The Cozen Lens

  • The election may be over, but the politics for Federal Reserve Board Chair Jerome Powell and his Fed colleagues are just getting more complicated as they seek to bring down inflation.
  • FTX’s collapse could grease the wheels of the bureaucracy to produce a range of new oversight of the industry, from legislation to rulemakings to more aggressive enforcement.
  • Big Tech is coming under greater scrutiny from Republicans and Democrats. Deep divides lie between them though over what issues are of greatest concern, which makes forging bipartisan action challenging. But some common ground does exist and could still serve as the basis for turning pointed rhetoric into action.

Politics and the Fed

Powell's Institutional Gambit. The Federal Reserve is raising rates at the fastest rate in 40 years to bring down the highest inflation in 40 years. The key is whether markets entrust Jay Powell to do the job.

  • For Powell and the Fed, perception is reality when it comes to fighting inflation. If Americans believe the Fed will bring inflation down, they will anchor their expectations accordingly, which, in turn, will make it easier for the Fed to contain inflation while mitigating the economic pain that comes with raising rates. If they don't trust the Fed though, Powell will be forced to be more aggressive, which increases the risk of a painful recession, as well as the hit to the Fed’s credibility.
  • Americans don't trust institutions. According to Gallup polling this year, just 27 percent have a "great deal" or "quite a lot" of confidence in institutions. That’s the lowest level since polling began in 1979. Specific confidence for the Fed has also deteriorated recently. Only 37 percent view the institution favorably, nearing a low point.
  • Powell is taking an overtly hawkish stance on rates. He has communicated that the risk of raising rates too little is greater than the risk of hiking them too much, meaning he would choose a recession over persistent inflation.

Politics Meets the Fed. The Federal Reserve is theoretically an independent institution. But monetary policy doesn't happen in a vacuum.

  • A Fed-induced recession next year would spell trouble for Democrats. The last American president to win reelection after facing a recession in the last two years of his first full term was President William McKinley in 1900.
  • Democrats are telling Powell the cure for inflation can't be worse than the disease itself. Senators Elizabeth Warren (D-MA), Sherrod Brown (D-OH), and John Hickenlooper (D-CO), and Rep. Maxine Waters (D-CA) have all sent letters to Powell warning of this. These Democrats have ties to the progressive, labor, and financial worlds, all of which are looking for a pivot from the Fed.
  • While some Democrats are setting up Powell to be the scapegoat for a recession, President Biden remains committed to the Fed's independence, at least thus far.

Powell's Legacy Moment: Powell is the most politically astute Fed chair since Alan Greenspan. He's going to need to use his political antennae to maneuver through the next year.

  • Powell is the ultimate DC institutionalist. He has developed a plain spoken and unassuming persona that lends him some credibility and goodwill with both Democrats and Republicans.
  • Powell has already faced political pressure from former President Trump in his first term. "I'd rather go in the books as a terrible Fed chair than as somebody who knuckled under," Powell told a reporter in 2018 as Trump was telegraphing his dissatisfaction with interest rate increases.
  • Powell can't be "keeping at it" to raise rates (as his hero, former Fed Chair Paul Volcker, would say) if he doesn't maintain control of the Federal Open Market Committee (FOMC). The Fed chair often tries to seek consensus with the 12-member committee that sets interest rate policy. Even if Powell feels immune to political pressures, other members may not, leaving Powell in a delicate role of trying to communicate resolve while keeping the dovish FOMC members on board.

Crypto Regulation in the Wake of FTX

Listening First. Advancing legislation will take a back seat to hearings over the next few weeks as members of Congress work to get their arms fully around FTX’s collapse.

  • Already, the Senate Banking, Housing, and Urban Affairs Committee and the House Financial Services Committee have said that they will hold hearings next month. The panels are expected to call a range of people to testify including regulators and individuals and entities linked to FTX, particularly former CEO Sam Bankman-Fried.
  • While some members had planned to use the final weeks of the year to hold committee markups on legislation, this seems to largely be on hold now. In the case of the Digital Commodities Consumer Protection Act (DCCPA), its sponsors have backed off pushing the measure given Bankman-Fried’s vocal support of the bill, an association now seen as toxic in Washington.

Crypto in the Spotlight. When it rains it pours, and it looks like the next Congress will focus heavily on digital assets in the wake of FTX’s demise.

  • One issue Congress will likely look to address is regulation of exchanges and ensuring that the market regulators have sufficient authority to oversee crypto markets. This will likely include a revised DCCPA, which would give the Commodity Futures Trading Commission (CFTC) more authority over the spot markets. What the legislation does not answer is what tokens are securities, which some have said makes it incomplete.
  • Also likely to garner attention will be stablecoin legislation. This has been an effort so far championed most successfully by House Financial Services Committee Chair Maxine Waters (D-CA) and Ranking Member Patrick McHenry (R-NC). McHenry is set to take the gavel under a Republican majority and is expected to make digital assets a significant part of his agenda.
  • Vital in getting any of these bills across the finish line will be getting support from bipartisan and bicameral leadership and key committee leaders. Included on this list is Senator Sherrod Brown (D-OH), a noted crypto skeptic. Brown is the chair of the Senate Banking, Housing, and Urban Affairs Committee. If Brown is not on board with crypto legislation, it will be a significant uphill battle to get any relevant measure through the upper chamber.

Regulators March On. President Biden’s regulators have been the most aggressive on policing the crypto industry to date, a role they will likely pursue with even greater zeal after the FTX crisis.

  • Regulation of exchanges is now under a microscope, an effort that is being led by the Securities and Exchange Commission (SEC) and CFTC. This largely could be done through enforcement actions rather than rulemakings, but regardless of the method, expect the agencies to make a point of requiring exchanges to create firewalls between the various aspects of their businesses.
  • SEC Chair Gary Gensler will make the case that the FTX debacle could have been avoided or at least mitigated if FTX had registered with the agency. Exchanges have been hesitant to submit to this level of oversight, as there has still been no legal clarity on what tokens are a security, despite Gensler’s insistence that most tokens are securities. With this belief, Gensler will aggressively continue to pursue enforcement actions against token issuers and exchanges, with the only sure way to avoid these cases being to register with the SEC.

Big Tech Will Get Squeezed from Both the Left and the Right

Republican Tech Targets. In a Republican-controlled House, freedom of speech online and Section 230 reform are likely to be top priorities when it comes to overseeing Big Tech.

  • Alleged censorship of conservative views by social media platforms is a major GOP concern. House Minority Leader (and likely incoming Speaker) Kevin McCarthy (R-CA) earlier this year promised that “if you shut down constitutionally protected speech (not lewd and obscene) you should lose 230 protection.” This Congress, House Republicans released about a dozen proposals for updating Section 230, the provision of federal law that shields internet platforms from liability for user-generated content. Rep. Cathy McMorris Rodgers (R-WA), who is set to chair the House Energy and Commerce Committee, has spoken in favor of Section 230 reform.
  • Section 230 is a polarizing issue, making any legislation unlikely to pass out of a divided Congress. Instead, any changes to it are likely to come from the Supreme Court. Justices will soon consider the first Supreme Court case regarding Section 230, Gonzalez v. Google LLC, which deals with the question of whether it covers only editorial decisions by platforms (e.g., removing content for violating standards) or algorithm-driven recommendations also. The Court may wade further into social media regulation after lower courts issued split rulings on the constitutionality of Texas and Florida laws blocking platforms from limiting political speech.
  • The GOP-led House is likely to use its oversight powers aggressively. A key figure will be Rep. Jim Jordan (R-OH), who is set to be the chair of the House Judiciary Committee. In September, Jordan gave a preview of what to expect from a GOP House when he sent Meta CEO Mark Zuckerberg a letter about Facebook’s alleged censorship of content unfavorable to Biden.

Democratic Goals. In a divided Congress, a Democratic Senate will pursue its own priorities.

  • While the GOP focuses largely on free speech, Democrats are generally concerned about the spread of misinformation. Earlier this month, for example, a group of Democratic lawmakers led by Rep. Tony Cárdenas (D-CA) and Senators Bob Menendez (D-NJ) and Ben Ray Luján (D-NM) sent a letter to YouTube raising alarms about disinformation in Spanish. Biden has supported removing Big Tech’s Section 230 protections but the divide between the parties on content moderation makes any bipartisan agreement on this issue unlikely.
  • Elon Musk’s purchase of Twitter and his decision this past weekend to allow former President Trump back on the platform will ensure that content moderation remains part of the national conversation. Democrats last week called on the Federal Trade Commission (FTC) to look into Twitter over consumer protection issues. An FTC spokesperson previously told The Hill that “We are tracking recent developments at Twitter with deep concern.”
  • By holding the Senate, Democrats will be able to continue confirming Biden’s nominees for judgeships and for executive positions relating to tech. At the top of the to-do list is likely to be installing a Democratic majority at the Federal Communications Commission (FCC), which could pursue long-held Democratic priorities such as the restoration of net neutrality. Gigi Sohn, Biden’s nominee for an open seat on the FCC, could be confirmed during the lame duck session.

Bipartisan Concerns. Though the parties disagree on many tech issues, there is some common ground.

  • Members of both parties have supported tightening data privacy protections. The bipartisan American Data Privacy and Protection Act has failed to advance so far this Congress, but it could return in some form. McMorris Rodgers supports it and will be in a position to make another push on data privacy in the next Congress. Passing both a GOP House and a Democratic Senate would be a tall order, however. Any privacy bill that passes next year is likely to take a narrow approach. For example, Senators Maria Cantwell (D-WA) and Ted Cruz (R-TX) last week cosponsored a bill to require disclosures from smart devices capable for video or audio recording.
  • Republicans have historically been more hawkish on TikTok, but there’s now bipartisan concern about the app and its potential links to the Chinese government. Earlier this month. Reps. Jan Schakowsky (D-IL) and Gus Bilirakis (R-FL) sent letters to Apple and Google that highlighted privacy and security risks relating to TikTok. Senators Mark Warner (D-VA) and Marco Rubio (R-FL) have called on the FTC to investigate TikTok and parent company ByteDance. Scrutiny of TikTok could be one area of agreement in a divided Congress.