose last month by 9.1% from the year-earlier period. That topped a Dow Jones forecast of 8.8% and market the fastest pace for inflation going back to 1981.
A big driver for that increase is a surge in energy prices. West Texas Intermediate, the U.S. oil benchmark, is up more than 28% in in 2022, as the war between Ukraine and Russia raises concern over already tight supply in the market.
Higher prices have also dented U.S. consumer sentiment. The University of Michigan’s consumer sentiment index hit a record low last month, tumbling to 50.
These inflationary pressures have pushed the Federal Reserve to tighten monetary policy this year more quickly than investors anticipated. Last month, the central bank hiked rates by 0.75 percentage point, and some economists on Wall Street expect the Fed to hike by as much as a full point later in July.
Inflation has also had massive political ramifications in the U.S.
According to a poll conducted by the Pew Research Center, President Joe Biden’s approval rating has slumped to 37% — with a majority of Americans saying his policies have made the economy worse. Pew also found that just 13% of Americans rate U.S. economic conditions as “excellent/good.”
Dimon’s remarks follow comments he made last month in which he warned investors to brace themselves for an economic “hurricane.”
Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

WATCH LIVEWATCH IN THE APP More