Evelyn Reynolds

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    Inflation Cooled in March, but Stubborn Price Increases Remain

    The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures index, slowed in March. But signs point to staying power.Inflation is slowing, a fresh reading of the Federal Reserve’s preferred index showed, but costs continue to climb rapidly after stripping out volatile food and fuel — which shows that price pressures retain staying power and it could be a long road back to normal.The Personal Consumption Expenditures index climbed by 4.2 percent in the year through March, down notably from 5.1 percent in the year through February.But after stripping out food and fuel prices, a closely watched “core” index held nearly steady last month. That measure rose by 4.6 percent over the year, compared with 4.7 percent in the previous reading — a figure that was revised up slightly.The data provide further evidence that inflation is moderating, but that the process remains bumpy and could take a long time to fully play out. Fed officials have raised interest rates sharply over the past year to make money more expensive to borrow and slow demand, and those moves are only slowly trickling through the economy and weighing down price increases.The central bank meets on May 3 to make its next policy decision, and officials are widely expected to raise rates by a quarter percentage point to just above 5 percent. Markets will be just as focused on what they signal for the future: Central bankers forecast in March that they might stop lifting interest rates after their next adjustment. Both incoming price and wage data and financial news could inform whether they feel comfortable hitting pause.The Fed will also need to weigh turmoil in the banking sector as it considers its next move. A series of prominent bank failures in March sent tremors through the system, and those persist. First Republic has continued to struggle, and its stock plummeted this week. Problems in the industry can slow lending to consumers and businesses, weighing on the economy.With growth slowing and the bank issues further weighing consumers down, companies may find in the coming months that they are less able to charge more for their goods and services without scaring away customers. So far, though, many have retained an ability to raise prices.“If we see inflation that warrants us needing to take additional pricing, we’ll take it,” Brian Niccol, chief executive at the burrito chain Chipotle, said during an earnings call this week. “I think we’ve now demonstrated we do have pricing power.” More

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    Euro zone economy ekes out 0.1% growth in first quarter, misses expectations as Germany stagnates

    Euro zone gross domestic product grew by 0.1% in the first quarter, missing a forecast of 0.2% growth.
    Annual growth was also below expectations of 1.4%, at 1.3%.
    While the bloc has avoided a widely feared recession, growth will continue to be impacted by monetary tightening, with the European Central Bank expected to hike rates by at least 25 basis points next week.

    Skyscrapers of the city center can be seen from the Lohrberg in the north of Frankfurt. Photo: Arne Dedert/dpa (Photo by Arne Dedert/picture alliance via Getty Images)
    Picture Alliance | Picture Alliance | Getty Images

    The euro zone economy grew by a marginal 0.1% in the first quarter of the year, preliminary figures showed Friday, even as Germany’s GDP flatlined over the period.
    The print came in below analyst expectations, with a Reuters poll of economists previously forecasting quarterly growth of 0.2%. The economy expanded by 1.3% on an annual basis, just missing an outlook of 1.4%.

    Earlier this month, statistics agency Eurostat had revised down its fourth-quarter 2022 GDP estimate for the euro zone from 0.1% quarterly growth to no growth, following 0.4% growth in the third quarter.
    The slight first-quarter growth signal comes as economic performance contends with persistently high inflation. Energy prices have been a key driver over the past year, as European consumers progressively lost access to Russian supplies in the wake of Moscow’s full-scale invasion of Ukraine. Carsten Brzeski, global head of macro at Dutch bank ING, said that the fall in wholesale energy prices, warmer-than-expected weather and fiscal stimulus had helped the bloc dodge a widely-feared recession over the winter.

    But he noted significant disparities between individual countries, and said that future growth would be impacted by an ongoing race between positive momentum in industry and wage growth on the one hand, and European Central Bank monetary tightening and U.S. recession risks on the other.

    Divergence

    Europe’s leading economies diverged in their first-quarter performance, national figures showed on Friday. The German economy stagnated over January-March, compared with the previous three-month period. It was up 0.2% on an annual adjusted basis and 0.1% lower on a non-adjusted basis due to one extra working day in the prior year, German statistics agency Destatis said.
    Deutsche Bank economists said Germany had avoided a technical recession by a “hair’s breadth” and reiterated their call of 0% GDP growth this year, with the economy held back by high inflation, rate hikes and an expected second-half U.S. recession.

    France’s GDP meanwhile picked up by 0.2% in the first quarter, Insee statistics revealed, despite a spate of widespread strikes that slowed activity sparked in protest of President Emmanuel Macron’s planned pension reforms.
    The Irish GDP was a notable weak spot, declining by 2.7% on the previous quarter, while Portugal’s economy grew by 1.6%.

    Policy stake

    The GDP figures will be keenly watched ahead of the May 4 meeting of the ECB, which seeks to tackle headline inflation of 6.9% and core inflation at a record high of 5.7%.
    Some ECB policymakers have stressed they believe they have further to go on interest rate rises as they weigh up a 25 basis point or even 50 basis point hike next week. The March collapse of several lenders across the U.S. and Europe and ensuing turmoil in the banking sector had ignited questions whether central banks would be forced to slow or walk back their interest rate increases.

    The ECB most recently raised its three key interest rates by 50 basis points in March, taking the main rate to 3%.
    Nerves on the European front have largely settled and officials have underlined the strength of the sector, though the shadow of deposit flights and further volatility remains. More

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    What to Watch as the Fed Releases Its Look Into Silicon Valley Bank

    The Federal Reserve is set to release an examination of why its oversight of the bank failed to stem disaster at 11 a.m. on Friday.WASHINGTON — The Federal Reserve is set to release a highly anticipated report on Friday examining what went wrong with its oversight of Silicon Valley Bank, which collapsed in mid-March, in the largest bank failure since the 2008 financial crisis.The post-mortem comes as the aftershocks of Silicon Valley Bank’s collapse continue to shake the American financial system: First Republic, which required a cash infusion from other large banks as nervous customers pulled their deposits and fled, remains imperiled.The Fed’s investigation into what went wrong at Silicon Valley Bank has been overseen by Michael S. Barr, the central bank’s head of supervision and one of the architects of the 2010 Dodd-Frank law, which aimed to prevent a repeat of the 2008 crisis. The review was announced on March 13, just after S.V.B.’s failure and the government’s sweeping announcement on March 12 that it would protect the bank’s large depositors, among other measures to shore up the banking system.That same weekend, the federal government also shuttered a second institution, Signature Bank. The Federal Deposit Insurance Corporation, which was the primary supervisor for Signature, will release its own report Friday.Still, most of the attention has focused on S.V.B., in part because significant weaknesses at the bank appear to have started and grown progressively worse in plain sight in the years leading up to its demise. The bank had a large share of deposits above the government’s $250,000 insurance limit. That is a potential risk, given that uninsured depositors are more likely to pull their money at the first sign of trouble to prevent losing their savings.The bank’s leaders also made a big bet on interest rates staying low. That became a problem as the Fed, trying to control rapid inflation, carried out its most aggressive rate increase campaign since the 1980s. The bank held longer-term bonds that dropped in value as interest rates rose, because newer debt issued at the higher rates became more attractive for investors.Supervisors at the Fed were aware of many of the bank’s problems and had flagged and tried to follow up on some of them. Yet the issues were not resolved quickly enough to save the bank.The questions that the review could answer center on what went wrong. Was it a problem at the Federal Reserve Bank of San Francisco, which supervised the bank, or did the fault rest with the Federal Reserve Board, which has ultimate responsibility for bank oversight? It is also unclear whether there was an issue with the Fed’s culture around — and approach to — supervision, or whether the existing rules were lacking.“It’s a little bit of a mystery” what the report will hold, said Steven Kelly, a researcher at the Yale Program on Financial Stability, explaining that he had little expectation that the release would point fingers. “In some sense, they really need a head on a pike — and they’re not going to do that in this report.”Jeff Hauser, director of the Revolving Door Project, said he was interested to see how the report would deal with the tone around bank supervision at the Fed, and the reality that Gregory Becker, S.V.B.’s chief executive, sat on the board of the Federal Reserve Bank of San Francisco. That role gave Mr. Becker no official influence over bank oversight, but Mr. Hauser thinks that such positions might offer banks the advantage of more prestige.Mr. Hauser said he also thinks an independent review is needed in addition to the Fed’s internal probe and whatever its inspector general — who is also looking into the matter — eventually releases. Mr. Barr will still have to work with his colleagues in the future, Mr. Hauser pointed out, and the central bank’s inspector general is appointed by the Fed chair.“We need someone with some independence to dig in,” Mr. Hauser said. More

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    IMF warns of ‘disorderly’ house price corrections in Europe as interest rates move higher

    “House price declines could accelerate if markets reprice inflation risks and financial conditions tighten more than expected,” the IMF said.
    Data from Europe’s statistics office, Eurostat, showed house prices dropping for the first time since 2015.
    The European Central Bank is due to meet next week, and one of its members has recently suggested that a 50 basis point hike is not off the table.

    A pedestrian inspects advertisements for residential properties for sale in Stockholm, Sweden.
    Bloomberg | Bloomberg | Getty Images

    STOCKHOLM, Sweden — The International Monetary Fund warned Friday of “disorderly” house price corrections in Europe, at a time when the region is struggling to bring down inflation.
    In its latest regional economic outlook for Europe, the IMF said that a downward correction is already underway in some European housing markets, but this decline could accelerate as central banks increase interest rates further.

    “Disorderly corrections in real estate markets could occur even if broader financial distress is avoided. A housing market correction is already underway in some European countries, for instance, in the Czech Republic, Denmark, as well as in Sweden where house prices declined more than 6% in 2022,” the Fund said.
    “House price declines could accelerate if markets reprice inflation risks and financial conditions tighten more than expected. These price declines would have adverse effects on household and bank balance sheets,” the IMF added.
    Mortgage payments might go up as well, as central banks increase interest rates in efforts to reduce inflation levels. Consequently, mortgage holders may have less disposable income to spend, and, in some cases, could even reach a point where they are unable to repay their credits. Banks could also struggle in an environment where repayments are not made.
    “Empirical models linking house prices to their fundamental drivers point to an overvaluation of 15–20% in most European countries. Therefore, with mortgage rates still on the rise and real incomes dented by inflation, house prices have been declining recently in many markets,” the Fund said.

    Data from Europe’s statistics office Eurostat showed house prices dropping for the first time since 2015. Across the European Union, house prices fell 1.5% in the fourth quarter of 2022 from the previous three-month period.

    “General house price issues are across the board, not just in high debt countries, and they need to be tackled with supervision. They need to be tackled with stress tests, they need to be watched very carefully,” Alfred Kammer, director of the European department at the IMF, told CNBC in Sweden.

    Sticky Inflation

    At the same time, estimates point to further challenges with inflation. The IMF expects headline inflation to average 5.3% in the euro zone this year and 2.9% next year — above the European Central Bank’s target of 2%.
    “The ECB needs to be increasing interest rates relatively early and need to maintain those through at least mid-2024. We expect to come back to the inflation target of 2% during 2025,” Kammer told CNBC.
    The European Central Bank is due to meet next week, and one of its members has recently suggested that a 50 basis point increase is not off the table. The central bank embarked on a hiking path in July 2022, when it brought its main rate from -0.5% to 0. The ECB’s main rate is currently at 3%.
    The latest inflation print in the euro zone showed the headline rate falling to 6.9% in March from 8.5% in February. Core inflation, which excludes energy and food costs, showed a slight increase over the same period.
    “Further tightening is required, and when the terminal rate has been reached, that terminal rate needs to be maintained for longer, because core inflation is (…) high, and it’s very persistent. And there’s nothing worse than pausing an inflation fighting effort too early, or abandoning it too early because if you need to do it a second time, the costs to the economy are so much larger,” Kammer said.
    In Sweden, where house prices have come down significantly last year, inflation expectations also suggest that the central bank has more room to go in terms of rising rates. Headline inflation is seen at 6.8% this year and 2.3% next year, according to the IMF’s latest figures.
    The picture is also similar in the U.K. with headline inflation set to reach 6.8% this year and 3% in 2023.
    Amid these forecasts, the IMF suggested that central banks have no choice but to press ahead with further rate hikes.
    “High and potentially more persistent than expected underlying inflation calls for tight monetary policy, until core inflation is unambiguously on a path back to central bank inflation targets,” the Fund said. More

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    Stress Builds as Office Building Owners and Lenders Haggle Over Debt

    A real estate investment fund recently defaulted on $750 million of mortgages for two Los Angeles skyscrapers. A private equity firm slashed the value of its investment in the Willis Tower in Chicago by nearly a third. And a big New York landlord is trying to extend the deadline for paying down a loan for a Park Avenue office tower.Office districts in nearly every U.S. city have been under great stress since the pandemic emptied workplaces and made working from home common. But in recent months, the crisis has entered a tense phase that could damage local economies and cause financial hits to real estate investors and scores of banks.Lenders are increasingly reluctant to make new loans to owners of office buildings, especially after the collapse of two banks last month.“They don’t want to make new office building loans because they don’t want more exposure,” said Scott Rechler, a New York landlord who is a big player in the city’s office market and sits on the board of the Federal Reserve Bank of New York.The timing of the pullback in lending couldn’t be worse. Landlords need to refinance about $137 billion of office mortgages this year and nearly half a trillion dollars in the following four years, according to Trepp, a commercial real estate data firm. The Federal Reserve’s campaign to fight inflation by raising interest rates has also substantially raised the cost of loans still on offer.Banks’ unwillingness to lend and building owners’ desperation for credit have created a standoff. Lenders want to extend loans and make new ones only if they can get better terms. Many landlords are pushing back, and some are threatening to default, effectively betting that banks and investors stand to lose more in a foreclosure. Blackstone slashed the value of the Willis Tower in Chicago by 29 percent. Lyndon French for The New York TimesThe Willis Tower, formerly the Sears Tower, is the third tallest in the country.Lyndon French for The New York TimesHow private negotiations between lenders and building owners are resolved could have major ramifications. Defaults could heap pressure on regional banks and help push the economy into recession. Local property tax revenue, already under pressure, could plummet, forcing governments to cut services or lay off workers.“What we are seeing is this dance between lenders and owners,” said Joshua Zegen of Madison Realty Capital in New York, a firm that specializes in financing for commercial real estate projects. “No one knows what the right value is. No one wants to take a building back,” he said, adding that building owners don’t want to put in new capital, either.He added that the office sector was feeling far more stress than other kinds of commercial real estate like hotels and apartment buildings.Some industry experts are optimistic that given enough time, building owners and their lenders will hammer out compromises, avoiding foreclosures or a big loss in property tax revenue because everybody wants to minimize losses.“I don’t see it as something that is going to result in systematic risk,” said Manus Clancy, a senior managing director at Trepp. “It’s not going to bring down banks, but you could see some banks that have problems. Nothing gets resolved quickly in this market.”Loans on commercial buildings are typically easier than home mortgages to extend or modify. Negotiations are handled by bank executives or specialized finance firms called servicers, which act on behalf of investors that own securities backed by one or more commercial mortgages.But striking a deal can still be hard.Mr. Rechler’s company, RXR, recently stopped making payments on a loan it used to finance the purchase of 61 Broadway in downtown Manhattan. His company got its original investment in the building back after selling nearly half its stake to another investor several years ago, he said. He added that the lender, Aareal Bank, a German institution, was considering selling the loan and the building.“In this illiquid market, can they sell that loan? Can they sell the building?” Mr. Rechler said. Aareal Bank declined to comment.Blackstone bought Willis Tower for about $1.3 billion in 2015.Lyndon French for The New York TimesAnd it committed to spending $500 million on renovating the 50-year-old building.Lyndon French for The New York TimesEric Gural is a co-chief executive of GFP Real Estate, a family-owned firm that has stakes in several Manhattan office buildings, mostly older ones. He has been embroiled in nearly seven months of negotiations with a bank to extend a $30 million loan on a building in Union Square, and just two months are left on the mortgage.“I’m trying to get a one-year extension on an existing loan so I can see what interest rates look like next year, which is likely to be better than they are now,” Mr. Gural said. “Hybrid work has created fear in the banks.”Though many workers have returned to offices at least a few days a week, 18.6 percent of U.S. office space is available for rent, according to Cushman & Wakefield, a commercial real estate services firm, the most since it started measuring vacancies in 1995.Public pension funds, insurance companies and mutual fund firms that invest in bonds backed by commercial mortgages also have an interest in seeing problems resolved or put off. A wave of foreclosures would lower the value of their securities.Many of the mortgages that analysts are most worried about involve buildings in Chicago, Los Angeles, New York, San Francisco and Washington — cities where there is a glut of vacant space or where workers are reluctant to return to offices.One such property is the 108-story Willis Tower in Chicago — the third-tallest building in the country, after One World Trade Center and Central Park Tower, both in Manhattan. The giant private equity firm Blackstone bought it for about $1.3 billion in 2015 and committed to spending $500 million on renovating the 50-year-old building, formerly the Sears Tower, including adding retail space and a rooftop terrace.But in December, United Airlines, the building’s largest tenant, paid an early termination fee and vacated three floors; the company still occupies 16 floors. That month, about 83 percent of the building was occupied, according to KBRA Analytics, a credit data and research firm. Blackstone disputes those numbers; Jeffrey Kauth, a company spokesman, said that “approximately 90 percent of the office space is leased.”Blackstone recently notified some of its real estate fund investors that it had written down the value of its equity investment in Willis Tower by $119 million, or 29 percent, said a person briefed on the matter, who spoke on the condition of anonymity to discuss sensitive financial information. In March, Blackstone got a fourth extension on the $1.33 billion mortgage, pushing the due date to next year, according to Trepp. Under the terms of the loan, the firm can seek another one-year extension next year.The loan on the Gas Company Tower in downtown Los Angeles is in default.Tag Christof for The New York TimesA loan default sets up 777 Tower for potential foreclosure or sale.Tag Christof for The New York TimesBlackstone said only around 2 percent of the firm’s real estate funds were invested in office buildings — down a lot from a decade ago.Even streets with some of the priciest real estate in the country are not immune.In Manhattan, the owner of 300 Park Avenue, an office building across the street from the Waldorf Astoria, is seeking a two-year extension on a $485 million loan coming due in August, according to KBRA Analytics. The property is owned by a joint venture including Tishman Speyer and several unnamed investors.The 25-story building, built in 1955, is the headquarters for Colgate-Palmolive. But the consumer products conglomerate is shrinking its presence there.“We requested that our loan be transferred to the special servicer well in advance of its maturity so that we can work together on a mutually beneficial extension,” said Bud Perrone, a spokesman for Tishman Speyer.Portions of a bond deal that includes the 300 Park Avenue loan were downgraded last fall by Fitch Ratings because some tenants had left the building, and a lower-rated slice of the bond now trades at about 85 cents on the dollar.Across the country, an investment fund connected to the real estate giant Brookfield Properties defaulted on $750 million of loans for the Gas Company Tower and a nearby building, 777 Tower, in downtown Los Angeles, setting up a possible foreclosure or a sale of the properties, according to the fund.Andrew Brent, a spokesman for Brookfield, said in an emailed statement that office buildings suffering financial challenges were “a very small percentage of our portfolio.”Even as building owners struggle with vacancies and high interest rates, some have found a way to put their properties on a more solid footing.The owners of the Seagram Building in Manhattan have been working to refinance a portion of a loan that comes due in May.Haruka Sakaguchi for The New York TimesNew tenants are needed to fill several floors that Wells Fargo occupied in the Seagram Building.Haruka Sakaguchi for The New York TimesRFR Holding, an investment group that bought the Seagram Building in 2000, is trying to lure tenants back to the office.Haruka Sakaguchi for The New York TimesThe owners of the Seagram Building at 375 Park Avenue in Manhattan have been working to refinance a $200 million portion of a loan that comes due in May while finding new tenants to fill several floors previously occupied by Wells Fargo.RFR Holding, an investment group led by Aby J. Rosen and Michael Fuchs, bought the 38-story building in 2000 for $379 million. To entice employees back to the office, RFR last year built a $25 million “playground” in an underground garage that’s equipped with a climbing wall and pickleball and basketball courts. Four new tenants signed leases in the past few months, according to Trepp.Even with all the vacant space, some landlords like Mr. Rechler’s RXR still want to build new towers. RXR is moving ahead with plans to build what could be one of the tallest buildings in the country at 175 Park Avenue.“It’s one of a kind in what is and will always be one of the best office markets in the world,” he said, referring to the tower. More

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    Russian Pranksters Trick the Fed Chair, Based on Internet Videos

    Videos circulating online show Jerome H. Powell, the Federal Reserve chair, answering basic questions about the American and global economy.WASHINGTON — Pranksters posing as Ukraine’s president tricked Jerome H. Powell, the Federal Reserve chair, into a conversation in January about the U.S. and global economy, based on video clips covered on Russian state television and posted online.The footage shows Mr. Powell answering an interviewer’s questions on a video call, apparently thinking that he is talking to Volodymyr Zelensky, Ukraine’s leader. The ruse appears to have been carried out by Vladimir Kuznetsov and Alexei Stolyarov, pranksters who are supporters of President Vladimir V. Putin of Russia.The clips — now circulating on the internet — were earlier reported on by Bloomberg News. They show Mr. Powell answering questions about central banking and inflation. His comments appear to be in line with what he regularly expresses in public.A Fed spokesperson said Mr. Powell participated in a conversation in January with someone who misrepresented himself as the Ukrainian president, noting that the discussion took place in the context of the central bank’s support for the Ukrainian people. The spokesperson said no sensitive or confidential information was discussed.The video appears to have been edited, and the Fed said it could not confirm its accuracy. The matter has been referred to law enforcement, the spokesperson said.The two men who carried out the prank have also tricked other global leaders, including Christine Lagarde, the president of the European Central Bank, and Angela Merkel, Germany’s former chancellor.An E.C.B. spokesperson said Ms. Lagarde had agreed to the conversation in good faith, and to show support for Ukraine and its people.The Fed-related video was posted on Rutube, a Russian video hosting platform, and covered by Russian state-run television and news agencies. Mr. Kuznetsov and Mr. Stolyarov posted excerpts from the call on their social media page, and dedicated a special episode of a show that they host to it.The clips show Mr. Powell discussing a number of challenges facing the American economy — including rapid inflation and the possibility of a recession. In the clips, he acknowledges that an economic downturn is possible or even likely, but that it is necessary to cool the economy and slow price increases. That is consistent with what the Fed chair has said in testimony and speeches.Fed officials are now in their pre-meeting quiet period, during which officials avoid speaking publicly in the run-up to an interest rate decision. They will meet next week and release a rate decision on Wednesday, after which Mr. Powell will hold a news conference.Oleg Matsnev More

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    Biden Faces His First Big Choice on Debt Limit

    After Republicans passed a bill that pairs spending cuts and fossil fuel support with raising the nation’s borrowing cap, the president must decide when and how to negotiateWASHINGTON — This week’s vote by House Republicans to couple deep spending cuts with an agreement to raise the debt limit for one year has put President Biden on the defensive, forcing him to confront a series of potentially painful choices at a perilous economic moment.Mr. Biden has long maintained that he would not negotiate spending cuts or other efforts to reduce the federal debt as part of discussions over raising the nation’s debt limit, which must be raised in order for the United States to keep borrowing money to pay its bills.But business groups, fiscal hawks and some congressional Democrats are calling on Mr. Biden to begin negotiating in earnest toward a deal that would avoid a default on the debt, which could come as soon as June or July.Mr. Biden and his aides now must choose how quickly to engage with Speaker Kevin McCarthy of California — along with Senator Chuck Schumer, Democrat of New York, the majority leader; Senator Mitch McConnell of Kentucky, the minority leader; and Representative Hakeem Jeffries of New York, the House minority leader — and on what terms.The president faces a cascading set of decisions as the nation, which has already bumped up against its $31.4 trillion debt limit, barrels toward default. He will need to find what, if any, common ground on spending cuts he has with Republicans, who do not share his preference for reducing the nation’s debt path largely by raising taxes on corporations and the rich. He will need to determine if he is prepared to sign any debt limit increase that is attached to conditions demanded by House conservatives.Ultimately, he may need to decide how aggressively to intervene in the delicate politics of House leadership. A potential debt-limit agreement could spur revolt by Mr. McCarthy’s most restless members, who laid the groundwork for the current brinkmanship when they held out against Mr. McCarthy’s ascension to the speaker’s gavel and retain the power to try to push him out.As administration officials describe it, they are all complicated choices. Mr. Biden and his aides do not want to encourage Republicans to habitually threaten economic collapse under Democratic presidents — and only under Democratic presidents — by allowing them to extract concessions to raise the limit now. They also recognize that a recession set off by default would hammer American families just as Mr. Biden is ramping up his re-election campaign, a dangerous scenario for an unpopular incumbent no matter which party voters blame for the default.House Speaker Kevin McCarthy after the House passed the debt limit bill.Kenny Holston/The New York TimesSome of Mr. Biden’s next steps are clear. To the chagrin of some House conservatives, there was no scenario in which the president would sign the bill that barely cleared the chamber on Wednesday. Along with raising the limit, it included spending cuts, new supports for oil and gas drilling and the near-total reversal of Mr. Biden’s signature law meant to fight climate change.“The president has made clear this bill has no chance of becoming law,” Karine Jean-Pierre, the White House press secretary, said on Wednesday after the vote. “In our history, we have never defaulted on our debt or failed to pay our bills. Congressional Republicans must act immediately and without conditions to avoid default.”But that does not mean Mr. Biden will be able to maintain his current posture toward Mr. McCarthy indefinitely. Administration officials have pushed business groups to pressure Republicans to pass a no-strings debt limit increase. But on Wednesday, leading business lobby groups, including the U.S. Chamber of Commerce and the Business Roundtable, lauded the House passage of the bill and called on Mr. Biden to engage.“Failing to raise the debt limit would trigger a strong market reaction with severe economic consequences, likely including widespread job losses, decimated retirement savings and serious hardship for millions of American families,” said Joshua Bolten, president and chief executive of the Business Roundtable. The group, he said, “is hopeful that today’s vote in the House will jump-start negotiations between Congress and the Biden administration on a bipartisan deal that takes default off the table and begins the hard work of dealing with our deficits and debt.”White House officials concede that Mr. Biden will have to convene negotiations with congressional leaders over taxes, spending and debt before the government runs out of money to pay its bills. In recent days, the president has suggested an openness to talk fiscal issues with Republicans, with the wink-nod stipulation that they have nothing to do with the borrowing limit.“I’m happy to meet with McCarthy, but not on whether or not the debt limit gets extended,” Mr. Biden told reporters at the White House on Wednesday. “That’s not negotiable.”Mr. Biden still sees his position in any fiscal talks, and the public debate around them, as a political winner. In the early months of this year, he demonized Republican plans that included cuts to safety-net programs and forced Mr. McCarthy to make Social Security and Medicare — the two largest drivers of federal spending growth in the years to come — untouchable in the Republican bill.More recently, officials across the administration have blasted the Republican bill for potentially cutting spending on popular programs for veterans, students and more. They are able to do that because the bill does not specify where the bulk of its spending reductions would come from, leaving the task to future congressional appropriators.In a White House memo obtained this week by The New York Times, officials sketch out what they believe Republicans would have to cut in order to satisfy the spending caps in their legislation, while keeping military spending intact. Over a decade, the reductions would include $500 billion for veterans’ health care, $300 billion from scientific and other research and $100 billion from the early childhood education program Head Start.Some administration officials privately suggest that a more modest version of spending caps, lasting for a few years at most, could plausibly form the centerpiece of an agreement to continue funding the government and raise the borrowing limit. Some business groups agree, though they would also like to see lawmakers add in a bipartisan effort to streamline government permitting for fossil fuels, clean energy and other projects, which they say would enhance economic growth.But many House Republicans appear in no mood to move from the bill that passed with only one vote to spare on Wednesday, raising the possibility that a deal with smaller spending cuts would need a combination of Republican and Democratic votes to pass the House — and potentially set off an effort by conservatives to depose Mr. McCarthy as speaker.Representative Ralph Norman of South Carolina, and a member of the Freedom Caucus, emerged from a closed-door briefing on the legislation ahead of the vote on Wednesday demanding that Republicans refuse to take anything less than their opening offer.“I wanted double what was in there,” Mr. Norman said. “I agreed to vote for it because that starts the ball and gets us in the arena to solve the debt problem. Now I’m not interested in anything coming back, anything but what we voted on.”Catie Edmondson More

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    U.S. GDP rose at a 1.1% pace in the first quarter as signs build that the economy is slowing

    Gross domestic product rose at a 1.1% annualized pace in the first quarter, below the 2% estimate.
    Slumping inventories and a general decline in private investment held back early year gains.
    Inflation was higher than expected in the quarter, with the PCE price index rising 4.2% against the 3.7% estimate.

    Customers walk through a shopping mall on March 15, 2023 in Chicago, Illinois. Retail sales slipped 0.4 percent in February after being up more than 3 percent in January. 
    Scott Olson | Getty Images

    Growth in the U.S. slowed considerably during the first three months of the year as interest rate increases and inflation took hold of an economy largely expected to decelerate even further ahead.
    Gross domestic product, a measure of all goods and services produced for the period, rose at a 1.1% annualized pace in the first quarter, the Commerce Department reported Thursday. Economists surveyed by Dow Jones had been expecting growth of 2%.

    The growth rate followed a fourth quarter in which GDP climbed 2.6%, part of a year that saw a 2.1% increase.
    The report also showed that the personal consumption expenditures price index, an inflation measure that the Federal Reserve follows closely, increased 4.2%, ahead of the 3.7% estimate. High inflation and slow growth is sometimes described as “stagflation,” which characterized the late 1970s and early ’80s U.S. economy.
    Stocks initially reacted little to the report, with major indexes pointing to a higher open. Treasury yields increased.
    The slowdown in growth came due to a decline in private inventory investment and a deceleration in nonresidential fixed investment, the report said. The inventory slowdown took 2.26 percentage points off the headline number.
    Consumer spending as measured by personal consumption expenditures increased 3.7% and exports were up 4.8%. Gross private domestic investment tumbled 12.5%.

    “The U.S. economy is likely at an inflection point as consumer spending has softened in recent months,” said Jeffrey Roach, chief economist at LPL Financial. “The backward nature of the GDP report is possibly misleading for markets as we know consumers were still spending in January but since March, have pulled back as consumers are getting more pessimistic about the future.”
    In other economic news Thursday, jobless claims totaled 230,000 for the week ended April 22, a decline of 16,000 and below the estimate for 249,000.
    The GDP report comes as the Federal Reserve is seeking to slow an economy burdened by inflation that had been running at its highest level in more than 40 years.
    In a policy tightening regime that began in March 2022, the central bank has raised its benchmark interest rate by 4.75 percentage points, taking it to the highest level in nearly 16 years. Though inflation has pulled back some from its peak around 9% in June 2022, it remains well above the Fed’s 2% goal. Policymakers all say inflation is still too high and will require elevated interest rates.
    At the same time, growth has taken a hit from troubles in the banking sector that are likely to infect the economy ahead. Those two issues – the Fed’s rate hiking cycle and an expected credit crunch ahead – are expected to tilt the economy into recession later this year.
    Consumers, though, have remained resilient and are expected to use excess savings and purchasing power to make the economic contraction short and shallow. A strong jobs market, with an unemployment rate at 3.5%, also is expected to underpin growth. More