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Federal Reserve Raises Interest Rate for the Fourth Time in 2022
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Evelyn Reynolds
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Fed hikes interest rates by 0.75 percentage point for second consecutive time to fight inflation
The Federal Reserve on Wednesday enacted its second consecutive 0.75 percentage point interest rate increase, taking its benchmark rate to a range of 2.25%-2.5%.
Chair Jerome Powell said there will be a point where the Fed starts to slow hikes to assess their impact.
“We actually think we need a period of growth below potential in order to create some slack,” he said.The Federal Reserve on Wednesday enacted its second consecutive 0.75 percentage point interest rate increase as it seeks to tamp down runaway inflation without creating a recession.In taking the benchmark overnight borrowing rate up to a range of 2.25%-2.5%, the moves in June and July represent the most stringent consecutive action since the Fed began using the overnight funds rate as the principal tool of monetary policy in the early 1990s.
While the fed funds rate most directly impacts what banks charge each other for short-term loans, it feeds into a multitude of consumer products such as adjustable mortgages, auto loans and credit cards. The increase takes the funds rate to its highest level since December 2018.Markets largely expected the move after Fed officials telegraphed the increase in a series of statements since the June meeting. Stocks hit their highs after Fed Chair Jerome Powell left the door open about its next move at the September meeting, saying it would depend on the data. Central bankers have emphasized the importance of bringing down inflation even if it means slowing the economy.“As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation,” Powell said.
In its post-meeting statement, the rate-setting Federal Open Market Committee cautioned that “recent indicators of spending and production have softened.””Nonetheless, job gains have been robust in recent months, and the unemployment rate has remained low,” the committee added, using language similar to the June statement. Officials again described inflation as “elevated” and ascribed the situation to supply chain issues and higher prices for food and energy along with “broader price pressures.”
Powell said he does not think the economy is in recession, though growth was negative in the first quarter and was expected to be barely positive in the second quarter.
“Think about what a recession is. It’s a broad-based decline across many industries that’s sustained more than a couple of months. This doesn’t seem like that now,” he said. “The real reason is the labor market has been such a strong signal of economic strength that it makes you question the GDP data.”
The rate hike was approved unanimously. In June, Kansas City Fed President Esther George dissented, advocating a slower course with a half percentage point increase.Arrows pointing outwards
The increases come in a year that began with rates floating around zero but which has seen a commonly cited inflation measure run at 9.1% annually. The Fed aims for inflation around 2%, though it adjusted that goal in 2020 to allow it to run a bit hotter in the interest of full and inclusive employment.
Powell said the Fed is “strongly committed” to reducing inflation and said that could come with a cost to general economic growth and the labor market in particular.
“We think it is necessary to have growth slow down. Growth is going to be slowing down this year for a couple of reasons,” he said. The economy, he added, probably will grow below its long-run trend for a period of time. “We actually think we need a period of growth below potential in order to create some slack.”
In June, the unemployment rate held at 3.6%, close to full employment. But inflation, even by the Fed’s standard of core personal consumption expenditures, which was at 4.7% in May, is well off target.The efforts to bring down inflation are not without risks. The U.S. economy is teetering on the brink of a recession as inflation slows consumer purchases and dents business activity.First-quarter GDP declined by 1.6% annualized, and markets were bracing for a reading on the second quarter to be released Thursday that could show consecutive declines, a widely used barometer for a recession. The Dow Jones estimate for Thursday’s reading is for growth of 0.3%.Along with rate increases, the Fed is reducing the size of asset holdings on its nearly $9 trillion balance sheet. Beginning in June, the Fed began allowing some of the proceeds from maturing bonds to roll off.The balance sheet has declined just $16 billion since the beginning of the roll-off, though the Fed set a cap of up to $47.5 billion that potentially could have been wound down. The cap will rise through the summer, eventually hitting $95 billion a month by September. The process is known in markets as “quantitative tightening” and is another mechanism the Fed uses to impact financial conditions.Along with the accelerated balance sheet runoff, markets expect the Fed to raise rates at least another half percentage point in September. Traders Wednesday afternoon were assigning about a 53% chance the central bank would go even further, with a third straight 0.75 percentage point, or 75 basis points, increase in September, according to CME Group data.The FOMC does not meet in August, but officials will gather in Jackson Hole, Wyoming, for the Fed’s annual retreat.Markets expect the Fed to start cutting rates by next summer, even though committee projections released in June show no cuts until at least 2024.Multiple officials have said they expect to hike aggressively through September then assess what impact the moves were having on inflation. Despite the increases — totaling 1.5 percentage points between March and June — the June consumer price index reading was the highest since November 1981, with the rent index at its highest level since April 1986 and dental care costs hitting a record in a data series going back to 1995.The central bank has faced critics, both for being too slow to tighten when inflation first started to accelerate in 2021, and for possibly going too far and causing a more severe economic downturn.Sen. Elizabeth Warren, D-Mass., told CNBC on Wednesday that she worried the Fed hikes would pose economic danger to those at the lowest end of the economic spectrum by raising unemployment.
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Pending home sales fell 20% in June versus a year earlier as mortgage rates soared
Signed contracts to purchase existing homes dropped 20% in June compared with the same month a year ago, the National Association of Realtors said.
Pending home sales also fell a wider-than-expected 8.6% in June from May. Economists polled by Dow Jones had predicted a 1% drop. The decline coincided with mortgage rates soaring to over 6% last month.
The NAR is now forecasting total sales for this year will be down 13%, but that they should start to rise in early 2023.A “Sale Pending” sign outside a house in Discovery Bay, California, on Thursday, March 31, 2022.
David Paul Morris | Bloomberg | Getty ImagesSigned contracts to purchase existing homes dropped 20% in June compared with the same month a year ago, the National Association of Realtors said Wednesday.
That is the slowest pace since September 2011, with the exception of the first two months of the coronavirus pandemic lockdowns, when sales plunged briefly and then rebounded sharply.On a monthly basis, pending home sales fell a wider-than-expected 8.6% in June. A Dow Jones survey of economists had predicted a 1% drop.
The steep declines coincided with a sharp jump in mortgage interest rates. The average on the 30-year fixed loan crossed over 6% in the middle of June, according to Mortgage News Daily. It started the year around 3%. Those high rates and inflation in the general economy are hitting buyer sentiment hard.“Contract signings to buy a home will keep tumbling down as long as mortgage rates keep climbing, as has happened this year to date,” said Lawrence Yun, chief economist for NAR. “There are indications that mortgage rates may be topping or very close to a cyclical high in July. If so, pending contracts should also begin to stabilize.”
The drop in sales was widespread, with the South and West seeing the worst of it. In the Northeast, pending sales fell 6.7% compared with May and were down 17.6% from June 2021. Sales were off 3.8% for the month in the Midwest and down 13.4% annually.
In the South, sales declined 8.9% monthly and 19.2% from the previous year. The results were worst in the West as sales tumbled 15.9% monthly and 30.9% from June 2021.Another report on sales of newly built homes in June, which are also counted by signed contracts, showed a similar drop, according to the U.S. Census. Builders are now offering more incentives to offload rising inventory, although prices are still higher than they were a year ago.
The NAR is now forecasting total sales for this year will be down 13%, but that they should start to rise in early 2023. But that upbeat forecast does depend on mortgage rate levels.
“Looking ahead, a slowdown in economic activity and pullback in business investments could lead to a moderation in the pace of mortgage rate gains, as investors shift allocations toward the safety of bonds,” said George Ratiu, senior economist at Realtor.com. “Combined with the increase in housing supply, we could see improved opportunities for homebuyers later in the year.”WATCH LIVEWATCH IN THE APP More
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Mortgage demand declines further, even as interest rates drop a bit
Applications for a loan to purchase a home fell 1% for the week, and were 18% lower than the same week one year ago.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased last week to 5.74% from 5.82%.
Demand for mortgage refinances are down 83% from a year ago.A prospective home buyer is shown a home by a real estate agent in Coral Gables, Florida.
Joe Raedle | Getty ImagesMortgage demand edged lower for the fourth straight week, according to data released Wednesday, even though interest rates have fallen from their recent highs.
Total volume was down 1.8% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.Applications for a loan to purchase a home fell 1% for the week but were 18% lower than the same week one year ago. More supply is coming onto the housing market, as competition cools among buyers. But prices and rates are still high, and inflation is weakening consumer confidence.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) decreased to 5.74% from 5.82%, with points falling to 0.61 from 0.65 (including the origination fee) for loans with a 20% down payment.Read more real estate coverage
“Increased economic uncertainty and prevalent affordability challenges are dissuading households from entering the market, leading to declining purchase activity that is close to lows last seen at the onset of the pandemic,” said Joel Kan, an economist at the Mortgage Bankers Association.
There could be “a potential silver lining” for the market, he added, as stabilizing mortgage rates and rising inventory “may bring some buyers back to the market during the second half of the year.”
Applications to refinance a home loan fell another 4% for the week and were 83% lower than the same week one year ago. The average rate on the 30-year fixed mortgage was 3.01% a year ago. Most borrowers have already refinanced to far lower rates than exist today. The refinance share of mortgage activity decreased to 30.7% of total applications from 31.4% the previous week.
All eyes and ears are now on the Federal Reserve, which is widely expected to increase its benchmark lending rate Wednesday at its latest meeting of the Federal Open Market Committee.
While mortgage rates do not follow the federal funds rate, they will respond to any commentary from Fed Chairman Jerome Powell after the meeting.WATCH LIVEWATCH IN THE APP More
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How Will Interest Rate Increases Impact Inflation?
The Federal Reserve is raising interest rates to fight inflation. Some economists want more; some politicians want less. What’s the logic?The Federal Reserve is expected to announce its fourth interest rate increase of 2022 on Wednesday as it races to tamp down rapid inflation. The moves have a lot of people wondering why rate increases — which raise the cost of borrowing money — are America’s main tool for cooling down prices.Senator Elizabeth Warren, the Massachusetts Democrat, wrote an opinion piece in The Wall Street Journal on Sunday arguing that the Fed’s demand-crushing rate increases are not the right policy to fight today’s inflation as fuel costs and supply chain turmoil push up prices. The policies will hurt workers, she said, and “it doesn’t have to be this way.”Others have argued that the Fed should continue to be forceful. Lawrence H. Summers, the former Democratic Treasury secretary, argued during an interview on CNN this week that the Fed needed to take “strong action” to control inflation and that allowing inflation to gallop out of control would be the “bigger mistake” than causing a recession.Onlookers could be excused for struggling to make sense of the debate. Fed officials themselves acknowledge that their tools are blunt, that they cannot fix broken supply chains and that it will be difficult to slow the economy enough without causing an economic downturn. So why is the Fed doing this?America’s central bank has for decades been what Paul Volcker, its chair in the 1980s, called “the only game in town” when it comes to fighting inflation. While there are things that elected leaders can do to combat rising prices — raising taxes to curb consumption, spending more on education and infrastructure to improve productivity, helping flailing industries — those targeted policies tend to take time. The things that elected policymakers can do quickly generally help mainly around the edges.But time is of the essence when it comes to controlling inflation. If price increases run fast for months or years on end, people begin to adjust their lives accordingly. Workers might ask for higher wages, pushing up labor costs and prompting businesses to charge more. Companies might begin to believe that consumers will accept price increases, making them less vigilant about avoiding them.By making money more expensive to borrow, the Fed’s rate moves work relatively quickly to temper demand. As buying a house or a car or expanding a business becomes pricier, people pull back from doing those things. With fewer consumers and companies competing for the available supply of goods and services, price gains are able to moderate.Unfortunately, that process could come at a hefty cost at a moment like this one. Bringing the economy into balance when supply is constrained — cars are hard to find because of semiconductor shortages, furniture is on back order, and jobs are more plentiful than laborers — could require a big decline in demand. Slowing the economy down that meaningfully could tip off a recession, leaving workers unemployed and families with lower incomes.Economists at Goldman Sachs, for example, estimate that the probability of a recession over the next two years is 50 percent. Already, signs abound that the economy is slowing as the Fed begins to push rates higher, with overall growth data, housing market trackers and some metrics of consumer spending showing a pullback.But central bankers believe that even if the risks are difficult to bear, they are necessary. A downturn that pushes unemployment higher would undoubtedly be painful, but inflation is also a major impediment for many families today. Getting it under control is critical to putting the economy back on a sustainable path, officials argue.“It is essential that we bring inflation down if we are to have a sustained period of strong labor market conditions that benefit all,” Jerome H. Powell, the Fed chair, said at his news conference last month. More
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How U.S. Inflation Expectations Are Being Shaped by Consumer Choices
How Bacon and Costco Fish Shape America’s View of InflationEconomic policymakers are razor focused on inflation expectations after more than a year of rapid price increases. Consumers explain how they’re thinking about rising costs.Jeanna Smialek and July 27, 2022Inflation started in the bacon aisle for Dan Burnett, a 58-year-old former medical center administrator who lives in Margaretville, N.Y.Last summer, he began to notice that the breakfast staple was increasing sharply in price, jumping to $10 from $8 per pack at his local grocer. Before long, a wide variety of food products were more expensive — so many that he began driving 45 miles to shop at Aldi and Walmart, hoping to score better deals. This summer, it seems that inflation is across the board, pushing up prices on brake repair, hotel rooms and McDonald’s fries.“My biggest fear is that they don’t get it under control, and that it just persists,” Mr. Burnett said. He is thinking about how he might have to reshape his financial future in a world where prices — which had long increased at a rate of 2 percent or less per year — now climb by considerably more.“Once people get this mind-set of ‘You can increase prices and people will just pay it,’ you’re off to the races.” Dan BurnettPeople like Mr. Burnett, who is beginning to believe that America’s price burst might last, are the Federal Reserve’s biggest fear. If consumers and companies expect fast inflation to be a permanent feature of the American economy, they might begin to shift their behavior in ways that cause prices to keep rising. Consumers might begin to accept price increases without shopping around, workers might demand higher pay to cover climbing costs, and businesses might raise prices both to cover their higher labor bills and because they think customers will stomach the heftier price tags.Economists often blame that sort of spiraling inflationary mind-set for fueling rapid price gains in the 1970s and 1980s, a painful episode in which inflation proved difficult to tame. That is why the Fed, which is responsible for keeping inflation under control, has been focusing on a range of inflation expectation measures, hoping that a high-price psychology is not taking hold.Most signs suggest that people still believe that inflation will fade with time. But interpreting inflation expectations is more art than science: Economists disagree about which metrics matter, how to measure them and what could make them change. And after more than a year of rapid price increases, central bank officials are increasingly worried that it’s foolish to take the stability of price expectations for granted. Officials have been rapidly raising interest rates to try to cool the economy and send a signal to the public that they are serious about wrestling price increases lower.“There’s a clock running here, where we have inflation running now for more than a year,” Jerome H. Powell, the Fed chair, said recently. “It would be bad risk management to just assume those longer-term inflation expectations would remain anchored indefinitely in the face of persistent high inflation. So we’re not doing that.”Central bankers closely watch measures including the University of Michigan’s longer-term inflation outlook survey as they try to judge whether expectations remain under wraps. Those have moved up since 2020, but have not jumped by as much as actual inflation. Still, those trackers show only where expectations are today. They say little about when they might change or what might shift them. To get a more detailed, qualitative sense of how consumers are thinking about inflation, The New York Times asked readers what costs were sticking out to them, how much inflation they expected and how they were forming that opinion. The takeaway: While many people still expect inflation to ease with time, that assumption is a fragile one as many Americans experience the fastest inflation of their adult lives across a broad range of goods and services.Grocery and gas prices are weighing heavily on many people’s minds, consistent with research about how consumers form price expectations. But the particular products raising eyebrows vary widely and expand beyond just food and gas.Guitars, rent and pedicures are getting more expensive in California. Artisan crafts are commanding higher prices in New Mexico.Pedicures are getting more expensive in California.People are coping with the climbing costs in a range of ways. Many said they were cutting consumption, which could help inflation to ease by lowering demand and giving supply a chance to catch up. A few were continuing to buy, hoping that costs would moderate with time. But others were asking for more pay or trying to find other ways to cover their climbing costs while resigning themselves to increasing prices.For Siamac Moghaddam, a 37-year-old who is in the Navy and lives in San Diego, dealing with inflation has been less about cutting down on little things — like the pedicures he enjoys getting, since he is in boots all the time — and more about saving on big expenses, like rent. His landlord recently raised his apartment rent by $200, so he moved out of his two bedroom and into a one bedroom.“Everyone’s adjusting,” he said. He thinks the Fed’s rate increases will bring inflation under control, though in the process, “I think we’re going to suffer economically.”Robert Liberty, 68 and from Portland, Ore., is trying to save on food and travel.“I reached for an avocado in the store, and I jerked back my hand like it was about to be burned when I saw the price — it was $5.50 per avocado,” said Mr. Liberty, a part-time lawyer and consultant whose husband works full time. He thinks inflation will moderate, though he’s unsure how much. For now, an avocado, he said, is “one thing we can do without.”“I quit Starbucks. I had to. I just didn’t feel like that was justifiable. It’s like a small car payment.” Fontaine WeymanFontaine Weyman, a 43-year-old songwriter from Charleston, S.C., is more toward the middle of the inflation-expectations range. Ms. Weyman delivers for Instacart and, with her husband, has a household income of around $80,000. Starbucks has always been her personal indulgence, but she’s cutting it out.“It’s $6.11 for just a Venti iced coffee with a little bit of cold foam on top — that’s like $180 a month,” Ms. Weyman said. While she still believes inflation will fade with time, she and her husband are thinking about how to increase their household income in case it doesn’t.“We know that he’ll most likely get a 5 to 10 percent raise anyway in March, but I’ve asked him to ask for 15 percent,” she said.That pattern — cutting back and hoping for the best but also planning for a possible higher-inflation future — is the one Susan Hsieh is embracing as she watches costs at Costco climb. Ms. Hsieh lives in Armonk, N.Y., with her husband and two teenage children, and has cut back on buying frozen Chilean sea bass fillets as they jump sharply in price, which is sad news for her family.“That fish is really tasty,” she said.Chilean sea bass has become more expensive at Costco.Rising costs across goods and services have also prompted Ms. Hsieh, who works at a branch of the United States Treasury, to ask for higher pay this year. She knew the 2.2 percent raise she was going to get as a typical cost-of-living adjustment was not going to keep up with inflation. She ended up just shy of a 5 percent raise.“I think I’m going to ask again,” she said of her salary negotiation this coming year, assuming inflation sticks around.Mr. Burnett, buyer of bacon, might offer the clearest illustration of why expectations for faster inflation could spell trouble for the Fed if they begin to take hold in earnest. For him, the breadth of today’s price changes makes it hard to believe that inflation will fade soon.Mr. Burnett, who is retired, is thinking about adapting his life accordingly. He co-owns a condominium in Florida with his sister, and maintenance fees on the unit are going up. Though he rents the condo to tenants for only part of the year, he’s likely to pass the full increase onto them.He likes the tenants and doesn’t want to raise rents by so much that he pushes them out, but he could also see himself and his sister charging even more if they notice that neighboring landlords are pushing prices higher.“I really want to make sure that I’m maximizing income,” he said, given the inflation. And he thinks other people will do the same, which is what makes him think inflation is unlikely to fade soon. “Once people get this mind-set of ‘You can increase prices and people will just pay it,’ you’re kind of off to the races.” More
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Here's how to know if we're in a recession, and it's not what you think
Most people think that back-to-back negative GDP quarters constitute a recession, but that’s not the case.
The National Bureau of Economic Research is the official arbiter of recessions, and uses multiple other factors in making its determination.
“The NBER would be laughingstocks if they said we had a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economic and Policy Research.Everyone who cares knows that recessions happen when there are two consecutive quarters of negative growth — everyone, that is, except for the people who actually decide when the economy is in recession.
For those folks, at the National Bureau of Economic Research, the definition of recession is much squishier.Officially, the NBER defines recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The bureau’s economists, in fact, profess not even to use gross domestic product, the broadest measure of activity, as a primary barometer.
People shop in a supermarket as inflation affected consumer prices in New York City, June 10, 2022.
Andrew Kelly | ReutersThat’s important, because data coming Thursday could indicate the U.S. saw its second straight negative-growth period in the second quarter. Even though every period since 1948 of two consecutive negative quarters has coincided with a recession, that may not happen this time.
Why? It’s complicated.
“The NBER would be laughingstocks if they said we had a recession when we were creating 400,000 jobs a month,” said Dean Baker, co-founder of the Center for Economic and Policy Research. “I can’t even imagine they would think for a second that we’re in a recession.”
Indeed, nonfarm payrolls grew an average 457,000 a month during the first six months of the year, hardly conditions associated with an economic downturn. Moreover, there are 11.3 million job openings and just 5.9 million available workers to fill them, indicating hiring should continue to be strong.The case for recession
But there have been downsides as well.
Consumer spending on a dollar level has been solid, but when adjusted for a 40-year high for inflation it has been much less so. The U.S. trade deficit hit a record high in March, another negative for GDP. Inventories have lagged, which also hurts growth as it is measured by the Bureau of Economic Analysis.
To the public, though, these are just details left for economists to figure out. If the second-quarter GDP number comes in negative, and journalists and the White House don’t call a recession, it’s bound to spark confusion and perhaps some anger from those who have been hit by surging inflation and a clear slowdown in aspects of the economy.
After all, there are a lot of things that are making it feel like a recession from sky-high prices, widespread product shortages and warnings from companies like Walmart that profits are shrinking due to changing consumer habits, just to name three.
The first quarter saw GDP contract 1.6%, and the Atlanta Federal Reserve’s real-time tracker is indicating the same decline for Q2.
“I think it’s still just a game of semantics. The trajectory of the economy is clearly lower, whether we’re going to define it as [a recession] or not,” said Peter Boockvar, chief investment officer at the Bleakley Advisory Group. “If anything, the third quarter is going to show further weakness. So you could have three quarters in a row of contraction for GDP. Does that technically mean we’re in a recession?”The criteria
For its part, the Cambridge, Massachusetts-based NBER is a bit of a shadowy group, meeting in private and not making recession calls generally months after they begin, and sometimes not until well after they’ve ended. Its most recent call came from the Covid-19 downturn, which it said began in February 2020 and ended two months later.
Still, the government and most business news outlets take the NBER’s rulings as gospel when determining expansions and contractions.
The organization is generally thought to use six factors: real personal income minus transfer payments, nonfarm payrolls, employment as gauged by the Bureau of Labor Statistics’ household survey, real personal consumption expenditures, sales adjusted for price fluctuations and industrial production.
The NBER did not reply to a CNBC request for comment.
“If this definition feels involved, it’s because it is,” Tim Quinlan, senior economist at Wells Fargo, said in a client note. “Defining a recession isn’t easy and extends beyond simply a downturn’s duration to how deep and widespread it is throughout the economy.”
Quinlan said the data points can be broken into four bigger groups: production, income, employment and spending.
“The economy has never been in recession when at least three NBER indicators rose during the month,” he said. “While we do not yet have real sales through May, nonfarm employment, real personal income less transfers and industrial production all rose during the month, suggesting the economy is not yet in recession.”
If the NBER does not call a recession anytime soon, the next question will be what is down the road.
Boockvar sees a recession as an inevitability, with the NBER declaration just a matter of timing. “I wouldn’t be surprised if their recession start date was a little bit later,” he said.
For all his optimism about first-half growth, Baker said he sees GDP coming in plus or minus 0.4%. After that, he acknowledges that there’s still a chance of a recession in the months ahead, though he thinks there’s a good chance the U.S. will avoid that fate.
Like many others, Baker fears that Federal Reserve interest rate increases aimed at controlling inflation and slowing the economy could overdo it and cause a downturn ahead.
But he’s sure that conditions from the first half do not point to a recession.
“Were we in a recession in the first half? That just makes zero sense,” Baker said. “The NBER people, I respect them as serious economists. There’s no way they’re going to say that’s recession.”WATCH LIVEWATCH IN THE APP More
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Kraken, a U.S. Crypto Exchange, Is Suspected of Violating Sanctions
The Treasury Department is investigating whether the crypto exchange allowed users in Iran to buy and sell digital tokens, said people with knowledge of the matter.Kraken, one of the world’s largest cryptocurrency exchanges, is under federal investigation, suspected of violating U.S. sanctions by allowing users in Iran and elsewhere to buy and sell digital tokens, according to five people affiliated with the company or with knowledge of the inquiry.The Treasury Department’s Office of Foreign Assets Control has been investigating Kraken since 2019 and is expected to impose a fine, said the people, who declined to be identified for fear of retribution from the company. Kraken would be the largest U.S. crypto firm to face an enforcement action from O.F.A.C. Sanctions against Iran, which the United States imposed in 1979, prohibit the export of goods or services to people or entities in the country.The federal government has increasingly cracked down on crypto companies, which are lightly regulated, as the market for digital currencies has grown. Tether, a stablecoin company, was fined by the Commodity Futures Trading Commission for misstatements about its reserves last year, while the Justice Department brought insider-trading charges this month against an ex-employee of Coinbase, the largest U.S. crypto exchange.Scrutiny of the industry has risen in recent months as the crypto market went into meltdown and several companies, such as Voyager Digital and Celsius Network, collapsed.Kraken, a private company valued at $11 billion that allows users to buy, sell or hold various cryptocurrencies, has previously faced regulatory actions. Last year, the C.F.T.C. levied a $1.25 million penalty against the company for a prohibited trading service.In an internal conversation about employee benefits in 2019, Jesse Powell, Kraken’s chief executive, suggested he would consider breaking the law in a wide range of situations if the advantages to the company outweighed potential penalties, according to messages seen by The New York Times. The company has also been dealing with internal conflict over issues including race and gender, which were stoked by Mr. Powell.Marco Santori, Kraken’s chief legal officer, said the company “does not comment on specific discussions with regulators.” He added, “Kraken closely monitors compliance with sanctions laws and, as a general matter, reports to regulators even potential issues.”A Treasury spokeswoman said the agency “does not confirm or comment on potential or ongoing investigations” and was committed to enforcing “sanctions that protect U.S. national security.”Sanctions are some of the most powerful tools the United States has to influence the behavior of nations it does not consider allies. But cryptocurrencies pose a threat to sanctions because the digital coins don’t flow through the traditional banking system, making the funds harder for the government to control.In October, the Treasury Department warned that cryptocurrencies “potentially reduce the efficacy of American sanctions.” It released a 30-page compliance manual that recommended cryptocurrency companies use geolocation tools to weed out customers in restricted regions.“The fact that crypto can move without a bank or intermediary means that exchanges are responsible for certain types of financial regulatory compliance,” said Hailey Lennon, a lawyer at Anderson Kill who handles regulatory issues in crypto. Kraken and the issue of sanctions surfaced in a November 2019 lawsuit by a former employee from the finance department, Nathan Peter Runyon, who accused the start-up of generating revenue from accounts in countries that were under sanctions. He said he had taken the matter to Kraken’s chief financial officer and top compliance official in early 2019, according to legal filings. (The suit was settled last year.)That same year, O.F.A.C. began investigating Kraken, focusing on the company’s accounts in Iran, the people familiar with the investigation said. Kraken’s customers have also opened accounts in Syria and Cuba, two other countries under U.S. sanctions, the people said. In 2020, O.F.A.C. fined BitGo, a digital wallet service with an office in Palo Alto, Calif., more than $98,000 in 2020 for 183 apparent sanctions violations. Last year, it fined BitPay, an Atlanta-based crypto payment processor, more than $500,000 for 2,102 apparent violations. Coinbase also disclosed in a 2021 financial filing that it had sent notices to O.F.A.C. flagging transactions that may have violated sanctions, though the agency hasn’t taken any enforcement action.Mr. Powell co-founded Kraken in 2011 and was an early proponent of Bitcoin, a digital currency that was marketed as being free of any government’s influence or regulation.In 2018, the New York attorney general’s office asked Kraken and 12 other exchanges to answer a questionnaire about their operations. Kraken refused to respond, with Mr. Powell calling New York “hostile to business” on Twitter.Kraken allows users to buy, sell or hold various cryptocurrencies.KrakenIn 2019, Mr. Powell got into an argument on Slack about parental leave at Kraken, according to messages viewed by The Times. Mr. Powell said parental leave was a burden for the company because a child “might as well be a second job, a distracting hobby or a harmful addiction” and “is something outside of work that has a negative impact on work.”The conversation soon shifted to a discussion of legal requirements. Mr. Powell said that in his “formula for everything,” it was important to consider whether it’s “worth the risk to not follow the legal requirement.” He added, “Not following the law would by default be ‘ill-advised,’ but it always has to be considered as an option.”Mr. Powell did not respond to an email requesting comment.This year, Mr. Powell was one of the loudest voices in the crypto industry resisting calls to shut down accounts in Russia after it invaded Ukraine. The United States has imposed sanctions on some individuals and businesses in Russia, but it hasn’t required crypto companies to cut off access to the country entirely.As of last month, Kraken appeared to still be servicing accounts in countries under sanctions, such as Iran, according to a spreadsheet that Mr. Powell posted to a companywide Slack channel to show where the company’s customers were. He said the data came from residence information listed on “verified accounts.”The spreadsheet said Kraken had 1,522 users with residences in Iran, 149 in Syria and 83 in Cuba, according to figures seen by The Times. The company also had more than 2.5 million users with residences in the United States and more than 500,000 in Britain. The spreadsheet was soon made unavailable to most employees. More
