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    The Fed’s Difficult Choice

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    The Federal Reserve has raised interest rates again. When should it stop?After raising interest rates again yesterday, the Federal Reserve now faces a tough decision.Some economists believe that the Fed has raised its benchmark rate — and, by extension, the cost of many loans across the U.S. economy — enough to have solved the severe inflation of the past couple years. Any further increases in that benchmark rate, which is now at its highest level in 22 years, would heighten the risk of a recession, according to these economists. In the parlance of economics, they are known as doves.But other experts — the hawks — point out that annual inflation remains at 3 percent, above the level the Fed prefers. Unless Fed officials add at least one more interest rate increase in coming months, consumers and business may become accustomed to high inflation, making it all the harder to eliminate.For now, Jerome Powell, the Fed chair, and his colleagues are choosing not to take a side. They will watch the economic data and make a decision at their next meeting, on Sept. 20. “We’ve come a long way,” Powell said during a news conference yesterday, after the announcement that the benchmark rate would rise another quarter of a percentage point, to as much as 5.5 percent. “We can afford to be a little patient.”The charts below, by our colleague Ashley Wu, capture the recent trends. Inflation is both way down and still somewhat elevated, while economic growth has slowed but remains above zero.Sources: Bureau of Labor Statistics; Bureau of Economic Analysis | By The New York TimesToday’s newsletter walks through the dove-vs.-hawk debate as a way of helping you understand the current condition of the U.S. economy.The doves’ caseThe doves emphasize both the steep recent decline in inflation and the forces that may cause it to continue falling. Supply chain snarls have eased, and the strong labor market, which helped drive up prices, seems to be cooling. “A happy outcome that not long ago seemed like wishful thinking now looks more likely than not,” the economist Paul Krugman wrote in Times Opinion this month.Economists refer to this happy outcome — reduced inflation without a recession — as a soft landing. The doves worry that a September rate hike could imperil that soft landing. (Already, corporate defaults have risen.)“It’s crystal clear that low inflation and low unemployment are compatible,” Rakeen Mabud, an economist at the Groundwork Collaborative, a progressive think tank, told our colleague Talmon Joseph Smith. “It’s time for the Fed to stop raising rates.”A recession would be particularly damaging to vulnerable Americans, including low-income and disabled people. The tight labor market has drawn more of them into work and helped them earn raises.The hawks’ caseThe hawks see the risks differently. They point to some signs that the official inflation rate of 3 percent is artificially low. Annual core inflation — a measure that omits food and fuel costs, which are both volatile — remains closer to 5 percent.“The Fed should not stop raising rates until there is clear evidence that core inflation is on a path to its 2 percent target,” Michael Strain of the American Enterprise Institute writes. “That evidence does not exist today, and it probably will not exist by the time the Fed meets in September.” (Adding to the hawks’ case is the fact that big consumer companies like Unilever keep raising their prices, J. Edward Moreno of The Times explains.)Fed officials themselves have argued that it’s important to tame inflation quickly to keep Americans from becoming used to rising prices — and demanding larger raises to keep up with prices, which could in turn become another force causing prices to rise.At root, the hawk case revolves around the notion that reversing high inflation is extremely difficult. When in doubt, hawks say, the Fed should err on the side of vigilance, to keep the U.S. from falling into an extended and damaging period of inflation as it did in the 1970s.And where do Fed officials come down? They have the advantage of not needing to pick a side, at least not yet. Between now and September, two more months of data will be available on prices, employment and more. Powell yesterday called a September rate increase “certainly possible,” but added, “I would also say it’s possible that we would choose to hold steady.”As our colleague Jeanna Smialek, who covers the Fed, says, “They have every incentive to give themselves wiggle room.”More on the FedThe Fed’s economists are no longer forecasting a recession this year.Powell noted that the labor force has been growing. “That’s good news for the Fed, because it helps ease the labor shortage without driving up unemployment,” Ben Casselman wrote.Responding to a question from Jeanna, Powell said it was good that consumer demand for the “Barbie” movie was so high — but that persistently high spending could be a reason for a future rate increase.Stock indexes rose after the Fed announced the increase, but fell after Powell delivered his economic outlook.THE LATEST NEWSWar in UkraineA Ukrainian soldier on the front line in eastern Ukraine.Tyler Hicks/The New York TimesUkraine appears to be intensifying its counteroffensive. Reinforcements are pouring into the fight, many trained and equipped by the West.The attack looks to be focused in the southern region of Zaporizhzhia, with the aim of severing Russian-occupied territories in Ukraine.U.S. officials said the assault was timed to take advantage of turmoil in the Russian military.PoliticsA judge halted Hunter Biden’s plea deal on tax charges after the two sides disagreed over how much immunity it granted him.In her first Supreme Court term, Ketanji Brown Jackson secured a book deal worth about $3 million, the latest justice to parlay fame into a big book contract.Mitch McConnell, the 81-year-old Senate Republican leader, abruptly stopped speaking during a Capitol news conference and was escorted away. He spoke in public again later.A former intelligence officer told Congress that the U.S. government had retrieved materials from U.F.O.s. The Pentagon denied his claim.Rudy Giuliani admitted to lying about two Georgia election workers he accused of mishandling ballots in 2020.Representative George Santos used his candidacy and ties to Republican donors to seek moneymaking opportunities.Other Big StoriesGetty ImagesSinead O’Connor, the Irish singer who had a No. 1 hit with “Nothing Compares 2 U,” died at 56. She drew a firestorm when she ripped up a photo of the pope on live TV.The heat wave that has scorched the southern U.S. is bringing 100-degree heat to the Midwest. The East Coast is probably next.Israel’s Supreme Court agreed to hear petitions challenging the new law limiting its power.Soldiers in Niger ousted the president and announced a coup.Gap hired Richard Dickson, the Mattel president who helped revitalize Barbie, as its chief executive.The messaging platform Slack was having an outage this morning.OpinionsCongress should create an agency to curtail Big Tech, Senators Lindsey Graham, a Republican, and Elizabeth Warren, a Democrat, argue.Thousands of Americans drown every year. More public pools would help, Mara Gay writes.Here are columns by Nicholas Kristof on affirmative action and Pamela Paul on the so-called Citi Bike Karen.MORNING READSEternally cool: Fans keep you dry on a hot day. They let you channel Beyoncé. They say, “I love you.” Can an air-conditioner do that?The yips: A star pitcher lost her ability to throw to first base. Now, she helps young athletes with the same problem.Spillover: Could the next pandemic start at the county fair?Lives Lived: Bo Goldman was one of Hollywood’s most admired screenwriters, winning Oscars for “One Flew Over the Cuckoo’s Nest” and “Melvin and Howard.” He died at 90.WOMEN’S WORLD CUPThe Dutch midfielder Jill Roord, left, and Lindsey Horan of the U.S. team.Grant Down/Agence France-Presse — Getty ImagesA second-half goal from the co-captain Lindsey Horan gave the U.S. a 1-1 tie against the Netherlands, in an evenly matched game.Spain’s star midfielder Alexia Putellas returned to the starting lineup for the first time in more than a year after a knee injury.OTHER SPORTS NEWSOff the market: The Angels are reportedly withdrawing the superstar Shohei Ohtani from trade talks.Honeymoon phase: Aaron Rodgers agreed to a reworked contract with the Jets, which saves the team money and likely ensures he plays multiple seasons in New York.ARTS AND IDEAS Alfonso Duran for The New York TimesA growing dialect: What is Miami English? The linguist Phillip Carter calls it “probably the most important bilingual situation in the Americas today,” but it’s not Spanglish, in which a sentence bounces between English and Spanish. Instead, Miamians — even those who are not bilingual — have adopted literal translations of Spanish phrases in their English speech. Some examples: “get down from the car” (from “bajarse del carro”) instead of “get out of the car,” and “make the line” (from “hacer la fila”) instead of “join the line.”More on cultureKevin Spacey was found not guilty in Britain of sexual assault.The Japanese pop star Shinjiro Atae came out as gay, a rare announcement in a country where same-sex marriage isn’t legal.THE MORNING RECOMMENDS …Armando Rafael for The New York TimesBrighten up grilled chicken with Tajín, the Mexican seasoning made with red chiles and lime.Preserve vintage clothes in wearable condition.Calculate your life expectancy to guide health care choices.Consider a body pillow.Reduce exposure to forever chemicals in tap water.GAMESHere is today’s Spelling Bee. Yesterday’s pangram was thrilling.And here are today’s Mini Crossword, Wordle and Sudoku.Thanks for spending part of your morning with The Times. See you tomorrow.P.S. David is on “The Daily” to talk about how the wealthy get an advantage in college admissions.Sign up here to get this newsletter in your inbox. Reach our team at [email protected]. More

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    Global Economy Shows Signs of Resilience Despite Lingering Threats

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    The International Monetary Fund upgraded its global growth forecast for 2023.The world economy is showing signs of resilience this year despite lingering inflation and a sluggish recovery in China, the International Monetary Fund said on Tuesday, raising the odds that a global recession could be avoided barring unexpected crises.The signs of optimism in the I.M.F.’s latest World Economic Outlook may also give global policymakers additional confidence that their efforts to contain inflation without causing serious economic damage are working. Global growth, however, remains meager by historical standards, and the fund’s economists warned that serious risks remained.“The global economy continues to gradually recover from the pandemic and Russia’s invasion of Ukraine, but it is not yet out of the woods,” Pierre-Olivier Gourinchas, the I.M.F.’s chief economist said a news conference on Tuesday.The I.M.F. raised its forecast for global growth this year to 3 percent, from 2.8 percent in its April projection. It predicted that global inflation would ease from 8.7 percent in 2022 to 6.8 percent this year and 5.2 percent in 2024, as the effects of higher interest rates filter throughout the world.The outlook was rosier in large part because financial markets — which had been roiled by the collapse of several large banks in the United States and Europe — have largely stabilized. Another big financial risk was averted in June when Congress acted to lift the U.S. government’s borrowing cap, ensuring that the world’s largest economy would continue to pay its bills on time.The new figures from the I.M.F. come as the Federal Reserve is widely expected to raise interest rates by a quarter point at its meeting this week, while keeping its future options open. The Fed has been aggressively raising rates to try to tamp down inflation, lifting them from near zero as recently as March 2022 to a range of 5 percent to 5.25 percent today. Policymakers have been trying to cool the economy without crushing it and held rates steady in June in order to assess how the U.S. economy was absorbing the higher borrowing costs that the Fed had already approved.As countries like the United States continue to grapple with inflation, the I.M.F. urged central banks to remain focused on restoring price stability and strengthening financial supervision.“Hopefully with inflation starting to recede, we have entered the final stage of the inflationary cycle that started in 2021,” Mr. Gourinchas said. “But hope is not a policy and the touchdown may prove quite difficult to execute.”He added: “It remains critical to avoid easing monetary policy until underlying inflation shows clear signs of sustained cooling.”Fed officials will release their July interest rate decision on Wednesday, followed by a news conference with Jerome H. Powell, the Fed chair. Policymakers had previously forecast that they might raise rates one more time in 2023 beyond the expected move this week. While investors doubt that they ultimately will make that final rate move, officials are likely to want to see more evidence that inflation is falling and the economy is cooling before committing in any direction.The I.M.F. said on Tuesday that it expected growth in the United States to slow from 2.1 percent last year to 1.8 percent in 2023 and 1 percent in 2024. It expects consumption, which has remained strong, to begin to wane in the coming months as Americans draw down their savings and interest rates increase further.Growth in the euro area is projected to be just 0.9 percent this year, dragged down by a contraction in Germany, the region’s largest economy, before picking up to 1.5 percent in 2024.European policymakers are still occupied by the struggle to slow down inflation. On Thursday, the European Central Bank is expected to raise interest rates for the 20 countries that use the euro currency to the highest level since 2000. But after a year of pushing up interest rates, policymakers at the central bank have been trying to shift the focus from how high rates will go to how long they may stay at levels intended to restrain the economy and stamp out domestic inflationary pressures generated by rising wages or corporate profits.Policymakers have raised rates as the economy has proved slightly more resilient than expected this year, supported by a strong labor market and lower energy prices. But the economic outlook is still relatively weak, and some analysts expect that the European Central Bank is close to halting interest rate increases amid signs that its restrictive policy stance is weighing on economic growth. On Monday, an index of economic activity in the eurozone dropped to its lowest level in eight months in July, as the manufacturing industry contracted further and the services sector slowed down.Next week, the Bank of England is expected to raise interest rates for a 14th consecutive time in an effort to force inflation down in Britain, where prices in June rose 7.9 percent from a year earlier.Britain has defied some expectations, including those of economists at the I.M.F., by avoiding a recession so far this year. But the country still faces a challenging set of economic factors: Inflation is proving stubbornly persistent in part because a tight labor market is pushing up wages, while households are growing increasingly concerned about the impact of high interest rates on their mortgages because the repayment rates tend to be reset every few years.A weaker-than-expected recovery in China, the world’s second-largest economy, is also weighing on global output. The I.M.F. pointed to a sharp contraction in the Chinese real estate sector, weak consumption and tepid consumer confidence as reasons to worry about China’s outlook.Official figures released this month showed that China’s economy slowed markedly in the spring from earlier in the year, as exports tumbled, a real estate slump deepened and some debt-ridden local governments had to cut spending after running low on money.Mr. Gourinchas said that measures that China has taken to restore confidence in the property sector are a positive step and suggested that targeted support for families to bolster confidence could strengthen consumption.Despite reasons for optimism, the I.M.F. report makes plain that the world economy is not in the clear.Russia’s war in Ukraine continues to pose a threat that could send global food and energy prices higher, and the fund noted that the recently terminated agreement that allowed Ukrainian grain to be exported could portend headwinds. The I.M.F. predicts that the termination of the agreement could lead grain prices to rise by as much as 15 percent.“The war in Ukraine could intensify, further raising food, fuel and fertilizer prices,” the report said. “The recent suspension of the Black Sea Grain Initiative is a concern in this regard.”It also reiterated its warning against allowing the war in Ukraine and other sources of geopolitical tension to further splinter the world economy.“Such developments could contribute to additional volatility in commodity prices and hamper multilateral cooperation on providing global public goods,” the I.M.F. said. More

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    Jerome Powell’s Prized Labor Market Is Back. Can He Keep It?

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    The Federal Reserve chair spent the early pandemic bemoaning the loss of a strong job market. It roared back — and now its fate is in his hands.Jerome H. Powell, the chair of the Federal Reserve, spent the early pandemic lamenting something America had lost: a job market so historically strong that it was boosting marginalized groups, extending opportunities to people and communities that had long lived without them.“We’re so eager to get back to the economy, get back to a tight labor market with low unemployment, high labor-force participation, rising wages — all of the virtuous factors that we had as recently as last winter,” Mr. Powell said in an NPR interview in September 2020.The Fed chair has gotten that wish. The labor market has recovered by nearly every major measure, and the employment rate for people in their most active working years has eclipsed its 2019 high, reaching a level last seen in April 2001.Yet one of the biggest risks to that strong rebound has been Mr. Powell’s Fed itself. Economists have spent months predicting that workers will not be able to hang on to all their recent labor market gains because the Fed has been aggressively attacking rapid inflation. The central bank has raised interest rates sharply to cool off the economy and the job market, a campaign that many economists have predicted could push unemployment higher and even plunge America into a recession.But now a tantalizing possibility is emerging: Can America both tame inflation and keep its labor market gains?Data last week showed that price increases are beginning to moderate in earnest, and that trend is expected to continue in the months ahead. The long-awaited cool-down has happened even as unemployment has remained at rock bottom and hiring has remained healthy. The combination is raising the prospect — still not guaranteed — that Mr. Powell’s central bank could pull off a soft landing, in which workers largely keep their jobs and growth chugs along slowly even as inflation returns to normal.“There are meaningful reasons for why inflation is coming down, and why we should expect to see it come down further,” said Julia Pollak, chief economist at ZipRecruiter. “Many economists argue that the last mile of inflation reduction will be the hardest, but that isn’t necessarily the case.”Inflation has plummeted to 3 percent, just a third of its 9.1 percent peak last summer. While an index that strips out volatile products to give a cleaner sense of the underlying trend in inflation remains more elevated at 4.8 percent, it, too, is showing notable signs of coming down — and the reasons for that moderation seem potentially sustainable.Housing costs are slowing in inflation measures, something that economists have expected for months and that they widely predict will continue. New and used car prices are cooling as demand wanes and inventories on dealer lots improve, allowing goods prices to moderate. And even services inflation has cooled somewhat, though some of that owed to a slowdown in airfares that may look less significant in coming months.All of those positive trends could make the road to a soft landing — one Mr. Powell has called “a narrow path” — a bit wider.For the Fed, the nascent cool-down could mean that it isn’t necessary to raise rates so much this year. Central bankers are poised to lift borrowing costs at their July meeting next week, and had forecast another rate increase before the end of the year. But if inflation continues to moderate for the next few months, it could allow them to delay or even nix that move, while indicating that further increases could be warranted if inflation picked back up — a signal economists sometimes call a “tightening bias.”Christopher Waller, one of the Fed’s most inflation-focused members, suggested last week that while he might favor raising interest rates again at the Fed meeting in September if inflation data came in hot, he could change his mind if two upcoming inflation reports demonstrated progress toward slower price increases.“If they look like the last two, the data would suggest maybe stopping,” Mr. Waller said.Interest rates are already elevated — they’ll be in a range of 5.25 to 5.5 percent if raised as expected on July 26, the highest level in 16 years. Holding them steady will continue to weigh on the economy, discouraging home buyers, car shoppers or businesses hoping to expand on borrowed money.Since 2020, the labor market has rebounded by nearly every major measure.Jamie Kelter Davis for The New York TimesSo far, though, the economy has shown a surprising ability to absorb higher interest rates without cracking. Consumer spending has slowed, but it has not plummeted. The rate-sensitive housing market cooled sharply initially as mortgage rates shot up, but it has recently shown signs of bottoming out. And the labor market just keeps chugging.Some economists think that with so much momentum, fully stamping out inflation will prove difficult. Wage growth is hovering around 4.4 percent by one popular measure, well above the 2 to 3 percent that was normal in the years before the pandemic.With pay climbing so swiftly, the logic goes, companies will try to charge more to protect their profits. Consumers who are earning more will have the wherewithal to pay up, keeping inflation hotter than normal.“If the economy doesn’t cool down, companies will need to bake into their business plans bigger wage increases,” said Kokou Agbo-Bloua, a global research leader at Société Générale. “It’s not a question of if unemployment needs to go up — it’s a question of how high unemployment should go for inflation to return to 2 percent.”Yet economists within the Fed itself have raised the possibility that unemployment may not need to rise much at all to lower inflation. There are a lot of job openings across the economy at the moment, and wage and price growth may be able to slow as those decline, a Fed Board economist and Mr. Waller argued in a paper last summer.While unemployment could creep higher, the paper argued, it might not rise much: perhaps one percentage point or less.So far, that prediction is playing out. Job openings have dropped. Immigration and higher labor force participation have improved the supply of workers in the economy. As balance has come back, wage growth has cooled. Unemployment, in the meantime, is hovering at a similar level to where it was when the Fed began to raise interest rates 16 months ago.A big question is whether the Fed will feel the need to raise interest rates further in a world with pay gains that — while slowing — remain notably faster than before the pandemic. It could be that they do not.“Wage growth often follows inflation, so it’s really hard to say that wage growth is going to lead inflation down,” Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said during a CNBC interview last week.Risks to the outlook still loom, of course. The economy could still slow more sharply as the effects of higher interest rates add up, cutting into growth and hiring.Consumer spending has slowed, but it has not plummeted — a signal that the economy is absorbing higher interest rates without cracking.Amir Hamja/The New York TimesInflation could come roaring back because of an escalation of the war in Ukraine or some other unexpected development, prodding central bankers to do more to ensure that price increases come under control quickly. Or price increases could simply prove painfully stubborn.“One data point does not make a trend,” Mr. Waller said last week. “Inflation briefly slowed in the summer of 2021 before getting much worse.”But if price increases do keep slowing — maybe to below 3 percent, some economists speculated — officials might increasingly weigh the cost of getting price increases down against their other big goal: fostering a strong job market.The Fed’s tasks are both price stability and maximum employment, what is called its “dual mandate.” When one goal is really out of whack, it takes precedence, based on the way the Fed approaches policy. But once they are both close to target, pursuing the two is a balancing act.“I think we need to get a 2-handle on core inflation before they’re ready to put the dual mandates beside each other,” said Julia Coronado, an economist at MacroPolicy Perspectives. Forecasters in a Bloomberg survey expect that measure of inflation to fall below 3 percent — what economists call a “2-handle” — in the spring of 2024.The Fed may be able to walk that tightrope to a soft landing, retaining a labor market that has benefited a range of people — from those with disabilities to teenagers to Black and Hispanic adults.Mr. Powell has regularly said that “without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all,” explaining why the Fed might need to harm his prized job market.But at his June news conference, he sounded a bit more hopeful — and since then, there has been evidence to bolster that optimism.“The labor market, I think, has surprised many, if not all, analysts over the last couple of years with its extraordinary resilience,” Mr. Powell said. More

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    JPMorgan, Citigroup and Wells Fargo Report Better-than-Expected Profits

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    The NewsThree of the biggest banks in the United States made a cumulative $22.3 billion in profit last quarter, a hefty jump from the same period last year, the lenders reported Friday.The largest bank in the nation, JPMorgan Chase, led the way with $14.5 billion in profit, helped by growth virtually across the board, including increases in lending and credit-card transactions. Wells Fargo pulled in $4.9 billion and Citi earned $2.9 billion in the quarter. All of the earnings were higher than analysts had expected.JPMorgan Chase’s headquarters in New York. The bank made $14.5 billion in profit last quarter.Haruka Sakaguchi for The New York TimesWhy It MattersGiven its size, JPMorgan in particular is a proxy for the banking industry. Jamie Dimon, the bank’s chief executive, has deep political connections, and his prognostications on the economy are scrutinized in some circles as closely as a central banker’s musings.On Friday, Mr. Dimon told analysts that he expected the U.S. economy to experience “a soft landing, mild recession or a hard recession,” though he didn’t put a time frame on the prediction. “Obviously, we shall hope for the best,” he said.In its latest report, the bank listed a litany of risks, including that consumers are burning through their cash buffers and that inflation remains high. Last quarter, JPMorgan lost $900 million on investments in U.S. Treasury bonds and mortgage-backed securities, which have dropped in value as rates have risen — but that was barely a dent in its results.Wells Fargo, one of the nation’s largest mortgage lenders, is watched by analysts for signs of economic stress. The U.S. economy “continues to perform better than many had expected,” said Charles W. Scharf, the bank’s chief executive.The bank said Friday that soured loans in its commercial business had increased, but that its consumer business had held fairly steady, with a slight rise in credit-card defaults offset by a drop in losses on auto loans. Commercial real estate, especially loans on office space, is a pain point, and the bank set aside nearly $1 billion more for losses.Unlike the other banks, Citigroup reported a fall in second-quarter profit, although the decline was not as severe as analysts had predicted. “The long-awaited rebound in investment banking has yet to materialize, making for a disappointing quarter,” Citi’s chief executive, Jane Fraser, said in a statement.BackgroundThe three major banks that reported earnings Friday have been all over the news this year, thanks to their prominent role attempting to be a stabilizing force during the spring banking crisis that felled three smaller lenders. JPMorgan bought one of those failed banks, First Republic. In an indication of how troubled that institution had become, JPMorgan said Friday that it was setting aside $1.2 billion to deal with losses in First Republic’s lending portfolio.Analysts still expect the acquisition to prove worthy in the end, thanks to First Republic’s base of wealthy clients and coastal branches, which Friday’s results show are already buoying JPMorgan’s asset and wealth management arms.The U.S. government debt-limit standoff in April and May was also reflected in the banks’ results, with Citi citing anxiety during the negotiations as pushing investment-banking clients to the “sidelines” during the second quarter.What’s NextIn the next week or so, a slew of other banks will report quarterly earnings. Among the most closely watched will be Wednesday’s results from Goldman Sachs, which has hinted publicly of a disappointing stretch, and regional banks like Western Alliance and Comerica, which will be looking to prove they have bounced back from their recent troubles. More

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    The Fed’s Vice Chair for Supervision Suggests Big-Bank Regulation Changes

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    In a series of changes that has bank lobbyists on the defensive, Michael Barr is calling for higher bank capital and tougher annual stress tests.Michael S. Barr, the Federal Reserve’s vice chair for supervision, announced on Monday that he would be pushing for significant changes to how America’s largest banks were overseen in a bid to make them more resilient in times of trouble — partly by ratcheting up how much capital they have to get them through a rough patch.The overhaul would require the largest banks to increase their holdings of capital — cash and other readily available assets that could be used to absorb losses in times of trouble. Mr. Barr predicted that his tweaks, if put into effect, would be “equivalent to requiring the largest banks hold an additional two percentage points of capital.”“The beauty of capital is that it doesn’t care about the source of the loss,” Mr. Barr said in his speech previewing the proposed changes. “Whatever the vulnerability or the shock, capital is able to help absorb the resulting loss.”Mr. Barr’s proposals are not a done deal: They would need to make it through a notice-and-comment period — giving banks, lawmakers and other interested parties a chance to voice their views. If the Fed Board votes to institute them, the transition will take time. But the sweeping set of changes that he set out meaningfully tweak how banks both police their own risks and are overseen by government regulators.“It’s definitely meaty,” said Ian Katz, an analyst at Capital Alpha who covers banking regulation.The Fed’s vice chair for supervision, who was nominated by President Biden, has spent months reviewing capital rules for America’s largest banks, and his results have been hotly anticipated: Bank lobbyists have for months been warning about the changes he might propose. Midsize banks in particular have been outspoken, saying that any increase in regulatory requirements would be costly for them, reining in their ability to lend.Monday’s speech made clear why banks have been worried. Mr. Barr wants to update capital requirements based on bank risk “to better reflect credit, trading and operational risk,” he said in his remarks, delivered at the Bipartisan Policy Center in Washington.For instance, banks would no longer be able to rely on internal models to estimate some types of credit risk — the chance of losses on loans — or for particularly tough-to-predict market risks. Beyond that, banks would be required to model risks for individual trading desks for particular asset classes, instead of at the firm level.“These changes would raise market risk capital requirements by correcting for gaps in the current rules,” Mr. Barr said.Perhaps anticipating more bank pushback, Mr. Barr also listed existing rules that he did not plan to tighten, among them special capital requirements that apply only to the very largest banks.The new proposal would also try to address vulnerabilities laid bare early this year when a series of major banks collapsed.One factor that led to the demise of Silicon Valley Bank — and sent a shock wave across the midsize banking sector — was that the bank was sitting on a pile of unrealized losses on securities classified as “available for sale.”The lender had not been required to count those paper losses when it was calculating how much capital it needed to weather a tough period. And when it had to sell the securities to raise cash, the losses came back to bite.Mr. Barr’s proposed adjustments would require banks with assets of $100 billion or more to account for unrealized losses and gains on such securities when calculating their regulatory capital, he said.The changes would also toughen oversight for a wider group of large banks. Mr. Barr said his more stringent rules would apply to firms with $100 billion or more in assets — lowering the threshold for tight oversight, which now applies the most enhanced rules to banks that are internationally active or have $700 billion or more in assets. Of the estimated 4,100 banks in the nation, roughly 30 hold $100 billion or more in assets.Mr. Katz said the expansion of tough rules to a wider set of banks was the most notable part of the proposal: Such a tweak was expected based on remarks from other Fed officials recently, he said, but “it’s quite a change.”The bank blowups this year illustrated that even much smaller banks have the potential to unleash chaos if they collapse.Still, “we’re not going to know how significant these changes are until the lengthy rule-making process plays out over the next couple of years,” said Dennis Kelleher, the chief executive of the nonprofit Better Markets.Mr. Kelleher said that in general Mr. Barr’s ideas seemed good, but added that he was troubled by what he saw as a lack of urgency among regulators.“When it comes to bailing out the banks, they act with urgency and decisiveness,” he said, “but when it comes to regulating the banks enough to prevent crashes, they’re slow and they take years.”Bank lobbyists criticized Mr. Barr’s announcement.“Fed Vice Chair for Supervision Barr appears to believe that the largest U.S. banks need even more capital, without providing any evidence as to why,” Kevin Fromer, the chief executive of the lobby group the Financial Services Forum, said in a statement to the news media on Monday.“Further capital requirements on the largest U.S. banks will lead to higher borrowing costs and fewer loans for consumers and businesses — slowing our economy and impacting those on the margin hardest,” Mr. Fromer said. Susan Wachter, a finance professor at the University of Pennsylvania’s Wharton School, said the proposed changes were “long overdue.” She said it was a relief to know that a plan to make them was underway.The Fed vice chair hinted that additional bank oversight tweaks inspired by the March turmoil were coming.“I will be pursuing further changes to regulation and supervision in response to the recent banking stress,” Mr. Barr said in his speech. “I expect to have more to say on these topics in the coming months.” More

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    At the Front Lines of the Inflation Fight, Uncertainty Reigns

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    Central bankers and economists gathered this week and, amid concerns about persistent inflation, wondered about all the things they still don’t know.When prices started to take off in multiple countries around the world about two years ago, the word most often associated with inflation was “transitory.” Today, the word is “persistence.”That was uttered repeatedly at the 10th annual conference of the European Central Bank this week in Sintra, Portugal.“It’s been surprising that inflation has been this persistent,” Jerome H. Powell, the chair of the Federal Reserve, said.“We have to be as persistent as inflation is persistent,” Christine Lagarde, the president of the European Central Bank, said.The latest inflation data in Britain “showed clear signs of persistence,” Andrew Bailey, the governor of the Bank of England, said.Policymakers from around the world gathered alongside academics and analysts to discuss monetary policy as they try to force inflation down. Collectively, they sent a single message: Interest rates will be high for awhile.Even though inflation is slowing, domestic price pressures remain strong in the United States and Europe. On Friday, data showed the inflation in the eurozone slowed to 5.5 percent, but core inflation, a measure of domestic price increases, rose. The challenge for policymakers is how to meet their targets of 2 percent inflation, without overdoing it and pushing their economies into recessions.It’s hard to judge when a turning point has been reached and policymakers have done enough, said Clare Lombardelli, the chief economist at the Organization for Economic Cooperation and Development and former chief economic adviser in the British Treasury. “We don’t yet know. We’re still seeing core inflation rising.” The tone of the conference was set on Monday night by Gita Gopinath, the first deputy managing director of the International Monetary Fund. In her speech, she said there was an “uncomfortable truth” that policymakers needed to hear. “Inflation is taking too long to get back to target.”Gita Gopinath, of the International Monetary Fund, said inflation was “taking too long” to come back down.Elizabeth Frantz/ReutersAnd so, she said, interest rates should be at levels that restrict the economy until core inflation is on a downward path. But Ms. Gopinath had another unsettling message to share: The world will probably face more shocks, more frequently.“There is a substantial risk that the more volatile supply shocks of the pandemic era will persist,” she said. Countries cutting global supply chains to shift production home or to existing trade partners would raise production costs. And they would be more vulnerable to future shocks because their concentrated production would give them less flexibility.The conversations in Sintra kept coming back to all the things economists don’t know, and the list was long: Inflation expectations are hard to decipher; energy markets are opaque; the speed that monetary policy affects the economy seems to be slowing; and there’s little guidance on how people and companies will react to large successive economic shocks.There were also plenty of mea culpas about the inaccuracy of past inflation forecasts.“Our understanding of inflation expectations is not a precise one,” Mr. Powell said. “The longer inflation remains high, the more risk there is that inflation will become entrenched in the economy. So the passage of time is not our friend here.”Meanwhile, there are signs that the impact of high interest rates will take longer to be felt in the economy than they used to. In Britain, the vast majority of mortgages have rates that are fixed for short periods and so reset every two or five years. A decade ago, it was more common to have mortgages that fluctuated with interest rates, so homeowners felt the impact of higher interest rates instantly. Because of this change, “history isn’t going to be a great guide,” Mr. Bailey said.Another poor guide has been prices in energy markets. The price of wholesale energy has been the driving force behind headline inflation rates, but rapid price changes have helped make inflation forecasts inaccurate. A panel session on energy markets reinforced economists’ concerns about how inadequately informed they are on something that is heavily influencing inflation, because of a lack of transparency in the industry. A chart on the mega-profits of commodity-trading houses last year left many in the room wide-eyed.A shopping district in central London. “Our understanding of inflation expectations is not a precise one,” said Jerome H. Powell, the chair of the Federal Reserve.Sam Bush for The New York TimesEconomists have been writing new economic models, trying to respond quickly to the fact that central banks have consistently underestimated inflation. But to some extent the damage has already been done, and among some policymakers there is a growing lack of trust in the forecasts. The fact that central bankers in the eurozone have agreed to be “data dependent” — making policy decisions based on the data available at each meeting, and not take predetermined actions — shows that “we don’t trust models enough now to base our decision, at least mostly, on the models,” said Pierre Wunsch, a member of the E.C.B.’s Governing Council and the head of Belgium’s central bank. “And that’s because we have been surprised for a year and a half.”Given all that central bankers do not know, the dominant mood at the conference was the need for a tough stance on inflation, with higher interest rates for longer. But not everyone agreed.Some argued that past rate increases would be enough to bring down inflation, and further increases would inflict unnecessary pain on businesses and households. But central bankers might feel compelled to act more aggressively to ward off attacks on their reputation and credibility, a vocal minority argued.“The odds are that they have already done too much,” said Erik Nielsen, an economist at UniCredit, said of the European Central Bank. This is probably happening because of the diminishing faith in forecasts, he said, which is putting the focus on past inflation data.“That’s like driving a car and somebody painted your front screen so you can’t look forward,” he said. “You can only look through the back window to see what inflation was last month. That probably ends with you in the ditch.” More

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    U.K. Inflation Remains Stuck at 8.7 Percent

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    The rate, which had been expected to edge lower in May, shows that Britain’s cost-of-living crisis persists, and is likely to prompt the Bank of England to raise interest rates again.Britain’s inflation rate held steady in May, frustrating expectations that price increases would slow down, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.Consumer prices rose 8.7 percent from a year earlier, the same as in April, the Office for National Statistics said. Economists had forecast it would dip slightly. The data is likely to compound concerns that Britain’s cost-of-living crisis may intensify in the coming months as mortgage holders confront the burden of higher interest rates pushed through to tackle stubbornly strong inflation.The Bank of England on Thursday is expected to lift interest rates for a 13th consecutive time, by a quarter-point to 4.75 percent, the highest since early 2008.Last week, wage data showed pay growing faster than expected. On Wednesday, the statistics agency said core inflation, which excludes energy and food prices and is used to assess how deeply inflation is embedding in an economy, rose to 7.1 percent in the year through May, the fastest pace since 1992. Services inflation, an indicator that is closely watched by policymakers, climbed to 7.4 percent, from 6.9 percent in April.“The overwhelming impression is that this is a disappointing set of numbers that shows broad-based strength” in prices, Sandra Horsfield, an economist at Investec, wrote in an analyst note. “This is simply not good enough.”The rise in core inflation is “something that may cause some concern,” Grant Fitzner, the chief economist at the statistics agency, told the BBC.That’s because it has been pushed higher by price increases in services, such as at restaurants and hotels, much of it reflecting higher wage costs for companies, Mr. Fitzner said. “Services prices are quite sticky,” he said. “It can take longer for them to pick up but likewise longer for them to unwind as well.”This is leading to worries that overall inflation will be much slower to fall that it was to rise, he added.And that is what Britain is experiencing, as inflation data over the past few months has repeatedly defied expectations and stayed higher than predicted.Britain’s headline inflation rate has slowed from a peak of 11.1 percent in October, but it’s still uncomfortably high, especially compared with its international peers. In the United States, the Consumer Price Index rose 4 percent in May from the year before, and in the eurozone, inflation averaged 6.1 percent last month for the 20 countries that use the euro. The Federal Reserve has paused its interest rate increases, and traders are betting that the European Central Bank will raise rates just once or twice more; in Britain, though, investors are predicting the central bank will be forced to raise rates for longer to stamp out inflation.“We are in a situation now where markets are saying they’ve lost faith and that requires a big reaction from the bank,” said Andrew Goodwin, an economist at Oxford Economics. The central bank “needs to acknowledge that the game has changed,” he said, adding that he wouldn’t be surprised if the central bank raised rates by half a point on Thursday.Andrew Bailey, the governor of the Bank of England, said last week that policymakers still expected the inflation rate to come down, but “it’s taking a lot longer than expected.”Mr. Bailey’s predecessor, Mark Carney, said recently that Britain’s departure from the European Union was part of the reason Britain was suffering from stubbornly high inflation. There were other economic shocks at the same time, such as rising energy prices following Russia’s invasion of Ukraine, but Brexit is a “unique” part of the adjustment that will take years to resolve, he said.“We laid out in advance of Brexit that this will be a negative supply shock for a period of time and the consequence of that will be a weaker pound, higher inflation and weaker growth,” he told The Daily Telegraph last week.Traders are betting that the Bank of England’s interest rate could reach 6 percent by early next year. These expectations are shown through rising yields on government bonds, which now exceed the levels reached during Liz Truss’s brief but turbulent stint as prime minister last fall.In response, mortgage rates are rising too. Last weekend, the average rate for a two-year fixed-rate mortgage hit 6 percent for the first time this year.Last month, the central bank warned that many mortgage holders had not experienced the cost of higher interest rates yet. About 1.3 million households are expected to reach the end of their fixed-rate term by the end of the year, prompting a reset in the rate that applies to their loan. And the average mortgage holder in that group will see their monthly interest payments increase about 200 pounds ($255) a month, or £2,400 over the course of a year, if their mortgage rate rises 3 percentage points, which is what mortgage quotes suggested last month, the bank said.The additional financial strain follows months of higher prices, from energy bills to groceries. Food and nonalcoholic drink prices rose 18.3 percent in May from a year earlier, data showed on Wednesday, a slight slowdown from previous months when food inflation hit a 45-year high. The moderation in food and fuel prices was offset by rising prices at restaurants and hotels and for secondhand cars and live music events.“We know how much high inflation hurts families and businesses across the country,” Jeremy Hunt, the chancellor of the Exchequer, said in a statement on Wednesday, adding that the government’s plan to halve the rate of inflation would be the best way to keep costs and interest rates down.“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy,” he said.In January the government, led by Prime Minister Rishi Sunak, vowed to halve inflation by the end of the year, which would mean a rate of about 5 percent, amid waves of public and private sector strikes from workers frustrated by declining living standards.When that promise was made, it seemed almost guaranteed to succeed based on economic forecasts. But as the months have worn on, inflation has been harder to slow down than expected and that pledge is now at risk of being missed.Adding to the government’s challenges, separate data published on Wednesday estimated that Britain’s public sector debt exceeded 100 percent of gross domestic product for the first time since 1961, as the government paid out more money for energy support programs and social benefits to mitigate the cost-of-living crisis. More

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    U.K. Moves to Use Frozen Russian Assets to Help Ukraine Rebuild

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    As Russia’s ruinous attacks on Ukraine mount, Britain’s government is proposing legislation that would enable it to divert frozen Russian assets to the rebuilding of Ukraine and keep sanctions in place until Moscow pays compensation to its war-torn neighbor.The British announcement is in line with a decision last month at the annual Group of 7 meeting in Hiroshima, Japan, to freeze the estimated $300 billion worth of Russian assets held by banks and financial institutions in those countries — including Britain — “until Russia pays for the damage it has caused to Ukraine.”The issue of seized assets is highly contentious. While governments have the power to freeze assets, the European Central Bank has privately warned Brussels that confiscating Russian funds or giving the earned interest on those accounts to Ukraine could undermine confidence in the euro and shake financial stability, according to a report in The Financial Times. Investors might be reluctant to use euros as a reserve currency if they fear their funds could be grabbed.Ukraine’s reconstruction costs are estimated to top $411 billion, according to the most recent numbers from the World Bank, the European Commission and the United Nations. The ravaged landscape of the eastern city of Bakhmut, which President Volodymyr Zelensky of Ukraine laid out at the G7 meeting, is just one sign of the damage. “You have to understand that there is nothing,” Mr. Zelensky told reporters. “They’ve destroyed everything. There are no buildings.”The bank’s estimate was calculated before the vast devastation unleashed by the destruction of the Kakhovka dam in southern Ukraine this month.Calls to seize Russian assets and use them for Ukraine’s reconstruction have increased as the war has stretched well into its second year. Last week, the United States Senate introduced a bipartisan bill to confiscate Russian assets and use them for Ukraine’s reconstruction. And the issue is also expected to come up at a Ukraine Recovery Conference being held in London on Wednesday and Thursday.Since Russia began its full-scale invasion of Ukraine early last year, Britain has frozen roughly $23 billion in assets and imposed sanctions on 1,550 individuals. The government’s latest proposal will require people under sanctions to disclose their holdings in Britain.“Through our new measures today, we’re strengthening the U.K.’s sanctions approach,” James Cleverly, Britain’s foreign secretary, said in a statement on Monday accompanying the announcement, “affirming that the U.K. is prepared to use sanctions to ensure Russia pays to repair the country it has so recklessly attacked.” More