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Washington Wrap — Weak jobs report casts doubt on Fed rate hikes

The Washington Wrap is a weekly look at regulation, news and chatter from the Capitol. Send tips and ideas to

At the White House

With Congress on recess this week, much of the financial policy action came from the executive branch. Analysts and industry observers are eagerly awaiting the U.S. Treasury Department's study of financial regulation.

On Feb. 3, President Donald Trump signed an executive order directing Treasury to complete a review of financial regulations within 120 days. The order established several priorities — such as preventing taxpayer-funded bailouts while enabling consumer choice and maximizing growth — by which regulations should be measured. The Treasury's 120 days to report to the president expires tomorrow, June 3.

In a June 2 note, Isaac Boltansky, an analyst for Compass Point Research & Trading LLC, suggested the report could make suggestions and would generate headlines but might not generate much action in the near term. "With the agenda seemingly full and the agencies still far from fully staffed," comprehensive review of financial regulations will not occur until the second half of 2017 or later, Boltansky wrote.

Meanwhile, a couple of leading academics on financial regulation are pushing for maintenance of a key post-crisis reform: the Financial Stability Oversight Council. The FSOC can designate financial institutions as systemically important, subjecting the companies to greater regulatory scrutiny. In a June 1 column for Bloomberg View, Antonio Weiss, a former counselor to the Treasury Secretary, and Simon Johnson, a former chief economist for the International Monetary Fund, argue that weakening FSOC, as proposed by Trump and congressional Republicans, would "raise the odds of another crisis."

The government's debt limit, an issue that has previously triggered shutdowns, is rearing its head earlier than expected. On May 24, Treasury Secretary Steven Mnuchin told Congress to raise the limit before its August recess. The White House budget director, Mick Mulvaney, reiterated the call on the logic that tax receipts are coming in slower than expected.

On May 30, Politico reported that Congress was taken aback by the requests and "is totally unprepared" to raise the limit by July. Quoting several politicians, the article noted that Republicans will look to raise the debt limit as part of legislation that would include spending cuts. Mnuchin asked for a "clean" bill, meaning spending cuts would not be attached to the hike, but more conservative members of Congress are already bristling at the idea. Democrats, on the other hand, see an opportunity for leverage with Republicans in control and likely bearing the brunt of blame for any shutdown.

Trump elicited negative reaction from several executives, including in the financial industry, with his June 1 announcement to withdraw from the Paris agreement on climate change. The move caused Goldman Sachs Group Inc. CEO Lloyd Blankfein to fire off his first tweet, denouncing the move as a step back for U.S. leadership on the global stage.

Elsewhere, financial executives are making a push to recapitalize the housing finance giants Fannie Mae and Freddie Mac. Financial firms Paulson & Co. Inc. and Blackstone Group LP are reportedly behind a new plan to release the companies from government control. The proposal, developed by investment bank Moelis & Co., would generate a massive financial windfall for the companies, which purchased preferred shares in the entities for pennies on the dollar.

Among regulatory agencies

Speculation about the potential next chair of the Federal Reserve made headlines this week. Chair Janet Yellen's term expires in February 2018, so Trump will have an opportunity to install his own choice to the powerful post. Axios reported that Gary Cohn, current director of the National Economic Council, is angling for the position.

But Cohn denied the news June 2 in an interview with Bloomberg Television, saying he likes his current role. In a June 1 note, Ian Katz, a policy analyst for Capital Alpha Partners, wrote that Cohn would have a good shot at Fed chair if he did want the job. Other potential candidates Katz tabbed included former bank CEOs Richard Davis from U.S. Bancorp or Jim Rohr from PNC Financial Services Group Inc., as well as Kevin Warsh, a former Fed governor.

More immediately, analysts are wondering if policymakers will raise rates when the Federal Open Market Committee meets June 13-14. On June 2, the jobs report disappointed with 138,000 nonfarm jobs added in May, compared to a consensus estimate of 185,000, according to Econoday.

Mekael Teshome, economist for PNC Financial Services, said he does not expect the jobs miss to change the Fed's plans to raise interest rates. "We expect the Fed to go through with the rate hike based on the belief that the U.S. economy is still growing," Teshome said in an interview. He also said the employment report appeared to be sufficient support for a rate hike, pointing instead to weak wage growth as "the big wild card."

While other economists agreed that the Fed will still raise rates this month, the likelihood of additional hikes later in the year appeared to be diminishing. Lindsey Piegza, chief economist for Stifel Fixed Income, said the jobs report "muddies picture for near-term rate hike," similarly pointing to the poor wage growth in May as the biggest factor. Scott Anderson, chief economist for Bank of the West, said in a note that the jobs report was disappointing and, while the June rate hike will likely push ahead as expected, chances of a September hike appear slim with the Fed funds futures probability dropping to 26% on the jobs report.