Credit and Debt

More stories

  • 113 Shares179 Views

    in Economy

    A Holiday Season Divided by Inflation and Economic Struggles

    by

    Even if policymakers achieve a gentle economic slowdown, it won’t be smooth for everyone.Langham Hotel in Boston has plush suites and conference rooms. Across town, in Dorchester, people line up for Thanksgiving turkeys at Catholic Charities.November has been busier than expected at the Langham Hotel in Boston as luxury travelers book rooms in plush suites and hold meetings in gilded conference rooms. The $135-per-adult Thanksgiving brunch at its in-house restaurant sold out weeks ago.Across town, in Dorchester, demand has been booming for a different kind of food service. Catholic Charities is seeing so many families at its free pantry that Beth Chambers, vice president of basic needs at Catholic Charities Boston, has had to close early some days and tell patrons to come back first thing in the morning. On the frigid Saturday morning before Thanksgiving, patrons waiting for free turkeys began to line the street at 4:30 a.m. — more than four hours before the pantry opened.The contrast illustrates a divide that is rippling through America’s topsy-turvy economy nearly three years into the pandemic. Many well-off consumers are still flush with savings and faring well financially, bolstering luxury brands and keeping some high-end retailers and travel companies optimistic about the holiday season. At the same time, America’s poor are running low on cash buffers, struggling to keep up with rising prices and facing climbing borrowing costs if they use credit cards or loans to make ends meet.The situation underlines a grim reality of the pandemic era. The Federal Reserve is raising interest rates to make borrowing more expensive and temper demand, hoping to cool the economy and bring the fastest inflation in decades back under control. Central bankers are trying to manage that without a recession that leaves families out of work. But the adjustment period is already a painful one for many Americans — evidence that even if the central bank can pull off a so-called “soft landing,” it won’t feel benign to everyone.“A lot of these households are moving toward the greater fragility that was the norm before the pandemic,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.Many working-class households fared well in 2020 and 2021. Though they lost jobs rapidly at the outset of the pandemic, hiring rebounded swiftly, wage growth has been strong, and repeated government relief checks helped families amass savings.But after 18 months of rapid price inflation — some of which was driven by stimulus-fueled demand — the poor are depleting those cushions. American families were still sitting on about $1.7 trillion in excess savings — extra savings accumulated during the pandemic — by the middle of this year, based on Fed estimates, but about $1.35 trillion of it was held by the top half of earners and just $350 billion in the bottom half.At the same time, prices climbed 7.7 percent in the year through October, far faster than the roughly 2 percent pace that was normal before the pandemic. As savings have run down and necessities like car repair, food and housing become sharply more expensive, many people in lower-income neighborhoods have begun turning to credit cards to sustain their spending. Balances for that group are now above 2019 levels, New York Fed research shows. Some are struggling to keep up at all.“With the cost of food, the explosive cost of eggs, people are having to come to us more,” said Ms. Chambers of Catholic Charities, explaining that other rising prices, including rent, are intensifying the struggle. The location planned to give out 1,000 turkeys and 600 gift cards for turkeys, at its holiday distribution, along with bags of canned creamed corn, cranberry sauce and other Thanksgiving fare.Tina Obadiaru, 42, was among those who lined up to get a turkey on Saturday. A mother of seven, she works full time caring for residents at a group home, but it isn’t enough to make ends meet for her and her family, especially after her Dorchester rent jumped last month to $2,500 from $2,000.“It is going to be really difficult,” she said.The disproportionate burden inflation places on the poor is one reason Fed officials are scrambling to quickly bring price increases back under control. Central bankers have lifted interest rates from near zero earlier this year to nearly 4 percent, and have signaled that there are more to come.But the process of lowering inflation is also likely to hurt for lower-income people. Fed policies work partly by making it expensive to borrow to sustain consumption, which causes demand to decline and eventually forces sellers to charge less. Rate increases also slow down the labor market, cooling wage growth and possibly even costing jobs.Catholic Charities has seen a surge in demand for food.November has been busier than expected at the Langham Hotel.That means that the solid labor market that has buoyed the working class through this challenging time — one that has particularly pushed up wages in lower-paying jobs, including leisure and hospitality, and transportation — could soon crack. In fact, Fed officials are watching for a slowdown in spending and pay gains as a sign that their policies are working.“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Jerome H. Powell, the Fed chair, said at a key Fed conference in August. “These are the unfortunate costs of reducing inflation.”Central bankers believe that a measure of pain today is better than what would happen if inflation were allowed to continue unchecked. If people and businesses begin to expect rapid price increases and act accordingly — asking for big raises, instituting frequent and large price increases — inflation could become entrenched in the economy. It would then take a more punishing policy response to bring it to heel, one that could push unemployment even higher.But evidence accumulating across the economy underscores that the slowdown the Fed has been engineering, however necessary, is likely to feel different across different income groups.Consumer spending overall has so far been resilient to the Fed’s rate moves. Retail sales data moderated notably early in the year, but have recently picked back up. Personal consumption expenditures aren’t expanding at a breakneck pace, but they continue to grow.Yet underneath those aggregate numbers, a nascent shift appears to be underway — one that highlights the growing divide in economic comfort between the rich and the poor. Credit card data from Bank of America suggest that high- and middle-income households have replaced lower-income households in driving consumption growth in recent months. Poorer shoppers contributed one-fifth of the growth in discretionary spending in October, compared with around two-fifths a year earlier.“This is likely due to lower-income groups being the most negatively impacted by surging prices — they have also seen the biggest drawdown of bank savings,” economists at the Bank of America Institute wrote in a Nov. 10 note.Even if the poor feel the squeeze of elevated prices and higher interest rates and pull back, the economists noted that continued economic health among richer consumers could keep demand strong in areas where wealthier people tend to spend their money, including services like travel and hotels.At the Langham, a newly renovated hotel in a century-old building that originally served as the Federal Reserve Bank of Boston, there is little to suggest an impending slowdown in spending. In “The Fed,” the hotel bar named in a nod to the building’s heritage, bartenders are busy every weeknight slinging cocktails with names like “Trust Fund Baby” and “Apple Butter Me Up” (both $16). When guests come back from shopping on nearby Newbury Street, the hotel’s managing director, Michele Grosso, said, their arms are full of bags. He sees the fact that the Thanksgiving brunch sold out so fast as emblematic of continued demand.“If people were pulling back, we’d still be promoting,” he said of the three-course, family-style meal. “Instead, we’ve got a waiting list.”The consumption divide playing out in Boston is also clear at a national level, echoing through corporate earnings calls. American Express added customers for platinum and gold cards at a record clip in the United States last quarter, for instance, as it reported “great demand” for premium, fee-based products.The $135-per-adult Thanksgiving Brunch at the Langham Hotel sold out weeks ago.Food to be distributed at Catholic Charities, which has been giving out Turkeys, cranberry sauce and other Thanksgiving fare.“As we sit here today, we see no changes in the spending behaviors of our customers,” Stephen J. Squeri, the company’s chief executive, told investors during an earnings call last month.Companies that serve more low-income consumers, however, are reporting a marked pullback.“Many consumers this year have relied on borrowing or dipping into their savings to manage their weekly budgets,” Brian Cornell, the chief executive of Target, said in an earnings call on Nov. 16. “But for many consumers, those options are starting to run out. As a result, our guests are exhibiting increasing price sensitivity, becoming more focused on and responsive to promotions and more hesitant to purchase at full price.”The split makes it hard to guess what will happen next with spending and inflation. Some economists think the return of price sensitivity among lower-income consumers will be enough to help overall costs moderate, paving the way for a notable slowdown in 2023.“You get more promotional activity, and companies starting to compete for market share,” said Julia Coronado, founder of MacroPolicy Perspectives.But others warn that, even if the very poor are struggling, it may not be sufficient to bring spending and prices down meaningfully.Many families paid off their credit card balances during the pandemic, and that is now reversing, despite high credit card rates. The borrowing could help some households sustain their consumption for a while, especially paired with strong employment gains and recently fallen gas prices, said Neil Dutta, head of U.S. economics at Renaissance Macro.As the world waits to see whether the Fed can slow down the economy enough to control inflation without forcing the country into an outright recession, those coming to Catholic Charities in Boston illustrate why the stakes are so high. Though many have jobs, they have been buffeted by months of rapid price increases and now face an uncertain future.“Before the pandemic, we thought in cases,” Ms. Chambers said, referencing how much food is needed to meet local need. “Now we think only in pallets.” More

  • 125 Shares99 Views

    in Economy

    As the Fed Raises Rates, Worries Grow About Corporate Bonds

    by

    Executives, analysts and bond traders are all wondering if corporate finance is about to unravel as interest rates rise.As the Federal Reserve raises interest rates in an effort to tame inflation, the corporate bond market, which lends money to many companies, has been hammered particularly hard.The steep rise in interest rates has caused bond values to tumble: From October 2021 to October 2022, an index that tracks investment-grade corporate bonds is down by roughly 20 percent. By some measures, overall bond market losses have been worse than at any time since 1926.Even the price of bonds issued by the highest-rated corporations have cratered this year.The ICE BofA US Corporate Index, which tracks the performance of U.S. dollar denominated investment grade rated U.S. corporate debt, has severely declined.

    Source: Federal Reserve Bank of St. LouisBy The New York TimesThe yield on bonds issued by solid businesses is now about 6 percent, about twice as much as it was a year ago. That number indicates how high of an interest rate rock-solid corporations would have to pay to borrow more money right now; rates are even higher for smaller businesses or those that investors consider risky.Corporate bankruptcies and defaults remain low by historical standards, but a growing number of companies are struggling financially. Businesses in industries like retail, manufacturing and real estate are especially vulnerable because their sales are weak or falling. In many cases, their customers have also been hurt by higher interest rates because the higher borrowing costs have effectively raised the costs of big-tickets items like homes and cars.Until recently, for example, Carvana was a fast growing used car retailer with a soaring stock. The number of cars the company sold fell 8 percent in the third quarter, and its spending on interest payments tripled compared with the same period a year earlier. The interest rate on a big chunk of its debt issued this year that matures in 2030 is 10.25 percent. Its bonds are trading at less than 50 cents to the dollar, suggesting that investors would require Carvana to pay an interest rate of nearly 30 percent if it were to borrow more money for the same amount of time. The company’s stock is down more than 90 percent over the last year.“There’s certainly a lot of headwinds,” Ernest Garcia III, Carvana’s chief executive, said on a conference call with analysts last week. “Recently, we’ve seen car prices depreciate to the tune of give or take 10 percent so far this year, but we’ve also seen interest rates shoot up very rapidly and I think that overall has harmed affordability,” he added, even as he expressed optimism about the company’s ability to weather the financial storm.Carvana, Co. has paid more in interest payments in the last quarter compared to last year and sold fewer cars.Joe Raedle/Getty ImagesBefore rates jumped, companies borrowed a ton of money last year, with lower-rated firms selling more new bonds in 2021 than in any other year. But that flow has turned into a trickle as interest rates have risen and investors have grown more discerning about whom they lend money to. Banks are still making more commercial and industrial loans, but they are also becoming more discerning and are charging higher interest rates.Most investors, executives and economists expect a recession or anemic growth next year, which could make doing business, borrowing money and paying off loans even more difficult.What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More

  • 100 Shares99 Views

    in Economy

    Who Qualifies For Biden’s Student Loan Forgiveness Plan

    by

    President Biden’s move means the student loan balances of millions of people could fall by as much as $20,000. This F.A.Q. explains how it will work.President Biden announced on Wednesday that the federal government would cancel up to $20,000 worth of federal student loans for millions of people. But not everyone with debt will qualify.The action includes rules that will maintain the balances of debtors who currently have high incomes. Those who do qualify will need to navigate the balky federal loan servicing system and keep a close eye on their accounts and credit reports for any mistakes.It also extends the pause on monthly student loan payments, which means that borrowers won’t have to resume payments until at least January, and provides details on a new proposal to create a more affordable income-driven repayment plan.What follows are questions you may have about the cancellation program with answers that have come from the White House, the Department of Education and student loan servicers.We will update this article in the coming days and weeks as more details become available.Who qualifies for loan cancellation?Individuals who are single and earn under $125,000 will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is under $250,000.Eligibility will be based on your adjusted gross income. Income figures from either 2020 or 2021 can render you eligible, but 2022 income will not.If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in cancellation.Loans obtained after June 30 are not eligible for relief.Which types of debt qualify?Only federal student loan debt is eligible. This includes PLUS loans, whether parents or graduate students took them out.Private loans are not eligible. Neither are many so-called F.F.E.L. loans, which stand for Federal Family Education Loan. If your F.F.E.L. loan was not eligible for the payment pause that began in 2020, it will not be eligible for the new cancellation.I didn’t finish my degree. Does that disqualify me?No.President Biden, speaking at Morehouse College and Clark Atlanta University, is also giving those who received Pell Grants the possibility of qualifying for another $10,000 in loan cancellation.Doug Mills/The New York TimesWhat’s the first thing I need to do if I qualify?Start by making sure that your loan servicer knows how to find you, so that you’ll be able to receive any guidance it provides and follow any instructions that it issues. Check that your postal address, your email address and your mobile phone number are listed accurately.If you don’t know who your servicer is, consult the Department of Education’s “Who is my loan servicer?” web page for instructions.Will the $10,000 in cancellation happen automatically, or do I need to submit a tax return or do something else to prove that I qualify?It depends. If you’re already enrolled in some kind of income-driven repayment plan and have submitted your most recent tax return to certify that income, your servicer and the Education Department know how much you earn and you should not need to do anything else. Still, keep an eye out for guidance from your servicer.What to Know About Student Loan Debt ReliefCard 1 of 5What to Know About Student Loan Debt ReliefMany will benefit. More

  • 163 Shares189 Views

    in Economy

    In an Unequal Economy, the Poor Face Inflation Now and Job Loss Later

    by

    For Theresa Clarke, a retiree in New Canaan, Conn., the rising cost of living means not buying Goldfish crackers for her disabled daughter because a carton costs $11.99 at her local Stop & Shop. It means showering at the YMCA to save on her hot water bill. And it means watching her bank account dwindle to $50 because, as someone on a fixed income who never made much money to start with, there aren’t many other places she can trim her spending as prices rise.“There is nothing to cut back on,” she said.Jordan Trevino, 28, who recently took a better paying job in advertising in Los Angeles with a $100,000 salary, is economizing in little ways — ordering a cheaper entree when out to dinner, for example. But he is still planning a wedding next year and a honeymoon in Italy.And David Schoenfeld, who made about $250,000 in retirement income and consulting fees last year and has about $5 million in savings, hasn’t pared back his spending. He has just returned from a vacation in Greece, with his daughter and two of his grandchildren.“People in our group are not seeing this as a period of sacrifice,” said Mr. Schoenfeld, who lives in Sharon, Mass., and is a member of a group called Responsible Wealth, a network of rich people focused on inequality that pushes for higher taxes, among other stances. “We notice it’s expensive, but it’s kind of like: I don’t really care.”Higher-income households built up savings and wealth during the early stages of the pandemic as they stayed at home and their stocks, houses and other assets rose in value. Between those stockpiles and solid wage growth, many have been able to keep spending even as costs climb. But data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation.That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signs that poorer families are cutting back. If richer families don’t pull back as much — if they keep going on vacations, dining out and buying new cars and second homes — many prices could keep rising. The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown.In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. The bifurcated economy, and the policy decisions that stem from it, could become a double whammy for them, inflicting higher costs today and unemployment tomorrow.“That’s the perfect storm, if unemployment increases,” said Mark Brown, chief executive of West Houston Assistance Ministries, which provides food, rental assistance and other forms of aid to people in need. “So many folks are so very close to the edge.”America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases. Because such a big chunk of their budgets is devoted to food and housing, lower-income families have less room to cut back before they have to stop buying necessities. Some are taking on credit card debt, cutting back on shopping and restaurant meals, putting off replacing their cars or even buying fewer groceries.But while lower-income families spend more of each dollar they earn, the rich and middle classes have so much more money that they account for a much bigger share of spending in the overall economy: The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent. That means the rich can continue to fuel the economy even as the poor pull back, a potential difficulty for policymakers.The Federal Reserve has been lifting interest rates rapidly since March to try to slow consumer spending and raise the cost of borrowing for companies, which will in turn lead to fewer business expansions, less hiring and slower wage growth. The goal is to slow the economy enough to lower inflation but not so much that it causes a painful recession.Officials at West Houston Assistance Ministries said its food bank served 200 households on Friday.Meridith Kohut for The New York TimesBut job growth accelerated unexpectedly in July, with wages climbing rapidly. Consumer spending, adjusted for inflation, has cooled, but Americans continue to open their wallets for vacations, restaurant meals and other services. If solid demand and tight labor market conditions continue, they could help to keep inflation rapid and make it more difficult for the Fed to cool the economy without continuing its string of quick rate increases. That could make widespread layoffs more likely.“The one, singular worry is the jobs market — if demand is constrained to the point that companies have to start laying off workers, that’s what hits Main Street,” said Nela Richardson, chief economist at the job market data provider ADP. “That’s what hits low-income workers.”8 Signs That the Economy Is Losing SteamCard 1 of 9Worrying outlook. More

  • 88 Shares169 Views

    in Economy

    Loans Could Burn Start-Up Workers in Downturn

    by

    SAN FRANCISCO — Last year, Bolt Financial, a payments start-up, began a new program for its employees. They owned stock options in the company, some worth millions of dollars on paper, but couldn’t touch that money until Bolt sold or went public. So Bolt began providing them with loans — some reaching hundreds of thousands of dollars — against the value of their stock.In May, Bolt laid off 200 workers. That set off a 90-day period for those who had taken out the loans to pay the money back. The company tried to help them figure out options for repayment, said a person with knowledge of the situation who spoke anonymously because the person was not authorized to speak publicly.Bolt’s program was the most extreme example of a burgeoning ecosystem of loans for workers at privately held tech start-ups. In recent years, companies such as Quid and Secfi have sprung up to offer loans or other forms of financing to start-up employees, using the value of their private company shares as a sort of collateral. These providers estimate that start-up employees around the world hold at least $1 trillion in equity to lend against.But as the start-up economy now deflates, buffeted by economic uncertainty, soaring inflation and rising interest rates, Bolt’s situation serves as a warning about the precariousness of these loans. While most of them are structured to be forgiven if a start-up fails, employees could still face a tax bill because the loan forgiveness is treated as taxable income. And in situations like Bolt’s, the loans may be difficult to repay on short notice.“No one’s been thinking about what happens when things go down,” said Rick Heitzmann, an investor at FirstMark Capital. “Everyone’s only thinking about the upside.”The proliferation of these loans has ignited a debate in Silicon Valley. Proponents said the loans were necessary for employees to participate in tech’s wealth-creation engine. But critics said the loans created needless risk in an already-risky industry and were reminiscent of the dot-com era in the early 2000s, when many tech workers were badly burned by loans related to their stock options.Ted Wang, a former start-up lawyer and an investor at Cowboy Ventures, was so alarmed by the loans that he published a blog post in 2014, “Playing With Fire,” advising against them for most people. Mr. Wang said he got a fresh round of calls about the loans anytime the market overheated and always felt obligated to explain the risks.“I’ve seen this go wrong, bad wrong,” he wrote in his blog post.Start-up loans stem from the way workers are typically paid. As part of their compensation, most employees at privately held tech companies receive stock options. The options must eventually be exercised, or bought at a set price, to own the stock. Once someone owns the shares, he or she cannot usually cash them out until the start-up goes public or sells.That’s where loans and other financing options come in. Start-up stock is used as a form of collateral for these cash advances. The loans vary in structure, but most providers charge interest and take a percentage of the worker’s stock when the company sells or goes public. Some are structured as contracts or investments. Unlike the loans offered by Bolt, most are known as “nonrecourse” loans, meaning employees are not on the hook to repay them if their stock loses its value.This lending industry has boomed in recent years. Many of the providers were created in the mid-2010s as hot start-ups like Uber and Airbnb put off initial public offerings of stock as long as they could, hitting private market valuations in the tens of billions of dollars.That meant many of their workers were bound by “golden handcuffs,” unable to leave their jobs because their stock options had become so valuable that they could not afford to pay the taxes, based on the current market value, on exercising them. Others became tired of sitting on the options while they waited for their companies to go public.The loans have given start-up employees cash to use in the meantime, including money to cover the costs of buying their stock options. Even so, many tech workers do not always understand the intricacies of equity compensation.“We work with supersmart Stanford computer science A.I. graduates, but no one explains it to them,” said Oren Barzilai, chief executive of Equitybee, a site that helps start-up workers find investors for their stock. Secfi, a provider of financing and other services, has now issued $700 million of cash financing to start-up workers since it opened in 2017. Quid has issued hundreds of millions’ worth of loans and other financing to hundreds of people since 2016. Its latest $320 million fund is backed by institutions, including Oaktree Capital Management, and it charges those who take out loans the origination fees and interest.So far, less than 2 percent of Quid’s loans have been underwater, meaning the market value of the stock has fallen below that of the loan, said Josh Berman, a founder of the company. Secfi said that 35 percent of its loans and financing had been fully paid back, and that its loss rate was 2 to 3 percent.But Frederik Mijnhardt, Secfi’s chief executive, predicted that the next six to 12 months could be difficult for tech workers if their stock options decline in value in a downturn but they had taken out loans at a higher value.“Employees could be facing a reckoning,” he said.Such loans have become more popular in recent years, said J.T. Forbus, an accountant at Bogdan & Frasco who works with start-up employees. A big reason is that traditional banks won’t lend against start-up equity. “There’s too much risk,” he said.Start-up employees pay $60 billion a year to exercise their stock options, Equitybee estimated. For various reasons, including an inability to afford them, more than half the options issued are never exercised, meaning the workers abandon part of their compensation. Mr. Forbus said he’d had to carefully explain the terms of such deals to his clients. “The contracts are very difficult to understand, and they don’t really play out the math,” he said. Some start-up workers regret taking the loans. Grant Lee, 39, spent five years working at Optimizely, a software start-up, accumulating stock options worth millions. When he left the company in 2018, he had a choice to buy his options or forfeit them. He decided to exercise them, taking out a $400,000 loan to help with the cost and taxes.In 2020, Optimizely was acquired by Episerver, a Swedish software company, for a price that was lower than its last private valuation of $1.1 billion. That meant the stock options held by employees at the higher valuation were worth less. For Mr. Lee, the value of his Optimizely stock fell below that of the loan he had taken out. While his loan was forgiven, he still owed around $15,000 in taxes since loan forgiveness counts as taxable income.“I got nothing, and on top of that, I had to pay taxes for getting nothing,” he said.The office of Envoy, a start-up that makes workplace software, in San Francisco. The company began a loan program in May.Lauren Segal for The New York TimesOther companies use the loans to give their workers more flexibility. In May, Envoy, a San Francisco start-up that makes workplace software, used Quid to offer nonrecourse loans to dozens of its employees so they could get cash then. Envoy, which was recently valued at $1.4 billion, did not encourage or discourage people from taking the loans, said Larry Gadea, the chief executive.“If people believe in the company and want to double down on it and see how much better they can do, this is a great option,” he said.In a downturn, loan terms may become more onerous. The I.P.O. market is frozen, pushing potential payoffs further into the future, and the depressed stock market means private start-up shares are probably worth less than they were during boom times, especially in the last two years.Quid is adding more underwriters to help find the proper value for the start-up stock it lends against. “We’re being more conservative than we have in the past,” Mr. Berman said.Bolt appears to be a rarity in that it offered high-risk personal recourse loans to all its employees. Ryan Breslow, Bolt’s founder, announced the program with a congratulatory flourish on Twitter in February, writing that it showed “we simply CARE more about our employees than most.”The company’s program was meant to help employees afford exercising their shares and cut down on taxes, he said.Bolt declined to comment on how many laid-off employees had been affected by the loan paybacks. It offered employees the choice of giving their start-up shares back to the company to repay their loans. Business Insider reported earlier on the offer.Mr. Breslow, who stepped down as Bolt’s chief executive in February, did not respond to a request for comment on the layoffs and loans.In recent months, he has helped found Prysm, a provider of nonrecourse loans for start-up equity. In pitch materials sent to investors that were viewed by The New York Times, Prysm, which did not respond to a request for comment, advertised Mr. Breslow as its first customer. Borrowing against the value of his stock in Bolt, the presentation said, Mr. Breslow took a loan for $100 million. More

  • 150 Shares169 Views

    in Economy

    The Fed Raises Interest Rates by 0.75 Percentage Points to Tackle Inflation

    by

    The Federal Reserve took its most aggressive step yet to try to tame rapid and persistent inflation, raising interest rates by three-quarters of a percentage point on Wednesday and signaling that it is prepared to inflict economic pain to get prices under control.The rate increase was the central bank’s biggest since 1994 and could be followed by a similarly sized move next month, suggested Jerome H. Powell, the Fed chair, underscoring just how much America’s unexpectedly stubborn price gains are unsettling Fed officials.As central bankers drive their policy rate rapidly higher, it will make buying a home or expanding a business more expensive, restraining spending and slowing the broader economy. Officials expect growth to moderate in the coming months and years and predicted that unemployment will rise about half a percentage point to 4.1 percent by late 2024 as their policy squeezes companies and workers.Mr. Powell acknowledged that it was becoming increasingly difficult for the Fed to slow inflation without causing a recession as outside forces, including the war in Ukraine and factory shutdowns in China, threaten to curb the supply of goods and commodities like oil. If the Fed has to quash demand to an extreme degree in an effort to bring it into line with limited supply, it could make for a slump that leaves businesses shuttered and people unemployed.“We’re not trying to induce a recession right now, let’s be clear about that,” Mr. Powell said, explaining that the Fed still wants to reduce inflation to its 2 percent goal while keeping the labor market strong — an outcome economists call a “soft landing.”But “those pathways have become much more challenging due to factors that are outside of our control,” he said, later adding that “the environment has become more difficult, clearly, in the last four or five months.”The latest move set the Fed’s policy rate in a range of 1.50 percent to 1.75 percent, and more rate increases are to come. Mr. Powell signaled that the debate at the Federal Open Market Committee’s next meeting in July will be over whether to raise rates half a point or to repeat an increase of three-quarters of a point, though he added that he did “not expect moves of this size to be common.”Officials expect interest rates to hit 3.4 percent by the end of 2022, according to economic projections they released Wednesday, which would be the highest level since 2008. They also foresee the Fed’s policy rate peaking at 3.8 percent at the end of 2023, up from 2.8 percent when projections were last released in March.As rates rise, policymakers anticipate that growth will slow and joblessness will climb slightly, starting this year.“What Powell and the rest of the F.O.M.C. are saying is that restoring price stability is the primary focus — if they risk a mild recession, or a bumpy soft landing, that would still be successful,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “The focus is greatly on inflation right now.”Until late last week, investors and many economists expected the central bank to raise interest rates just half a percentage point at this week’s meeting. The Fed had lifted rates by a quarter point in March and half a point in May, and had signaled that it expected to continue that pace in June and July.But central bankers have received a spate of bad news on inflation in recent days. The Consumer Price Index jumped 8.6 percent in May from a year earlier, the fastest increase since late 1981. The pace was brisk even after the stripping out of food and fuel prices.While the Fed’s preferred price gauge — the Personal Consumption Expenditures measure — is climbing slightly more slowly, it remains too hot for comfort as well. And consumers are beginning to expect faster inflation in the months and years ahead, based on surveys, which is a worrying development. Economists think that expectations can be self-fulfilling, causing people to ask for wage increases and accept price jumps in ways that perpetuate high inflation.“What we’re looking for is compelling evidence that inflationary pressures are abating, and that inflation is moving back down,” Mr. Powell said at his news conference Wednesday, noting that instead the inflation situation has worsened. “We thought that strong action was warranted.”One Fed official, the president of the Federal Reserve Bank of Kansas City, Esther George, voted against the rate increase. Though Ms. George has historically worried about high inflation and favored higher interest rates, she would have preferred a half-point move in this instance.Some analysts found the Fed’s economic projections and Mr. Powell’s view that a soft landing may still be possible to be optimistic in light of the more aggressive policy path the central bank has charted. Economists at Wells Fargo announced after the Fed meeting that they expected a downturn to start midway through next year.“The Fed is becoming a bit more realistic about how difficult it is going to be to lower inflation without inflicting damage on the labor market,” said Sarah House, a senior economist at Wells Fargo. “There is that growing acknowledgment that a soft landing is increasingly difficult — I still think they’re painting a fairly rosy picture.”Stock prices have been plummeting and bond market signals are flashing red as Wall Street traders and economists increasingly expect that the economy may tip into a recession. On Wednesday, the S&P 500 rose 1.5 percent, climbing after the release of the decision and Mr. Powell’s news conference, most likely because investors had already expected the Fed to make a large move.The economy remains strong for now, but the Fed’s actions are beginning to have a real-world impact: Mortgage rates have risen sharply and are helping to cool the housing market; demand for consumer goods is showing signs of beginning to slow as borrowing becomes more expensive; and job growth, while robust, has begun to moderate.While the economic path ahead may be a rocky one, the Fed’s policymakers contend that things would be worse in the long run if they did not act. As prices surge, worker pay is not keeping up. That means that families are falling behind as they try to afford gas, food and rent, even in a very strong labor market.“You really cannot have the kind of labor market we want without price stability,” Mr. Powell said Wednesday, explaining that what officials want is a job market with lots of job opportunities and rising wages. “It’s not going to happen with the levels of inflation we have.”The White House has been emphasizing that the Fed plays the key role in bringing down inflation, even as the Biden administration does what it can to reduce some costs for beleaguered consumers and urges companies to improve gas supply.“The Federal Reserve has a primary responsibility to control inflation,” President Biden wrote in a recent opinion column. He added that “past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this.” More

  • 100 Shares179 Views

    in Economy

    What the Fed’s Rate Hike Means for Mortgages

    by

    What does the Fed’s decision to raise its key interest rate by three-quarters of a percentage point mean for mortgages? [Here’s what the Fed’s decision means for credit cards, car loans and student loans.]Rates on 30-year fixed mortgages don’t move in tandem with the Fed’s benchmark rate, but instead track the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations around inflation, the Fed’s actions and how investors react to all of it.“We are seeing rates move up pretty briskly and a lot of that has to do with forward-looking expectations with where things are headed,” said Len Kiefer, deputy chief economist at Freddie Mac. “Maybe inflation will be stickier than the market thought.”Mortgage rates have jumped by two percentage points since the start of 2022, though they’ve held somewhat steady in recent months. But with consumer prices still surging, mortgage rates are on the rise once again — by some estimates, reaching as high as 6 percent.The closely watched rate averages from Freddie Mac won’t be released until Thursday, but they already began to tick a bit higher last week: Rates on 30-year fixed rate mortgages were 5.23 percent as of June 9, according to Freddie Mac’s primary mortgage survey, up from 5.09 percent the week before and 2.96 percent the same week in 2021.Other home loans are more closely tethered to the Fed’s move. Home equity lines of credit and adjustable-rate mortgages — which each carry variable interest rates — generally rise within two billing cycles after a change in the federal funds rates. More