Brainard, Lael

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After Fed Cuts Rates, Biden Will Claim Credit for Economy’s Strength

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The president’s speech on Thursday won’t be a “victory lap,” officials said, but it will celebrate falling inflation and borrowing costs along with solid growth.President Biden is set to declare on Thursday that the economy has finally reached a turning point he has long sought. With price growth cooling and borrowing costs beginning to fall, he will cast the economic moment as vindication for his often-criticized management of the recovery from the pandemic recession.But Mr. Biden will stop short of “declaring victory” over inflation in his speech to the Economic Club of Washington, administration officials said.Instead, the president will stress the need for further action to bring down the costs of housing, groceries and other daily necessities that continue to frustrate American consumers. That is a nod to the politics of price growth, which are challenging for Vice President Kamala Harris as she seeks to succeed Mr. Biden in the November presidential election.“The president knows this is no time for a victory lap, which is why he will talk about the work ahead,” Jeffrey Zients, the White House chief of staff, told reporters on Wednesday.Still, Mr. Biden appears poised to more boldly claim credit for the economy’s performance than he has in recent months. The president and Ms. Harris have struggled to shake off voter discontent over an inflation surge earlier in his presidency that has left many Americans with a lingering case of sticker shock.In recent weeks, the president has been buoyed by a run of good news on prices, including for gasoline, groceries and the overall inflation rate, as well as the first report of rising real incomes for the typical American since the pandemic began. Mortgage rates have fallen from their recent highs, and on Wednesday, the Federal Reserve cut interest rates by half a percentage point and signaled further cuts this year.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Crypto’s Wild D.C. Ride: From FTX at the Fed to a Scramble for Access

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    FTX’s demise and its leader’s upcoming trial haven’t stopped a major lobbying push by the industry this week, but the events have changed its tone.Cryptocurrency lobbyists were riding so high in early 2022 that an FTX executive felt comfortable directly emailing Jerome H. Powell, the chair of the Federal Reserve, to ask him to meet with Sam Bankman-Fried, the soon-to-be-disgraced founder of the cryptocurrency exchange.It worked.“The day that would work for me is February 1,” Mr. Powell replied to a Jan. 11 email from Mark Wetjen, an FTX policy official and former commissioner at the Commodity Futures Trading Commission.Mr. Powell’s public calendar shows that he and Mr. Bankman-Fried met as planned. And Mr. Wetjen went on to send the Fed chair two policy papers that FTX had recently published, according to emails obtained through a public records request. “Hope you’re finding these useful!” Mr. Wetjen wrote. “Great to have people like you serving our country.”Mr. Powell has long been cautious about the digital currency industry, but, like many in Washington, he was trying to learn more. FTX was eager to do the teaching. According to newly released records, Mr. Wetjen managed to gain access to a range of federal officials. The records show that Mr. Bankman-Fried secured a virtual meeting in October 2021 with another top Fed official, Lael Brainard, who is now the director of the White House National Economic Council. And public calendars show that Mr. Bankman-Fried went on to meet with another top financial regulator, Martin Gruenberg, head of the Federal Deposit Insurance Corporation.The crypto industry faces a more difficult landscape in Washington after last fall’s collapse of FTX. Mr. Bankman-Fried was arrested on fraud charges in December, and his trial is set to start on Tuesday. The industry has also faced a wide-ranging government crackdown that has sent some crypto entrepreneurs abroad in search of friendlier governments.The companies that have survived crypto’s downturn are still pouring millions of dollars into lobbying, but they are having a harder time gaining access to the halls of power. Some congressional offices have become reluctant to meet with industry representatives. Crypto lobbyists appear less frequently on the public calendars of key officials at the regulatory agencies, and companies have had to shift strategy, straining to distinguish themselves from FTX.“There are a bunch of people who’ve had trouble having meetings,” said Sheila Warren, who runs the Crypto Council for Innovation, an advocacy group. “I have heard from some offices that they will not meet with certain people anymore.”With Mr. Bankman-Fried’s trial approaching, the crypto industry is scrambling to change the subject from FTX.Stand With Crypto, a nonprofit backed by the giant digital currency exchange Coinbase, is planning to hold a “fly-in” on Wednesday, bringing in industry players from around the country to talk with lawmakers.“It has been quieter — and more circumspect, in some respects — but the push from the industry hasn’t abated,” said Mark Hays, who tracks cryptocurrency regulation at Americans for Financial Reform. “The crypto industry knows that its star has been tarnished on Capitol Hill, to some extent.”The mood in Congress was friendlier to the industry in early 2022, when FTX was at its zenith: Mr. Bankman-Fried had been positioned as a sort of wunderkind, eccentric and brilliant. But since its collapse, many lawmakers have argued that the industry should be overseen more strictly.“The tone has certainly changed among Democrats — they’re much more skeptical,” said Bart Naylor at Public Citizen, a government watchdog that has been tracking cryptocurrency lobbying.Regulators were more hesitant to embrace crypto firms even in 2022. It was unusual that FTX directly landed a meeting with the Fed chair.Read the emailsA selection of correspondence between FTX and the Federal Reserve, pulled from a series of Freedom of Information Requests submitted by The New York Times.Read DocumentMr. Powell’s only other listed private-sector meetings in February 2022 were with Jane Fraser, the chief executive of Citigroup; David Solomon from Goldman Sachs; Suzanne Clark from the U.S. Chamber of Commerce; James Gorman, the chief executive, and Tom Wipf, a vice chair, from Morgan Stanley; Jamie Dimon, the chief executive of JPMorgan Chase; the Business Council, a group of chief executives; and the head of Singapore’s sovereign wealth fund.Mr. Powell has met with other financial technology companies — he talked with a representative from the payment processor Stripe in March 2022, for example. But he has not listed similar meetings in 2023, based on his calendars released to date.At the meeting with Mr. Bankman-Fried, Mr. Powell and the FTX officials discussed stablecoins as well as central bank digital currencies, a form of electronic cash backed by the government, a person familiar with the matter said.Mr. Powell has met with other financial technology companies in the past. But he has not listed similar meetings in 2023, based on his calendars released to date.Kevin Dietsch/Getty ImagesMr. Wetjen knew many of the agency officials with whom he was setting up meetings from his previous policy role in Washington. He and Mr. Powell had worked on regulatory issues together while Mr. Powell was a Fed governor, for instance.Dennis Kelleher, the head of the regulatory watchdog Better Markets, said FTX had exercised an extensive web of influence in broader regulatory circles, partly through Mr. Wetjen’s connections.“This is the problem: These relationships, which are not visible to the public, pay dividends year after year after year once these guys swing through the revolving door,” Mr. Kelleher said. FTX also flooded Washington with money, which helped it gain a foothold in congressional offices and at think tanks, he and several lobbyists said.The Fed did not provide a comment for this article, nor did Mr. Wetjen. The White House had no comment on Ms. Brainard’s meeting with Mr. Bankman-Fried. An F.D.I.C. spokesman noted that chairs of the agency often held courtesy visits with financial firm leaders.Back in 2022, FTX was trying to shape how the Commodity Futures Trading Commission regulated it, as Mr. Wetjen made clear to Mr. Powell in one email from that May.“We have an application before the C.F.T.C. that lays out for the agency how to do so,” Mr. Wetjen wrote of regulating FTX. “All the C.F.T.C. has to do is approve it.”The Fed had little control over such matters, but Mr. Powell does sit on the Financial Stability Oversight Council, an interagency regulatory body that includes the director of the Commodity Futures Trading Commission.Mr. Wetjen continued: “To the extent the crypto industry comes up in discussions” at the Financial Stability Oversight Council, “we wanted you to have this context and our views at FTX.”The company clearly failed to make much headway with the Fed chair. Mr. Powell supported an October decision by the Financial Stability Oversight Council to further study the kind of setup that FTX and other trading platforms wanted for crypto asset exchanges, rather than greenlighting it.Now, FTX’s demise has only bolstered the arguments of regulators who wanted to approach crypto firms carefully. This year, the Securities and Exchange Commission has sued Coinbase and Binance, FTX’s two largest competitors, amid a broader government crackdown. With Mr. Bankman-Fried out of the picture, other financial technology companies are spending millions to make sure that the future of regulatory oversight favors them.Mr. Hays of Americans for Financial Reform said the industry was hardly being shunned in Washington, because “money talks.”“I still think they’re getting doors opened.” More

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    Biden’s Debt Ceiling Strategy: Win in the Fine Print

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    The president and his negotiators believe they worked out a deal that allowed Republicans to claim big spending cuts even as the reality was far more modest.Shalanda Young couldn’t sleep.A small team of Biden administration officials had spent the past two days in intense negotiations with House Republicans in an attempt to avert a catastrophic government default. Ms. Young, the White House budget director, had been trading proposals on federal spending caps with negotiators deputized by Speaker Kevin McCarthy, whose Republican caucus was refusing to raise the nation’s $31.4 trillion borrowing limit without deep cuts.Now, as she scrolled Netflix in search of “bad television” to distract her racing mind, Ms. Young had a sinking feeling. What if she cut a deal to reduce spending and raise the debt limit, only to see Republicans attempt to force through much deeper cuts when it came time to pass annual appropriations bills this fall?At work the next morning, Ms. Young asked her staff how to stop that from happening. They settled on a plan, which in essence would penalize Republicans’ most cherished spending programs if they failed to follow the contours of the agreement. Then they forced Republicans to include that plan in the legislative text codifying the deal.That approach reflected a broader strategy President Biden’s team followed in the debt limit negotiations, according to interviews with current and former administration officials, some Republicans and other people familiar with the talks.On Saturday, that strategy reached its conclusion as Mr. Biden signed the Fiscal Responsibility Act of 2023 into law, just days before a potential default and following weeks of talks and a revolt from right-wing lawmakers in the House that put an agreement at risk of collapse.In pursuit of an agreement, the Biden team was willing to give Republicans victory after victory on political talking points, which they realized Mr. McCarthy needed to sell the bill to his conference. They let Mr. McCarthy’s team claim in the end that the deal included deep spending cuts, huge clawbacks of unspent federal coronavirus relief money and stringent work requirements for recipients of federal aid.But in the details of the text and the many side deals that accompanied it, the Biden team wanted to win on substance. With one large exception — a $20 billion cut in enforcement funding for the Internal Revenue Service — they believe they did.The way administration officials see it, the full final agreement’s spending cuts are nothing worse than they would have expected in regular appropriations bills passed by a divided Congress. They agreed to structure the cuts so they appeared to save $1.5 trillion over a decade in the eyes of the nonpartisan Congressional Budget Office. But thanks to the side deals — including some accounting tricks — White House officials estimate that the actual cuts could total as little as $136 billion over the two enforceable years of the spending caps that are central to the agreement.Much of the $30 billion in clawed-back Covid-19 money was probably never going to be spent, Biden officials say, including dollars from an aviation manufacturing jobs program that had basically ended.At one point in the talks, administration officials offered to include in the deal more than 100 relief programs from which they were willing to rescind money. The final list spanned 20 pages of a 99-page bill, and Mr. McCarthy championed it on the House floor. But because much of the money was repurposed for other spending, the net savings added up to only about $11 billion over two years. One of the programs had a remaining balance of just $40.Many Democrats remain furious that the deal included new work requirements that could push 750,000 people off food stamps, which the Biden team begrudgingly concluded it had to accept.That measure alone could have tanked Democratic support for the deal in Congress, officials knew. So they sought to counterbalance it with efforts to expand food stamp eligibility for veterans, the homeless and others, which Republicans agreed to do. The budget office concluded that the changes would actually add recipients to the program, on net.Some Democrats and progressive groups have sharply criticized Mr. Biden for negotiating over the debt limit at all, denouncing the spending cuts and work requirements and saying he cemented Republicans’ ability to ransom the borrowing limit whenever a Democrat occupies the White House.Republican negotiators sold the deal as a game-changing blow to Mr. Biden’s spending ambitions. “They absolutely have tire tracks on them in this negotiation,” Representative Garret Graves of Louisiana said before the House vote on Wednesday.Mr. Biden views it differently. As the Senate prepared to pass the agreement on Thursday evening, he huddled with his chief of staff, Jeffrey D. Zients, along with Steve Ricchetti, counselor to the president, and other aides, in Mr. Zients’s office in the West Wing of the White House. Mr. Biden asked them what you might call a scorecard question: What percentage of Democrats in the House had voted for the deal, and what share were expected to in the Senate?When Mr. Ricchetti told him the number of Democrats would be larger, in both chambers, than the share of Republicans supporting the deal, Mr. Biden was pleased. It was validation, in his view, that he had cut a good deal.Mr. Zients referred to that vote share in an interview on Friday. “If you go back a few months ago, no one would have thought this was possible,” he said.It was not an assured outcome. The negotiating teams came to the table with divergent views of the drivers of federal debt in recent years. White House negotiators blamed Republican tax cuts. Republicans blamed Mr. Biden’s economic agenda, including a debt-financed Covid relief bill in 2021 and a bipartisan infrastructure bill later that year.The dispute occasionally grew profane. At one point, after Mr. Biden’s negotiators criticized the 2017 Republican tax cuts, a “very mild-mannered” aide to Mr. McCarthy stood up, shook his finger at the Biden team and hotly responded that their argument was nonsense, using a vulgarity, Mr. Graves recounted.Mr. Biden had insisted for months that he would not negotiate over raising the borrowing limit. But privately, many aides had been planning on talks all along — though they refused to admit those talks were linked to the debt limit. The Biden team reasoned that it would have to negotiate fiscal issues this year anyway, both on appropriations bills and on programs like food stamps that are included in a regularly reauthorized farm bill.Mr. Biden’s economic advisers, including Lael Brainard, the director of the National Economic Council, and Treasury Secretary Janet L. Yellen, were warning of catastrophic damage to the economy if the government could no longer pay its bills on time.The president appeared to score wins before the talks even started. He goaded Republicans into agreeing, in the midst of his State of the Union address, that Social Security and Medicare would be off limits in the talks — thanks to a spontaneous riff that grew out of a passage in his speech that he had worked on extensively in the days beforehand. He proposed a budget filled with tax increases on the rich and corporations that were meant to reduce debt, but he refused to engage Mr. McCarthy in serious talks until Republicans offered a spending plan of their own.In late April, the House passed a bill that included $4.7 trillion in savings from spending cuts, canceling clean-energy tax breaks and clawing back money for Covid relief and the I.R.S. It featured work requirements and measures to speed fossil fuel projects, and it raised the debt limit for one year.Mr. Biden, under fire from business groups and others who feared the standoff could result in the United States running out of money before the debt limit was raised, soon agreed to designate a team of negotiators. The White House team was led by officials including Ms. Young and one of her top aides, Michael Linden, who delayed his departure from the White House to help negotiate along with Louisa Terrell, the legislative affairs director, and Mr. Ricchetti.Mr. McCarthy’s negotiators gave Biden officials the impression that to reach agreement, they needed at least one talking point from every major aspect of the House Republican debt limit bill.The talks took a few surprising turns. Multiple White House officials say the Republican team briefly entertained relatively modest proposals to raise tax revenue, including closing loopholes that benefit some real-estate owners and people who trade cryptocurrency. Those discussions stalled quickly.Democrats agreed to fast-track a natural gas pipeline, in what officials concede was making good on a promise to Senator Joe Manchin III, Democrat of West Virginia, for backing Mr. Biden’s signature climate law last year.The spending caps ended up roughly where many Biden aides had predicted they would in private discussions months ago. But few White House officials believed they would have to give up $20 billion of the $80 billion that Democrats approved last year to help the I.R.S. crack down on tax cheats. Mr. Biden hammered out the amount in a final call with Mr. McCarthy.Ms. Young said that cut was painful. “And not just for me,” she added. “It’s something we talked to the president about many times. He cares deeply about this.”On Thursday evening in Mr. Zients’s office, the president and his team were focused on upsides. They had beaten back Republican attempts to cancel the climate law, to add new work requirements on Medicaid recipients and to impose binding spending caps for a decade. Mr. Biden was particularly pleased to spare key veterans’ programs from cuts.On Friday morning, Mr. Zients gathered core officials in his office, as he had every day, seven days a week, for several weeks running. Ms. Brainard and the economic team were relieved to have cleared the threat of default not just for this year, but through the next presidential election. Aides worked on honing Mr. Biden’s planned remarks in an Oval Office address on Friday evening.The speech started at 7:01 p.m., unusually promptly for Mr. Biden. By then, his staff was already celebrating. An hour earlier, happy hour had begun in Mr. Zients’s office.Catie Edmondson More

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    Before Collapse of Silicon Valley Bank, the Fed Spotted Big Problems

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    The bank was using an incorrect model as it assessed its own risks amid rising interest rates, and spent much of 2022 under a supervisory review.WASHINGTON — Silicon Valley Bank’s risky practices were on the Federal Reserve’s radar for more than a year — an awareness that proved insufficient to stop the bank’s demise.The Fed repeatedly warned the bank that it had problems, according to a person familiar with the matter.In 2021, a Fed review of the growing bank found serious weaknesses in how it was handling key risks. Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations. Those warnings, known as “matters requiring attention” and “matters requiring immediate attention,” flagged that the firm was doing a bad job of ensuring that it would have enough easy-to-tap cash on hand in the event of trouble.But the bank did not fix its vulnerabilities. By July 2022, Silicon Valley Bank was in a full supervisory review — getting a more careful look — and was ultimately rated deficient for governance and controls. It was placed under a set of restrictions that prevented it from growing through acquisitions. Last autumn, staff members from the San Francisco Fed met with senior leaders at the firm to talk about their ability to gain access to enough cash in a crisis and possible exposure to losses as interest rates rose.It became clear to the Fed that the firm was using bad models to determine how its business would fare as the central bank raised rates: Its leaders were assuming that higher interest revenue would substantially help their financial situation as rates went up, but that was out of step with reality.By early 2023, Silicon Valley Bank was in what the Fed calls a “horizontal review,” an assessment meant to gauge the strength of risk management. That checkup identified additional deficiencies — but at that point, the bank’s days were numbered. In early March, it faced a run and failed, sending shock-waves across the broader American banking system that ultimately led to a sweeping government intervention meant to prevent panic from spreading. On Sunday, Credit Suisse, which was caught up in the panic that followed Silicon Valley Bank’s demise, was taken over by UBS in a hastily arranged deal put together by the Swiss government.Major questions have been raised about why regulators failed to spot problems and take action early enough to prevent Silicon Valley Bank’s March 10 downfall. Many of the issues that contributed to its collapse seem obvious in hindsight: Measuring by value, about 97 percent of its deposits were uninsured by the federal government, which made customers more likely to run at the first sign of trouble. Many of the bank’s depositors were in the technology sector, which has recently hit tough times as higher interest rates have weighed on business.And Silicon Valley Bank also held a lot of long-term debt that had declined in market value as the Fed raised interest rates to fight inflation. As a result, it faced huge losses when it had to sell those securities to raise cash to meet a wave of withdrawals from customers.The Fed has initiated an investigation into what went wrong with the bank’s oversight, headed by Michael S. Barr, the Fed’s vice chair for supervision. The inquiry’s results are expected to be publicly released by May 1. Lawmakers are also digging into what went awry. The House Financial Services Committee has scheduled a hearing on recent bank collapses for March 29.Michael S. Barr’s review of the Silicon Valley Bank problems will focus on a few key questions.Manuel Balce Ceneta/Associated PressThe picture that is emerging is one of a bank whose leaders failed to plan for a realistic future and neglected looming financial and operational problems, even as they were raised by Fed supervisors. For instance, according to a person familiar with the matter, executives at the firm were told of cybersecurity problems both by internal employees and by the Fed — but ignored the concerns.The Federal Deposit Insurance Corporation, which has taken control of the firm, did not comment on its behalf.Still, the extent of known issues at the bank raises questions about whether Fed bank examiners or the Fed’s Board of Governors in Washington could have done more to force the institution to address weaknesses. Whatever intervention was staged was too little to save the bank, but why remains to be seen.“It’s a failure of supervision,” said Peter Conti-Brown, an expert in financial regulation and a Fed historian at the University of Pennsylvania. “The thing we don’t know is if it was a failure of supervisors.”Mr. Barr’s review of the Silicon Valley Bank collapse will focus on a few key questions, including why the problems identified by the Fed did not stop after the central bank issued its first set of matters requiring attention. The existence of those initial warnings was reported earlier by Bloomberg. It will also look at whether supervisors believed they had authority to escalate the issue, and if they raised the problems to the level of the Federal Reserve Board.The Fed’s report is expected to disclose information about Silicon Valley Bank that is usually kept private as part of the confidential bank oversight process. It will also include any recommendations for regulatory and supervisory fixes.The bank’s downfall and the chain reaction it set off is also likely to result in a broader push for stricter bank oversight. Mr. Barr was already performing a “holistic review” of Fed regulation, and the fact that a bank that was large but not enormous could create so many problems in the financial system is likely to inform the results.Typically, banks with fewer than $250 billion in assets are excluded from the most onerous parts of bank oversight — and that has been even more true since a “tailoring” law that passed in 2018 during the Trump administration and was put in place by the Fed in 2019. Those changes left smaller banks with less stringent rules.Silicon Valley Bank was still below that threshold, and its collapse underlined that even banks that are not large enough to be deemed globally systemic can cause sweeping problems in the American banking system.As a result, Fed officials could consider tighter rules for those big, but not huge, banks. Among them: Officials could ask whether banks with $100 billion to $250 billion in assets should have to hold more capital when the market price of their bond holdings drops — an “unrealized loss.” Such a tweak would most likely require a phase-in period, since it would be a substantial change.But as the Fed works to complete its review of what went wrong at Silicon Valley Bank and come up with next steps, it is facing intense political blowback for failing to arrest the problems.Supervisors at the Federal Reserve Bank of San Francisco, which oversaw Silicon Valley Bank, issued six citations in 2021.Aaron Wojack for The New York TimesSome of the concerns center on the fact that the bank’s chief executive, Greg Becker, sat on the Federal Reserve Bank of San Francisco’s board of directors until March 10. While board members do not play a role in bank supervision, the optics of the situation are bad.“One of the most absurd aspects of the Silicon Valley bank failure is that its CEO was a director of the same body in charge of regulating it,” Senator Bernie Sanders, a Vermont independent, wrote on Twitter on Saturday, announcing that he would be “introducing a bill to end this conflict of interest by banning big bank CEOs from serving on Fed boards.”Other worries center on whether Jerome H. Powell, the Fed chair, allowed too much deregulation during the Trump administration. Randal K. Quarles, who was the Fed’s vice chair for supervision from 2017 to 2021, carried out a 2018 regulatory rollback law in an expansive way that some onlookers at the time warned would weaken the banking system.Mr. Powell typically defers to the Fed’s supervisory vice chair on regulatory matters, and he did not vote against those changes. Lael Brainard, then a Fed governor and now a top White House economic adviser, did vote against some of the tweaks — and flagged them as potentially dangerous in dissenting statements.“The crisis demonstrated clearly that the distress of even noncomplex large banking organizations generally manifests first in liquidity stress and quickly transmits contagion through the financial system,” she warned.Senator Elizabeth Warren, Democrat of Massachusetts, has asked for an independent review of what happened at Silicon Valley Bank and has urged that Mr. Powell not be involved in that effort.  He “bears direct responsibility for — and has a long record of failure involving” bank regulation, she wrote in a letter on Sunday.Maureen Farrell More

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    As Fed Nears Next Rate Decision, Its Vice Chair Cites Reasons for Hope

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    Lael Brainard, the vice chair of the Federal Reserve, emphasized that non-wage causes had driven inflation in a sweeping speech.The Federal Reserve’s second-in-command offered a hopeful analysis of America’s inflation situation on Thursday, emphasizing that many of the factors that have driven prices higher over recent years may be poised to fade.“It remains possible that a continued moderation in aggregate demand could facilitate continued easing in the labor market and reduction in inflation without a significant loss of employment,” Lael Brainard, the Fed’s vice chair, said in a speech at the University of Chicago Booth School of Business.Ms. Brainard spoke just days before Fed officials are set to begin the quiet period ahead of their Feb. 1 interest rate decision.In some ways, she broke with what her colleagues have been saying about the forces that could keep inflation high. Many central bankers have emphasized the roles that a tight labor market and strong wage growth are likely to play in propping up price increases, but Ms. Brainard focused on other factors that have sped up price increases, particularly when it comes to services.“There are a range of views on what it will take to bring down this component of inflation to prepandemic levels,” Ms. Brainard acknowledged in the remarks. She noted that wages are an important cost for services firms, so “one possible channel is through a weakening in labor demand.”But she added that “to the extent that inputs other than wages may have been responsible in part for important price increases,” a reversal in those factors could help to lower services inflation.In particular, Ms. Brainard noted that supply chain issues and jumps in fuel prices might be passing through to elevate some service costs, and that those could fade away, assuming supply chains continue to heal and gas stays relatively cheap.And Ms. Brainard also cited the reversal of swollen profit margins as something that could help inflation to moderate.Companies have enjoyed an unusual burst of pricing power in the pandemic era as repeated supply chain issues and resilient consumer demand have given them both a reason to try to raise prices and the wherewithal to do so without scaring away shoppers. Many firms have lifted what they are charging more than they needed to cover climbing costs, swelling their profits.“The labor share of income has declined over the past two years and appears to be at or below prepandemic levels, while corporate profits as a share of G.D.P. remain near postwar highs,” Ms. Brainard said.But that might be changing as demand wanes and price sensitivity returns.“The compression of these markups as supply constraints ease, inventories rise and demand cools could contribute to disinflationary pressures,” she said.The Fed is expected to raise interest rates again at its upcoming meeting as it tries to ensure that rapid inflation comes back under control. Officials slowed from a string of three-quarter-point moves in 2022 to a half-point move in December, and several have signaled that they would favor slowing to a quarter-point move at the February gathering.While Ms. Brainard did not speculate on what size rate move would be warranted in her prepared remarks, she did emphasize that borrowing costs will need to remain high to make sure that inflation moderates fully.“Policy will need to be sufficiently restrictive for some time to make sure inflation returns to 2 percent on a sustained basis,” she said. More

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    Fed Frets About Shadow Banks and Eyes Treasury Liquidity in New Report

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    The Federal Reserve is watching the government bond market and investment funds as rate increases ricochet through finance.The Federal Reserve warned in its twice-annual report on America’s financial stability that the government bond market could be primed for disruption, and cautioned that financial firms that operate outside of traditional banks could increase fragility in the system.Investors have been warning that market conditions are becoming increasingly fraught nine months into the Fed’s fastest rate-increase campaign since the 1980s. While the central bank is determined to push ahead with its effort to slow the economy as it tries to choke off rapid inflation, officials are keeping a careful eye on market conditions. A financial meltdown would make the Fed’s job more difficult — potentially even forcing it to deviate from some of its tightening efforts.Financial stability issues are in focus as central banks around the world raise interest rates in synchrony and other markets around the world — including the government bond market in Britain — offer early warning signs that cracks are beginning to emerge.The Financial Stability Report, released on Friday, delved into widely discussed challenges that have been plaguing Treasury markets and detailed less prominent vulnerabilities. Those included elevated leverage at financial institutions beyond banks, what is often referred to as the “shadow banking” system.The ease of trading Treasury securities, called liquidity, has been strained in recent months, which is making analysts and investors nervous that the market could be primed for disruption. The Fed attributed the decline in liquidity “primarily” to volatility in interest rates and economic uncertainty.What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More

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    Fed Vice Chair Says Another Big Interest Rate Increase Could Come in September

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    Lael Brainard, the Federal Reserve’s vice chair, suggested on Thursday that the central bank might make another large rate increase into September and threw cold water on the idea that policymakers might pause rate moves after the summer — signaling instead that they are intently focused on controlling too-high inflation.Ms. Brainard, in an interview on CNBC, said market expectations for half-percentage-point increases in June and July, increases that would be twice the size of the Fed’s typical ones, seemed “reasonable.” She does not know where the economy will be in September, she said, but explained that if inflation remained rapid, another big move “might well be appropriate.” If it slows, then a smaller pace of increase might make sense.She added, however, that it was “hard to see the case for a pause” at a time when the Fed had “a lot of work to do” to get inflation down to its goal, which is 2 percent on average over time. Prices picked up by 6.3 percent on a headline basis and 4.9 percent on a core basis over the year through April.Fed officials are fighting the fastest rate of inflation since the 1980s by lifting borrowing costs, which slows down consumer and business demand, helping to bring the economy back into balance. Central bankers began to shrink their balance sheet of bond holdings this week and have already lifted their main policy interest rate by 0.75 percentage points since March, efforts that are already making mortgages and other loans pricier.“We do expect to see some cooling of a very, very strong economy over time,” Ms. Brainard said, explaining that the Fed is looking for moderation and “better balance” in the labor market.Ms. Brainard said she was looking for “a string of decelerating inflation data” to feel more confident that inflation would get back no a more sustainable path.The Fed is operating against a fraught backdrop. Ms. Brainard said there was a “fair amount of uncertainty” about the economy, citing Russia’s war in Ukraine and lockdowns in China as factors clouding the outlook.Economists have warned that the Fed could struggle to slow down the economy without tipping it into an outright recession, especially as it withdraws support rapidly and in tandem with other central banks around the world. But Ms. Brainard said there was a path where demand could cool and inflation could come down while the labor market remained strong.“We are starting from a position of strength — the economy has a lot of momentum,” she said, also citing solid business and household balance sheets. More

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    Senate Confirms Biden Fed Nominee, Lael Brainard, as Vice Chair

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    The Senate voted to confirm one of President Biden’s nominees to the Federal Reserve’s Board of Governors, making Lael Brainard the central bank’s vice chair.Ms. Brainard, a Fed governor since 2014 who was originally nominated to the institution by President Barack Obama, was a key architect of the central bank’s response in 2020 as state and local lockdowns tied to the pandemic roiled markets and sent unemployment rocketing higher. She has been a close adviser to Jerome H. Powell, the Fed chair.Ms. Brainard received some bipartisan support, and passed the Senate in a 52-to-43 vote.The White House has also nominated Mr. Powell to another four-year term as chair. Mr. Powell, who was first appointed to the Fed by Mr. Obama, became chair in 2018 during the Trump administration. Mr. Biden has also nominated the economists Philip N. Jefferson and Lisa D. Cook to fill two open governor positions.Votes on those three nominees are expected soon.If all are confirmed, the four officials will make up a majority of the Fed’s seven-person Board of Governors in Washington, giving Mr. Biden a chance to leave his mark on the institution. Fed governors hold a constant vote on monetary policy, which they set alongside the central bank’s 12 regional reserve bank presidents, who vote on a rotating basis.But even as it gains new faces, the Fed is likely to stick to the course it has already begun to chart as it battles stubbornly rapid inflation. The central bank raised interest rates at its meeting in March and is expected to make an even bigger rate increase at its meeting next Tuesday and Wednesday. Policymakers have also signaled that they will soon begin to shrink their balance sheet of bond holdings in a bid to push up longer-term interest rates and further slow the economy.By making money more expensive to borrow, the Fed can slow down spending, which could allow inflation to moderate over time as supply catches up with demand. During their hearings, the nominees made it clear that they were committed to bringing down high inflation. Ms. Brainard and Mr. Powell regularly address that goal in public remarks.The central bank is hoping that it can calm the economy without pushing the unemployment rate higher and sending it into a recession.“I don’t think you’ll hear anyone at the Fed say that that’s going to be straightforward or easy,” Mr. Powell said at an event on Thursday. “It’s going to be very challenging. We’re going to do our very best to accomplish that.”The Senate has yet to start the process for voting on Mr. Biden’s fifth and most recent pick for the Fed Board: The White House this month nominated Michael S. Barr as the Fed’s vice chair for supervision. The White House’s initial nominee, Sarah Bloom Raskin, failed to secure enough support and was withdrawn from consideration for the job.Mr. Barr must appear before and then pass the Senate Banking Committee before advancing to a confirmation vote in the full Senate. More

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    March Fed Minutes: ‘Many’ Officials in Favor of a Big Rate Increase

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    Minutes from the Federal Reserve’s March meeting showed that central bankers were preparing to shrink their portfolio of bond holdings imminently while raising interest rates “expeditiously,” as the central bank tries to cool off the economy and rapid inflation.Fed officials are making money more expensive to borrow and spend in a bid to slow shopping and business investment, hoping that weaker demand will help to tame prices, which are now climbing at the fastest pace in four decades.Central bankers raised interest rates by a quarter of a percentage point in March, their first increase since 2018 — and the minutes showed that “many” officials would have preferred an even bigger rate move and were held back only by uncertainty tied to Russia’s invasion of Ukraine. Markets now expect the Fed to make half-point increases in May and possibly June, even as they begin to withdraw additional support from the economy by shrinking their balance sheet.The balance sheet stands at nearly $9 trillion — swollen by pandemic response policies — and Fed officials plan to shrink it by allowing some of their government-backed bond holdings to expire starting as soon as May, the minutes showed. That will help to further push up interest rates, potentially leading to slower growth, more muted hiring and weaker wage increases. Eventually, the theory goes, the chain reaction should help to slow inflation. “They’re very resolute in fighting inflation and moving it lower,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “They are concerned.”While central bankers were hesitant to react to rapid inflation last year, hoping it would prove “transitory” and fade quickly, those expectations have been dashed. Price increases remain rapid, and officials are watching warily for signs that they might turn more permanent.“All participants underscored the need to remain attentive to the risks of further upward pressure on inflation and longer-run inflation expectations,” the minutes showed.Now, officials are trying to cool off the economy as it is growing quickly and the job market is rapidly improving. Employers added 431,000 jobs in March, wages are climbing swiftly, and the unemployment rate is just about matching the 50-year low that prevailed before the pandemic.Central bankers are hoping that the strong job market will help them slow the economy without tipping it into an outright recession. That will be a challenge, given the Fed’s blunt policy tools, a reality that officials have acknowledged.At the same time, Fed officials are worried that if they do not respond vigorously to high inflation, consumers and businesses may come to expect persistently higher prices. That could perpetuate quick price increases and make wrestling them under control even more painful.“It is of paramount importance to get inflation down,” Lael Brainard, a Fed governor who is the nominee to be the central bank’s vice chair, said on Tuesday. “Accordingly, the committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”Ms. Brainard’s statement that balance sheet shrinking could happen “rapidly” caught markets by surprise, sending stocks lower and rates on bonds higher. Investors also focused their attention on the minutes released on Wednesday.The notes from the March meeting provided more details about what the balance sheet process might look like. Fed officials are coalescing around a plan to slow their reinvestment of securities, the minutes showed, most likely capping the monthly shrinking at $60 billion for Treasury securities and $35 billion for mortgage-backed debt.That would be about twice the maximum pace the Fed set when it shrank its balance sheet between 2017 and 2019, confirming the signal policymakers have been giving in recent weeks that the plan could proceed much more quickly this time around.The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More