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    The Financial Crisis the World Forgot

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    #masthead-section-label, #masthead-bar-one { display: none }The Coronavirus OutbreakliveLatest UpdatesMaps and CasesRisk Near YouVaccine RolloutGuidelines After VaccinationCredit…Jasper RietmanSkip to contentSkip to site indexThe Financial Crisis the World ForgotThe Federal Reserve crossed red lines to rescue markets in March 2020. Is there enough momentum to fix the weaknesses the episode exposed?Credit…Jasper RietmanSupported byContinue reading the main storyMarch 16, 2021, 5:00 a.m. ETBy the middle of March 2020 a sense of anxiety pervaded the Federal Reserve. The fast-unfolding coronavirus pandemic was rippling through global markets in dangerous ways.Trading in Treasurys — the government securities that are considered among the safest assets in the world, and the bedrock of the entire bond market — had become disjointed as panicked investors tried to sell everything they owned to raise cash. Buyers were scarce. The Treasury market had never broken down so badly, even in the depths of the 2008 financial crisis.The Fed called an emergency meeting on March 15, a Sunday. Lorie Logan, who oversees the Federal Reserve Bank of New York’s asset portfolio, summarized the brewing crisis. She and her colleagues dialed into a conference from the fortresslike New York Fed headquarters, unable to travel to Washington given the meeting’s impromptu nature and the spreading virus. Regional bank presidents assembled across America stared back from the monitor. Washington-based governors were arrayed in a socially distanced ring around the Fed Board’s mahogany table.Ms. Logan delivered a blunt assessment: While the Fed had been buying government-backed bonds the week before to soothe the volatile Treasury market, market contacts said it hadn’t been enough. To fix things, the Fed might need to buy much more. And fast.Fed officials are an argumentative bunch, and they fiercely debated the other issue before them that day, whether to cut interest rates to near-zero.But, in a testament to the gravity of the breakdown in the government bond market, there was no dissent about whether the central bank needed to stem what was happening by stepping in as a buyer. That afternoon, the Fed announced an enormous purchase program, promising to make $500 billion in government bond purchases and to buy $200 billion in mortgage-backed debt.It wasn’t the central bank’s first effort to stop the unfolding disaster, nor would it be the last. But it was a clear signal that the 2020 meltdown echoed the 2008 crisis in seriousness and complexity. Where the housing crisis and ensuing crash took years to unfold, the coronavirus panic had struck in weeks.As March wore on, each hour incubating a new calamity, policymakers were forced to cross boundaries, break precedents and make new uses of the U.S. government’s vast powers to save domestic markets, keep cash flowing abroad and prevent a full-blown financial crisis from compounding a public health tragedy.The rescue worked, so it is easy to forget the peril America’s investors and businesses faced a year ago. But the systemwide weaknesses that were exposed last March remain, and are now under the microscope of Washington policymakers.How It StartedThe Fed began to roll out measure after measure in a bid to soothe markets.Credit…John Taggart for The New York TimesFinancial markets began to wobble on Feb. 21, 2020, when Italian authorities announced localized lockdowns.At first, the sell-off in risky investments was normal — a rational “flight to safety” while the global economic outlook was rapidly darkening. Stocks plummeted, demand for many corporate bonds disappeared, and people poured into super-secure investments, like U.S. Treasury bonds.On March 3, as market jitters intensified, the Fed cut interest rates to about 1 percent — its first emergency move since the 2008 financial crisis. Some analysts chided the Fed for overreacting, and others asked an obvious question: What could the Fed realistically do in the face of a public health threat?“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain,” Chair Jerome H. Powell said at a news conference, explaining that the Fed was doing what it could to keep credit cheap and available. But the health disaster was quickly metastasizing into a market crisis.Lockdowns in Italy deepened during the second week of March, and oil prices plummeted as a price war raged, sending tremors across stock, currency and commodity markets. Then, something weird started to happen: Instead of snapping up Treasury bonds, arguably the world’s safest investment, investors began trying to sell them.The yield on 10-year Treasury debt — which usually drops when investors seek safe harbor — started to rise on March 10, suggesting investors didn’t want safe assets. They wanted cold, hard cash, and they were trying to sell anything and everything to get it.How It WorsenedNearly every corner of the financial markets began breaking down, including the market for normally steadfast Treasury securities.Credit…Ashley Gilbertson for The New York TimesReligion works through churches. Democracy through congresses and parliaments. Capitalism is an idea made real through a series of relationships between debtors and creditors, risk and reward. And by last March 11, those equations were no longer adding up.The Coronavirus Outbreak More

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    What the Bond Market Is Telling Us About the Biden Economy

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    AdvertisementContinue reading the main storyUpshotSupported byContinue reading the main storyWhat the Bond Market Is Telling Us About the Biden EconomyA recent rise in interest rates hints that a recovery is on the way, but it could also mean harder choices ahead on spending.Feb. 23, 2021, 5:00 a.m. ETTreasury Secretary Janet Yellen, right, at a White House meeting this month. She has emphasized that interest rates are crucial in determining how much the government should borrow and spend.Credit…Carlos Barria/ReutersWhile Washington debates the size of a new economic rescue plan, the bond market is sending a message: A meaningful acceleration in both growth and inflation in the years ahead looks more likely now than it did just a few weeks ago.That would be mostly good news, suggesting an economy recovering quickly from the pandemic. Interest rates remain very low by historical standards, even for the longest-term securities. Bond prices imply that inflation will be consistent with the Federal Reserve’s target of 2 percent annual rises in consumer prices, not a more worrisome spiral.[embedded content]But the surge in rates has brought an end to a period of several months when borrowing was essentially free, seemingly far into the future. For the Biden administration and the Federal Reserve, that implies that the free-lunch stage of the crisis is ending, and there could be harder questions ahead.In particular, it means that the downside of bad policy — federal spending that doesn’t generate much economic activity, for example — is higher than it was as recently as December.“We’re at a place where the markets are starting to grapple with the question of whether there are trade-offs between more stimulus today and potentially higher rates and more inflation down the road,” said Nathan Sheets, chief economist of PGIM Fixed Income and a former official at the Treasury and the Fed.The yield on 10-year Treasury bonds — the rate the United States government must pay to borrow money for a decade — was 1.37 percent Monday, low by historical standards but well above its recent low of 0.51 percent in August and 0.92 percent at the end of December. Those higher Treasury rates generally translate into higher mortgage rates and corporate borrowing costs, so the surge could take some of the air out of bubbly housing and financial markets.The inflation-adjusted interest rate the United States Treasury must pay to borrow money for 30 years was negative for much of the last year, meaning the government would pay investors back less in inflation-adjusted terms than it borrowed. Last week, the rate rose into positive territory for the first time since June and closed at 0.06 percent Monday. (For shorter time horizons, the “real yield” remains in negative territory.)That’s particularly striking given that Fed officials have repeatedly said they expect the short-term interest rate target they control to be near zero for quite some time — and bond investors appear to believe them. The yield on two-year Treasuries has barely budged in the same span.What is happening is known as a “steepening of the yield curve,” with long-term rates rising as short-term rates hold still. It tends to presage faster economic growth; it is the opposite of a “yield curve inversion,” which is known as a harbinger of recessions.But the flip side is that the moment appears to have passed when bond markets were giving the government an all-clear signal to do whatever was necessary to boost the economy, essentially making endless funding available at extraordinarily low cost. That could have implications for how the Biden administration approaches the rest of its economic agenda.Treasury Secretary Janet Yellen has emphasized that low interest rates, which keep the cost of debt service low, are important in her thinking about how much the government can comfortably borrow and spend.At The New York Times’s DealBook conference on Monday, Ms. Yellen, after noting that the government’s ratio of debt to the size of the economy is much larger than it was before the global financial crisis, said: “Look at a different metric, which is more important, which is what is the cost of that debt. Look for example at interest payments on the debt as a share of G.D.P.,” which is below 2007 levels.“So I think we have more fiscal space than we used to because of the interest rate environment,” Ms. Yellen told the Times’s Andrew Ross Sorkin.By implication, the further that bond yields rise, and inflation expectations along with them, the more the Biden administration would view their potential spending to be constrained. Congress is now at work on a $1.9 trillion pandemic aid package, which Democratic leaders hope to pass in March. They envision a large-scale infrastructure plan after that.Jerome Powell, the Federal Reserve chair, will face questions from Congress on Tuesday about the central bank’s policies. In other recent appearances, he has emphasized the importance of returning the economy to full health above all other goals, and stressed that inflation has been persistently too low rather than too high over the last decade.“Fed Chair Powell has taken each and every opportunity to reassure investors that the Fed would consider near-term inflationary pressure to be transitory,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management. “The market is taking the Fed at its word that short rates will be anchored at zero for a considerable time.”The gap between the prices of regular and inflation-protected bonds as of Friday’s close imply that the Consumer Price Index is expected to rise 2.29 percent a year over the next five years, and 1.99 percent a year for the five years after that. The Fed aims for 2 percent annual inflation as measured by a different index that tends to be somewhat lower, meaning these so-called “inflation break-evens” are broadly consistent with the central bank’s goals.Put it all together, and the surge in rates so far is basically an optimistic sign that the post-pandemic economy will mark the end of a long period of sluggish growth. But the speed of the adjustment is a reminder that the line between too hot and just right is a narrow one.AdvertisementContinue reading the main story More