Economy

In a political career spanning decades, Toomey represented Pennsylvania in the Senate from 2011 to 2023, serving on the Senate banking, housing, and urban affairs, budget, and finance committees.Toomey, a member of the Republican Party, previously served in the U.S. House of Representatives from 1999 to 2005, where he was a member of the house budget committee.The appointment comes at a turbulent time for private equity firms which have struggled over the past year due to stubbornly high inflation, rising interest rates and geopolitical turmoil that together weighed on sentiment and crimped lucrative exit from investments.Earlier in February, New York-based Apollo said its fourth-quarter adjusted net income rose 77% owing to strong earnings from its retirement services business, even as gains were partly offset by a steep decline in its PE portfolio.Shares in Apollo have rallied nearly 9% so far this year after closing 2022 down 12%. More

The main indexes shed more than 2% on Tuesday as investors interpreted a rebound in U.S. business activity in February to mean interest rates will need to stay higher for longer to control inflation.Minutes from the Fed’s Jan.31-Feb.1 meeting, expected at 2:00 p.m. ET (1900 GMT), is anticipated to detail the breadth of debate at the central bank over how much further interest rates may need to be raised to slow inflation.Following a market rout in 2022, the three major indexes logged monthly gains in January as investors hoped the Fed would pause its rate hikes and perhaps turn a corner in its monetary policy tightening around the year-end. However, stocks have had a volatile run in February as traders priced in higher interest rates for longer, considering inflation still remains above the 2% target in the face of a sturdy economy.Money market participants expect rates to peak at 5.35% by July and stay around those levels till the end of 2023.At 07:13 a.m. ET, Dow e-minis were up 26 points, or 0.08%, S&P 500 e-minis were up 2.5 points, or 0.06%, and Nasdaq 100 e-minis were up 12 points, or 0.1%.Among single stocks, Palo Alto Networks (NASDAQ:PANW) Inc rose 9.3% in premarket trading after the cybersecurity company raised its annual profit forecast. Rival Crowdstrike Holdings Inc gained 2%.U.S.-listed shares of Baidu Inc (NASDAQ:BIDU) advanced 6.6% after China’s e-commerce beat fourth-quarter revenue estimates and announced a new share repurchase program. CoStar Group (NASDAQ:CSGP) dropped 15.2% as the online real estate marketplace provider said it was no longer in talks to buy Realtor.com owner Move Inc from News Corp (NASDAQ:NWSA) and forecast disappointing first-quarter revenue.St. Louis Fed President James Bullard said rates will have to go north of 5% to tame inflation. New York Fed President John Williams, a voting member of the rate-setting committee this year, is scheduled to speak later in the day. More

U.S. officials pledged to crack down on shipments to Russia that can be used for both civilian and military purposes, but that has proved hard to police.WASHINGTON — President Biden and his top officials vowed this week to introduce additional sanctions aimed at impeding Russia’s war efforts against Ukraine. But the administration’s focus is increasingly shifting to the role that China has played in supplying Russia with goods that have both civilian and military uses.As one of the world’s biggest manufacturers of products like electronics, drones and vehicle parts, China has proved to be a particularly crucial economic partner for Russia.Beijing has remained officially unaligned in the war. Yet China, along with countries like Turkey and some former Soviet republics, has stepped in to supply Russia with large volumes of products that either civilians or armed forces could use, including raw materials, smartphones, vehicles and computer chips, trade data shows.Administration officials are now expressing concern that China could further aid Russia’s incursion by providing Moscow with lethal weapons. While there is no clear evidence that China has given weapons and ammunition to Russia, Secretary of State Antony J. Blinken warned in recent days that China may be preparing to do so.President Biden, speaking in Kyiv on Monday, said the United States and its partners would announce new measures targeting sanctions evasion this week. He did not specify whether those actions would be directed at Moscow or its trading partners.“Together we have made sure that Russia is paying the price for its abuses,” he said the next day in Warsaw.And in a speech on Tuesday at the Council on Foreign Relations, Wally Adeyemo, the deputy Treasury secretary, said the United States would be working “to identify and shut down the specific channels through which Russia attempts to equip and fund its military.”“Our counterevasion efforts will deny Russia access to the dual-use goods being used for the war and cut off these repurposed manufacturing facilities from the inputs needed to fill Russia’s production gaps,” he said.The comments came on the same day that Wang Yi, China’s top diplomat, visited Moscow.The actions that the United States has taken against Russia in partnership with more than 30 countries constitute the broadest set of sanctions and export controls ever imposed against a major economy. But this regime still has its limits.One year into the war, the Russian economy is stagnant, but not crippled. The country has lost direct access to coveted Western consumer brands and imports of the most advanced technology, like semiconductors. But individuals and companies around the world have stepped in to provide Russia with black market versions of these same products, or cheaper alternatives made in China or other countries.Russia is unable to produce precision missiles today because the country no longer has access to leading-edge semiconductors, a U.S. official said.Maxim Shipenkov/EPA, via ShutterstockIn particular, the United States and its allies appear to have had limited success in stopping the trade of so-called dual-use technologies that can be used in both military equipment and consumer goods.The United States included many types of dual-use goods in the export controls it issued against Russia last February, because the goods can be repurposed for military uses. Aircraft parts that civilian airlines can use, for example, may be repurposed by the Russian Air Force, while semiconductors in washing machines and electronics might be used for tanks or other weaponry.The Chinese Spy Balloon ShowdownThe discovery of a Chinese surveillance balloon floating over the United States has added to the rising tensions between the two superpowers.Tensions Rise: In the aftermath of the U.S. downing of a Chinese spy balloon on Feb. 4 and three unidentified flying objects a week later, the nations have traded accusations over their spying programs.U.S.-China Meeting: Secretary of State Antony Blinken held a confrontational meeting with his Chinese counterpart on Feb. 18 in Munich, resuming diplomatic contact between Washington and Beijing.A ‘Military-Civil Fusion’: The international fracas over China’s spy balloon program has thrown a light on Beijing’s efforts to recruit commercial businesses to help strengthen the Chinese military.Unidentified Objects: As more objects were shot down after the balloon incident, experts warned that there was an “endless” array of potential targets crowding America’s skies. Here’s a look at some of them.Top U.S. officials warned their Chinese counterparts against supporting Russia’s war effort after the invasion of Ukraine last year, saying there would be firm consequences. While China has been careful not to cross that line, it has provided support for Russia in other ways, including through active trade in certain goods..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}How Times reporters cover politics. We rely on our journalists to be independent observers. So while Times staff members may vote, they are not allowed to endorse or campaign for candidates or political causes. This includes participating in marches or rallies in support of a movement or giving money to, or raising money for, any political candidate or election cause.Learn more about our process.The United States has cracked down on some of the companies and organizations providing goods and services to Russia. In January, it imposed sanctions on a Chinese company that had provided satellite imagery to the Wagner mercenary group, which has played a large role in the battle for eastern Ukraine. In December, it added two Chinese research institutes to a list of entities that supply the Russian military, which will restrict their access to U.S. technology.But tracking by research firms shows that trade in goods that the Russian military effort can use has flourished. According to the Observatory of Economic Complexity, an online data platform, shipments from China to Russia of aluminum oxide, a metal that can be used in armored vehicles, personal protective equipment and ballistic shields, soared by more than 25 times from 2021 to 2022.Shipments of minerals and chemicals used in the production of missile casings, bullets, explosives and propellants have also increased, according to the Observatory of Economic Complexity. And China shipped $23 million worth of drones and $33 million worth of certain aircraft and spacecraft parts to Russia last year, up from zero the prior year, according to the group’s data.Data from Silverado Policy Accelerator, a Washington nonprofit, shows that Russian imports of integrated circuits, or chips, which are crucial in rebuilding tanks, aircraft, communications devices and weaponry, plummeted immediately after the invasion but crept up over the past year.In December, Russia’s imports of chips had recovered to more than two-thirds of their value last February, just before the war began, according to Silverado. China and Hong Kong, in particular, together accounted for nearly 90 percent of global chip exports to Russia by value from March to December.Shipments from China to Russia of smart cards, light-emitting diodes, polysilicon, semiconductor manufacturing equipment and other goods have also risen, the firm said.Secretary of State Antony J. Blinken said he had shared concerns with Wang Yi, China’s top diplomat, that Beijing was considering providing weapons and ammunition to aid Russia’s campaign in Ukraine.Pool photo by Stefani ReynoldsRelations between the United States and China have soured in recent weeks after the flight of a Chinese surveillance balloon across the United States early this month. But divisions over Russia are further straining geopolitical ties. A meeting between Mr. Blinken and Mr. Wang, his Chinese counterpart, on the sidelines of the Munich Security Conference on Saturday night was particularly tense.U.S. officials have been sharing information on China’s activities with allies and partners in their meetings in Munich, a person familiar with the matter said.On “Face the Nation” on Sunday, Mr. Blinken said he had shared concerns with Mr. Wang that China was considering providing weapons and ammunition to aid Russia’s campaign in Ukraine, and that such an action would have “serious consequences” for the U.S.-Chinese relationship.“To date, we have seen Chinese companies — and, of course, in China, there’s really no distinction between private companies and the state — we have seen them provide nonlethal support to Russia for use in Ukraine,” Mr. Blinken said.“The concern that we have now is, based on information we have, that they’re considering providing lethal support,” he added. “And we’ve made very clear to them that that would cause a serious problem for us and in our relationship.”U.S. officials have emphasized that China by itself is limited in its ability to supply Russia with all the goods it needs. China does not produce the most advanced types of semiconductors, for example, and restrictions imposed by the United States in October will prevent Beijing from buying some of the most advanced types of chips, and the equipment used to make them, from other parts of the world.Russia is unable to produce precision missiles today because the country no longer has access to leading-edge semiconductors made by the United States, Taiwan, South Korea and other allied sources, a senior administration official said on Monday.“While we are concerned about Russia’s deepening ties with them, Beijing cannot give the Kremlin what it does not have, because China does not produce the advanced semiconductors Russia needs,” Mr. Adeyemo said during his remarks. “And nearly 40 percent of the less advanced microchips Russia is receiving from China are defective.”But Ivan Kanapathy, a former China director for the National Security Council, said that most of what Russia needed for its weapons were less advanced chips, which are manufactured in plenty in China.“The U.S. government is very well aware that our export control system is designed in a way that really relies on a cooperative host government, which we don’t have in this case,” Mr. Kanapathy said.He added that it was “quite easy” for parties to circumvent export control through the use of front companies, or by altering the names and addresses of entities. “China is quite adept at that.” More

NEW YORK (Reuters) – Wall Street’s benchmark S&P 500 index is expected to advance about 5% from Tuesday’s close by year-end although high interest rates and inflation have many strategists in a Reuters poll predicting a correction within the next three months.The S&P 500 was expected to end 2023 at 4,200 points, which would amount to a 9.4% increase for the calendar year, according to the median forecast of 42 strategists polled by Reuters. This forecast target is unchanged from a November 2022 poll.After falling 19.4% in 2022, the S&P 500 index is up 4.1% for the year so far.Over 70% of analysts, 10 of 14, who answered an additional question said there was a high chance of a correction in the U.S. equity market over the coming three months. The remaining four said low.However, more than a three-quarters majority said their year-end forecasts did not depend, even in part, on central banks like the U.S. Federal Reserve cutting interest rates within 12 months.”The odds of rates going higher and staying (higher) longer have increased. That also increases the probability of a Fed mistake of some kind which would weigh on multiples,” said Sameer Samana, senior global market strategist at Wells Fargo (NYSE:WFC) Investment Institute in Charlotte, NC. Because the labor market and the broader economy have been more resilient than previously expected, Samana sees that making “the glide path for inflation a shallower dip,” than he had initially expected.The S&P was trading at 18.5 times expectations for earnings for the next 12 months compared with its average forward P/E of 15.8 for the last 20 years, according to recent Refinitiv data.As of Feb. 17, Wall Street’s expectation for S&P earnings growth for 2023 has fallen to 1.6% from an expected 4.4% on Jan. 1, according to Refinitiv. Graphic: S&P valuations have fallen but still above 20-year average https://fingfx.thomsonreuters.com/gfx/mkt/zjvqjykkkpx/valuationgraphicSnP500.PNG Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis sees “significant headwinds for equities” including elevated inflation, the Fed’s rating hiking cycle and decreasing earnings expectations for 2023. As such he said it is “difficult to envision equities trending meaningfully higher” but still he said “sentiment is becoming increasing constructive.” But while Sandven’s year-end S&P 500 target doesn’t depend on interest rate cuts he said “it does depend on moderating inflation and improved earnings visibility”.Survey respondents (12) were equally split, six for six, on whether growth or value stocks would perform better this year. The poll also showed the Dow Jones Industrial average was expected to rise 9.2% for the full year to 36,200 by year end. This compared with its Tuesday close of 33,129.59 and its 2022 closing level of 33,147.25, which represented an 8.8% drop for last year.Strategists had expected the Dow to end 2023 at 36,500, according to a November poll.(Other stories from the Reuters Q1 global stock markets poll package:) More

Citigroup has forecast that UK inflation will plunge from the current double-digit rates to close to 2 per cent by the end of this year as rapid falls in gas prices give Rishi Sunak’s government hope of solving some of its biggest economic challenges. Citi said on Wednesday that consumer price inflation was likely to fall to 2.3 per cent in November, well below the Bank of England’s forecast that it would remain around 4 per cent in the fourth quarter of the year. The new projections provide a fillip for the UK prime minister, potentially making it easier to resolve public sector strikes over pay and to fulfil his pledge of halving inflation by the end of the year. The inflation rate in January was 10.1 per cent. Benjamin Nabarro, Citi’s chief UK economist, said the sell-off in European gas prices had prompted the bank to republish its inflation forecasts. He now expects UK headline inflation to slow to below 5 per cent from July. Only a month ago he expected that to happen in October.Citi’s new forecasts reflect the likely fall in household energy bills as wholesale gas prices continue to drop. The price of UK gas for delivery in September has halved in the past two months from £2.60 a therm to £1.26 a therm and fallen more than 80 per cent since its peak last August. These reductions will translate into a lower energy price cap in the fourth quarter of this year from £3,295 for a household with average consumption of gas and electricity to £2,161, according to the latest forecasts from consultancy Cornwall Insight.The fall in the energy prices will in turn pull down inflation, as the cap is forecast to be lower than that imposed by the energy price guarantee of £2,500 for the fourth quarter of 2022. The rapid decline in inflation will be amplified by the Office for National Statistics raising the weighting given to gas and electricity in the consumer price index this year from 3.6 per cent of household spending to 4.8 per cent. As energy prices fall, the higher weighting of gas and electricity in the index will pull the overall rate of inflation down faster.

In a further potential boost to the public finances, Nabarro forecast that inflation measured by the retail price index, which is used to uprate £560bn of inflation-linked government debt, is also likely to fall rapidly, limiting the cost of servicing this debt. He expects the RPI measure of inflation to drop from the current rate of 13.4 per cent to 4.3 per cent in the fourth quarter of this year, well below the Office for Budget Responsibility’s November forecast of 6.3 per cent towards the end of 2023.That would provide further relief to the government on the costs of servicing debt in an area where the UK has been more exposed than other countries because it has a larger share of its debt linked to inflation. The average forecast of CPI inflation in the fourth quarter among economists polled by the Treasury this month stood at 4.5 per cent, down from 5 per cent in the poll carried out in January. The RPI forecast for the same period stood at 6 per cent, down from 6.8 per cent forecast a month earlier. More

The state has become a hub for chip makers including Intel and TSMC, as the government prepares to release a gusher of funds for the strategic industry.In recent weeks, Gina Raimondo, the commerce secretary, has talked with Senator Mark Kelly of Arizona, spent time with the president of Arizona State University and appeared at a conference with the mayor of Phoenix.Their discussions centered on one main topic: chips.Ms. Raimondo is in charge of handing out $52 billion for semiconductor manufacturing and research under the CHIPS Act, a funding package intended to expand domestic production of the foundational technology, which acts as the brains of computers. The legislation, which passed in August, is a prime piece of President Biden’s industrial policy and part of a push to ensure America’s economic and technology leadership over China.Arizona wants to make sure it is in position for a portion of that once-in-a-generation gusher of federal funding, for which the Commerce Department will begin taking applications after Thursday. As a result, Arizona officials have inundated Ms. Raimondo to promote the state’s growing chip industry and talked with the chief executives of giant chip companies such as Intel and Taiwan Semiconductor Manufacturing Company.Arizona, which is vying for subsidies along with Texas, New York and Ohio, may have a head start on the action. The state has been home to semiconductor makers since the 1940s and has 115 chip-related companies, whereas there is one major manufacturer in Ohio.Arizona has also led the nation in chip investments since 2020, with the announcements of two new chip-making plants by TSMC and two additional factories from Intel that will cost a combined $60 billion. State leaders had helped persuade the companies to open the facilities by offering big tax breaks and water and other infrastructure grants. They also promised to expand technical and engineering education in the state.State officials and chip companies also acted as a lobbying bloc in Washington. They helped shape the CHIPS Act to include federal tax credits, subsidies, and research and work force grants. TSMC expanded its lobbying staff to 19 people from two in two years, and Intel spent more than $7 million in lobbying efforts last year, the most it had spent in two decades. Arizona State University spent $502,000 on lobbying last year, also the most in two decades.“It has been an intentional and an all-hands-on-deck effort,” said Sandra Watson, president of the Arizona Commerce Authority, a nonprofit economic development organization that has helped lead state efforts to attract chip companies and push for the CHIPS Act.Sandra Watson, president of the Arizona Commerce Authority, hosted more than 20 chief executives of chip companies at the Super Bowl this month.Caitlin O’Hara for The New York TimesThe Commerce Department is expected to soon begin handing out $39 billion in subsidies to semiconductor makers, later opening the process to companies, universities and others to apply for $13.2 billion in research and work force development subsidies. The CHIPS Act also provides an investment tax credit for up to 25 percent of a manufacturer’s capital expenditure costs.Ms. Raimondo has described the process as a “race” among states. “Every governor, every state legislature, every president of public universities in every state ought to be now putting their plan of attack together,” she said in August during a visit to Arizona State University’s tech research and development center. “This is going to be a competitive process.”The Commerce Department declined to comment.Arizona’s history with chip manufacturing stretches back to 1949, when the telecom hardware and services provider Motorola opened a lab in Phoenix that later developed transistors. In 1980, Intel built a semiconductor plant in Chandler, a suburb southeast of Phoenix, drawn by the state’s low property taxes, relative proximity to its Silicon Valley headquarters and stable geology. (Earthquakes are rare in Arizona.)During President Donald J. Trump’s administration, he pushed an “America First” policy agenda. That opened an opportunity for Doug Ducey, a Republican who was then Arizona’s governor, and other state officials to transform their economy into a tech hub.Arizona’s governor at the time, Doug Ducey, and Commerce Secretary Gina Raimondo while touring the TSMC construction site in December.T.J. Kirkpatrick for The New York TimesIn 2017, Mr. Ducey and other Arizona officials traveled to Taiwan to meet with executives of TSMC, the world’s biggest maker of leading-edge chips. They promoted the state’s low taxes, its business-friendly regulatory environment and Arizona State University’s engineering school of more than 30,000 students.Mr. Ducey, who was close to Mr. Trump, also had calls with Commerce Secretary Wilbur Ross, Defense Secretary Mark Esper and Secretary of State Mike Pompeo on financial incentives to expand domestic production of chips.“My job is to sell Arizona,” Mr. Ducey said. “In this case, it was to sell Arizona to TSMC but also to the administration.”In 2019, Mr. Ducey helped set up calls between the cabinet secretaries and TSMC’s executives to lock in a deal to open manufacturing plants in Arizona. The state promised tax credits and other financial incentives to help offset costs for the company to move production to the United States from Taiwan.In May 2020, TSMC announced plans to build a $12 billion factory in Phoenix. Later that year, the city provided TSMC with $200 million in infrastructure incentives, including water lines, sewage and roads. One traffic light would cost the city $500,000.“TSMC appreciates the support from our dedicated partners on the state, local and federal levels,” said Rick Cassidy, the chief executive of TSMC Arizona, adding that the CHIPS Act funds will enable the company and its suppliers to expand “for years to come.”The CHIPS Act is a prime piece of President Biden’s industrial policy. He toured TSMC’s Arizona plant in December.T.J. Kirkpatrick for The New York TimesIn early 2021, Pat Gelsinger, Intel’s chief executive, announced a sweeping strategy to increase U.S. production of chips. States began soliciting the company. Arizona officials highlighted their long relationship with Intel and perks, such as the state’s low property and business taxes.Intel soon announced a $20 billion expansion in Chandler, with two additional factories that would bring 3,000 new jobs to the state. Chandler also approved $30 million in water and road improvements for the new plants.“The Arizona government has been a great collaborator,” said Bruce Andrews, Intel’s chief government affairs officer. “By investing in semiconductors early, they created an ecosystem that has had a jobs multiplier effect and massive economic benefits.”But some of the tax breaks have rankled Arizona residents, who say the moves have hurt funding for public schools. The state ranks 47th in per-student spending.“We need to bring business to our state, but we need to look at balance,” said Beth Lewis, the executive director of Save Our Schools in Arizona. “Corporations are choosing not to settle in Arizona because of our devastated public education system.”Arizona pressed ahead with pushing Congress to create legislation for chip subsidies. In March 2021, Senator Kelly joined Senators John Cornyn, Republican of Texas, and Mark Warner, Democrat of Virginia, the authors of legislation that would become the CHIPS Act, in a call with the new Biden administration to push for the White House’s support of funding.Mr. Kelly, an early sponsor of the CHIPS Act, became a chief negotiator on the legislation in Congress. He negotiated the inclusion of a four-year 25 percent investment tax credit in the bill, including a provision that ensured Intel and TSMC would get the tax credits even though their Arizona factory projects were announced before the bill would go into effect.Mr. Kelly also helped the president of Arizona State University, Michael Crow, lobby for the inclusion of more than $13 billion in grants for research and development and work force training. And Mr. Kelly and state leaders hosted administration officials at events to showcase the state’s semiconductor efforts as part of the White House’s manufacturing strategy.Senator Mark Kelly of Arizona at TSMC’s factory in December.Adriana Zehbrauskas for The New York Times“We have the potential to lead the nation in microchip production,” Mr. Kelly said in a statement. “I was honored to lead this effort, and now I’m working to maximize it for Arizona”Mr. Ducey, who left office when his term ended in January, pushed for more tech-friendly policies, including an income-tax cut. He also said he would use $100 million that the state had received from federal Covid grants to attract more chip companies and help them apply for funds provided by the CHIPS Act.In December, TSMC announced a second factory that would bring its total investment in Arizona to $40 billion. Mr. Biden and Ms. Raimondo traveled to Phoenix to speak at the announcement, with Mr. Kelly accompanying them on Air Force One.Arizona officials continue to pitch semiconductor companies to open factories in the state.This month, Ms. Watson hosted more than 20 chief executives of chip companies at the Super Bowl in Glendale. Katie Hobbs, Arizona’s new governor and a Democrat, and Mr. Kelly heralded how the state could benefit from the CHIPS Act.“There’s a robust pipeline,” Ms. Watson said. More

Good morning. Ethan here; Rob’s away this week.By 2022 standards, yesterday would’ve been just another day of bear-market selling. But after a euphoric January, a 2 per cent down day for the S&P 500 feels sombre. The clearest cause is the return of interest rate volatility, as markets start to believe the Federal Reserve really will raise rates to high heaven. The S&P peaked on February 2, a day after the Move index, a measure of rate volatility, bottomed. The Fed is still the biggest story in markets, and it isn’t close. Email me: [email protected] America is still investingAnswer this with one word: why has the US economy stayed strong? Our pick would be “consumers”. Buoyed by a structurally tight labour market and a still-intact pandemic savings cushion, consumers, who make up some 70 per cent of nominal gross domestic product, are powering through rate rises.But a good runner-up might be “corporations”. Business investment (something like a fifth of GDP) has likewise withstood higher interest rates. In the fourth quarter, S&P 500 companies grew capital expenditure 10 per cent year-on-year after adjusting for inflation, estimates Spencer Hill at Goldman Sachs. The nominal figure is a rollicking 17 per cent. There is talk of a “capex supercycle”.The backstory is that companies used the Covid stimulus to tidy up their finances, leaving behind a nice cash pile. Pantheon Macroeconomics puts the leftover cash buffer at about $400bn, compared to the pre-Covid trend. Meanwhile, balance sheets have gotten cleaned up and debt maturities pushed out well into the future. Many think this is blunting the immediate impact of rate increases on businesses.Higher rates still do bite, however. As we’ve written before, revenue growth is slowing and margins are compressing. But looking across the universe of US companies, Goldman’s Hill sees most cost cuts coming from a less-discussed source:So far, companies appear to be responding to lower margins and higher financing costs by cutting share buybacks — which fell 12 per cent in the [fourth] quarter — as opposed to reducing investment or employment.After months of news about job cuts and cost reductions, this explanation feels unintuitive, but it may better match the macro picture of steady capex growth and rock-bottom unemployment.Yet unless margin pressure abates, it’s hard to see investment being insulated for ever. If it gets cut, is the economy in trouble?The 2015-17 default cycle offers a useful comparison. Driven by a commodity downturn, it’s not a precise analogy (it rarely is). But it is a good example of a non-recessionary contraction in capex. Here’s what business fixed investment did during that period:A sector-specific bust created four quarters of contracting investment. But since (real) consumption spending kept chugging along at a 2.8 per cent rate, a recession was avoided.Maybe the fact that investment can shrink without causing a recession makes you more willing to believe in a soft landing. Or maybe it makes you think inflation is pretty darn entrenched (we’re sympathetic). The point is that despite real signs of slowdown building on the margins, the Fed faces an economy that isn’t just being pulled along by consumers. At its core, strength abounds.Will the Fed stick to 2 per cent?A few readers have recently written in to voice their suspicion about the Fed’s commitment to a 2 per cent inflation target — which Unhedged has often taken as a given. They think the US central bank is going to abandon the target the moment it is expedient to do so.Markets don’t discount the possibility. The five-year break-even, a proxy for market inflation expectations, sits at 2.6 per cent, compared with a 2003-19 average of 1.8 per cent. Survey measures aren’t much different; the New York Fed’s five-year expected inflation rate is 2.5 per cent.This looks consistent with the Fed reaching 3ish per cent inflation and deciding, well, close enough. It’s not hard to see why. As we’ve written before, the first leg of disinflation is probably going to be easier than what comes after. Consider that core inflation has taken a big step down — from a 0.6 per cent monthly pace in mid-2022 to 0.4 per cent in January — with no increase in unemployment. But it may get uglier. In a recent note, Don Rissmiller and Brandon Fontaine at Strategas write:Elevated job openings & consumer cash holdings are providing cushions now. But the last -1 per cent reduction in inflation (from 3 per cent [headline consumer price index] to 2 per cent) could be very expensive in terms of job loss. Perhaps a 6-7 per cent unemployment rate is needed (more consistent with historical US recessions).As job losses, and political pressure, mount for the Fed, Rissmiller and Fontaine think it will consider lowering the bar:Pushing all the way down to a 2 per cent number, which is chosen arbitrarily anyway, may not be credible. Declaring mission accomplished in the neighbourhood of 2 per cent provides the best hope of a “soft-ish” landing for the economy that we see going forward. The Fed declaring victory at 3 per cent, as long as 3 per cent looks anchored, would mean short rates could have a 3-handle in 2024 (as policy moves back towards neutral).This account seems plausible enough, especially since prominent voices are already calling for the 2 per cent target to go.But it also assumes the Fed knows at what level interest rates become restrictive, and thus has precise control over inflation and unemployment. It seems more likely to us that the Fed is feeling around in the dark. Yes, the central bank can always cut if it goes too far, but easy monetary policy exhibits long and variable lags, too. We would humbly offer up another scenario: by the time the central bank realises it has overtightened, it’s already too late.One good readScott Alexander revisits his predictions about 2023, made in 2018. More

The writer is an FT contributing editor and global chief economist at Kroll Quantitative easing has developed a certain resemblance to the Eagles’ “Hotel California” — you can check out any time you like, but you can never leave. We should pay more attention to quantitative tightening, suggest former Reserve Bank of India governor Raghuram Rajan and others in a recent paper. Commercial banks change their behaviour when there are plentiful reserves, making QT far more volatile and difficult to pull off than expected.Our grasp of how QE and QT really work remains tenuous. In announcing a bond-buying programme, a central bank signals to the markets it is committed to accommodative policy and that rates will be low for a long time. The entire yield curve drops as a result. In purchasing long-dated bonds, the central bank pushes their yield down and in theory incentivises investors to move into higher return securities (the so-called portfolio rebalancing channel).However, QT isn’t just QE in reverse. When rates are at the zero lower bound, the signalling channel is strong. But announcements about the central bank’s balance sheet are less effective when the policy rate is well above zero. In 2017, Janet Yellen, then Federal Reserve chair, promised QT would be more “like watching paint dry”. The reality has been somewhat different. Rajan argues this is because commercial banks change their behaviour when the central bank expands its balance sheet, but do not change it back again when the balance sheet shrinks.The mechanics of QE are a bit wonky. When the central bank buys bonds from investors, the proceeds are deposited in a commercial bank account. The banks steer the money into demand deposits (which can be withdrawn at any time) because they pay less interest than time deposits. To balance out these liabilities, the Fed credits the banks with the same amount of reserves as assets. The reserves give banks confidence they can weather any significant deposit withdrawals, and they are also used to extend credit lines that generate fees. This shortens the average maturity of bank assets, undermining the portfolio rebalancing channel and increasing bank vulnerability to liquidity shortages.According to Rajan’s data, none of this unwinds when the central bank shrinks its balance sheet and reserves become less ample. Instead, banks substitute lost reserves with other assets that are eligible collateral in repo transactions, to remain confident of getting enough cash if they need it. But if every bank tries to transform their assets into cash simultaneously, there will inevitably be a shortage, as happened in the US repo market in 2019. Banks also continue to extend credit lines even as liquidity wanes, to maintain client relationships.That means banks make greater claims on the system’s liquidity during QT, which may continue until there is a market blow-up. Central banks can step in and buy bonds again to paper over these liquidity crises, as they did in 2019, at the start of the pandemic and in the recent liability-driven investment freeze in the UK. But that ratchets up banks’ demands for liquidity still further — and makes QT even harder to pull off down the line.One way around this is to minimise the signalling channel of QE, as the Bank of England did last autumn when it announced it would buy gilts for a very limited period, after the fallout from the Liz Truss-Kwasi Kwarteng “mini” Budget. But that would only work in a small-scale market meltdown. Imagine the Fed announcing in March 2020 that it would buy bonds but only for a short time, reserves would not be plentiful forever and rates would rise soon. Investors would have continued their dash for cash.Central banks could simply forget about QT. Unlike commercial banks they can take losses and run in the red. But there are good reasons why they should not have an ever-growing balance sheet. Investors would have an incentive to take more risk. Governments may lean on the central bank to buy more bonds to finance pet projects. Central bank independence would be severely at risk, undermining credibility. A forever-distorted yield curve would make price discovery impossible.Better bank capitalisation could help reduce vulnerability in the face of greater liquidity needs. Bank regulators could prevent reserve hoarding by allowing banks to meet an average of liquidity requirements over time rather than daily targets. Standing repo facilities can be extended to non-banks with good collateral, as the Bank of England has recently done. Ultimately, however, the best way to get out of QE may be not to start it in the first place. You don’t have to check out if you’ve never checked in. More