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    To Calm Markets, Bank of England Will Buy Bonds ‘On Whatever Scale is Necessary’

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    The purchases are designed “to restore orderly market conditions,” the central bank said, after days of turmoil that followed the government’s plan for sweeping tax cuts and higher borrowing.The Bank of England said on Wednesday that it would temporarily buy British government bonds, a major intervention in financial markets after the new government’s fiscal plans sent borrowing costs soaring higher over the past few days.The news brought some relief to the bond market, but the British pound resumed its tumble, falling 1.7 percent against the dollar, to $1.05, back toward the record low reached on Monday.The British government’s plans to bolster economic growth by cutting taxes, especially for high earners, while spending heavily to protect households from rising energy costs has been resoundingly rejected by markets and economists, in part because of the large amount of borrowing it will require at a time of rising interest rates and high inflation. The International Monetary Fund unexpectedly made a statement about the British economy on Tuesday, urging the government to “re-evaluate” its plans.The sell-off in British assets since Friday, when the government’s plan was announced, has particularly affected bonds with long maturities, the Bank of England said. “Were dysfunction in this market to continue or worsen, there would be a material risk to U.K. financial stability,” it said in a statement. This would lead to a reduction of the flow of credit to businesses and households, it added.“The purpose of these purchases will be to restore orderly market conditions,” the central bank added in its statement, which had an immediate effect on markets. “The purchases will be carried out on whatever scale is necessary to effect this outcome.”Rising Inflation in BritainInflation Slows Slightly: Consumer prices are still rising at about the fastest pace in 40 years, despite a small drop to 9.9 percent in August.Interest Rates: On Sept. 22, the Bank of England raised its key rate by another half a percentage point, to 2.25 percent, as it tries to keep high inflation from becoming embedded in the nation’s economy.Energy Bills to Soar: Gas and electric charges for most British households are set to rise 80 percent this fall, further squeezing consumers and stoking inflation.Investor Worries: The financial markets have been grumbling with unease about Britain’s economic outlook. The government plan to freeze energy bills and cut taxes is not easing concerns.Bond auctions would take place from Wednesday until Oct. 14.The yield on 10-year British government bonds on Wednesday climbed as high as 4.58 percent — the highest since early 2008 — before the central bank’s statement. Thirty-year yields had exceeded 5 percent for the first time since 2002.After the announcement bond yields dropped sharply, with the 30-year yield falling by more than half a percentage point to about 4.35 percent.The central bank’s statement has echoes of a famous promise by Mario Draghi in 2012, when as head of the European Central Bank he vowed to do “whatever it takes” to save the euro, which had come under severe pressure in the markets.Wednesday’s intervention in Britain came after a central bank committee had warned of the risks to Britain’s financial stability from dysfunction in the government bond market.The British government’s sweeping fiscal plan, presented without an independent fiscal and economic assessment, has sent investors fleeing from British assets. The pound fell to a record low against the U.S. dollar on Monday, and traders suspected that the central bank would be forced to raise rates quickly, which pushed up short- and long-term borrowing costs.The speed of the rise in bond yields had disrupted Britain’s mortgage market, with some lenders pulling offers on new mortgages because they had become too difficult to price.“A decision by the government to scrap some of the tax cuts, or to cut spending sharply, would help to alleviate the stress in” currency and bond markets, Samuel Tombs, an economist at Pantheon Macroeconomics, wrote in a research note. “But its actions to date have eroded confidence among global investors, which cannot be easily restored. Accordingly, a painful recession driven by surging borrowing costs lies ahead.”The market turmoil and the central bank’s intervention reveal the extent to which the government’s plans are at odds with the bank’s monetary policy goals. The government is trying to quickly generate economic demand, while the bank is trying to cool it to lower inflation.On Tuesday, Huw Pill, the chief economist of the Bank of England, said the government’s fiscal plans would be met with a “significant” response by officials at the Bank of England, who are scheduled to meet again in early November.Just last Thursday, the central bank said it would initiate its plan to sell bonds back to the market as it tried to end the long era of easy money in its fight against inflation. It had insisted there would be a “high bar” for the bank to deviate from the plan, which would over the next year reduce its holdings of bonds by £80 billion through sales and redemptions, to £758 billion. On Wednesday, the bank said it was postponing the start of sales until the end of October. More

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    Fed’s Kashkari says officials are ‘a long way’ from backing off inflation fight.

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    Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, suggested on Friday that markets had gotten ahead of themselves in anticipating that the central bank — which has been raising interest rates swiftly this year — would soon begin to back off.“I’m surprised by markets’ interpretation,” Mr. Kashkari said in an interview. “The committee is united in our determination to get inflation back down to 2 percent, and I think we’re going to continue to do what we need to do until we are convinced that inflation is well on its way back down to 2 percent — and we are a long way away from that.”Fed officials raised interest rates by three-quarters of a percentage point this week, their second consecutive supersize rate increase and a move that took their policy setting to a range of 2.25 to 2.5 percent. That’s roughly what policymakers think of as a neutral setting, one that neither stokes nor slows growth, and further increases in interest rates will begin to actively hit the brakes on the economy.Given that fact, Jerome H. Powell, the Fed chair, said policymakers would now set rates meeting by meeting rather than committing to a broad plan well in advance. Investors took that as a sign that the central bank was likely to slow rate moves sharply in the coming months as the economy slows. In fact, bond market pricing suggests that investors think officials may even begin to cut interest rates next year.“I don’t know what the bond market is looking at in reaching that conclusion,” Mr. Kashkari said, adding that the bar would be “very, very high” to lower rates.Mr. Kashkari said that it was too soon to know how big of a rate increase might be appropriate in September, but that raising rates by half a point at coming Fed meetings “seems reasonable” to him.He noted, however, that inflation data had been surprising “in a bad way” and that continued higher core inflation could push him to think a three-quarter-point move would be needed. (Core inflation strips out volatile fuel and food prices to get a sign of underlying inflation pressures.)The difficult question to answer, Mr. Kashkari said, is how high interest rates will need to rise to wrestle inflation back down.“How much are we going to have to do to break the cycle of inflation and get inflation well on its way back down?” Mr. Kashkari said. “Nobody knows that.”But, he added, “We know we have a job to do, and we’re committed to doing it.” More

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    Stock Market Drop Accelerated as Recession Seemed More Likely

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    Further losses may be on the way, even after a 20 percent drop in the first half of the year, as Wall Street continues to price in the Fed’s aggressive interest rate policy.Investors had an awful start to the year as stocks twice entered bear market territory, falling more than 20 percent. Stocks didn’t hang there long the first time, but the second drop has proved more durable, as Wall Street has come to accept that inflation is more persistent and that the Federal Reserve will have to be more aggressive in combating it.The S&P 500 lost 16.4 percent in the second quarter, leaving it 20.6 percent below its level at the end of 2021.Where to now? While a bounce in stocks certainly seems due, investment advisers say a lasting recovery is unlikely for now. They warn that a recession is probably on the way, if it’s not here already, and that valuations remain high, even after the big decline.“I think we’re in for a lot more pain, probably, in U.S. stocks,” said Meb Faber, chief investment officer of Cambria Investment Management. “Just to get back to historical valuations, we could easily go down a third from here.”Ella Hoxha, a manager of global bond portfolios for Pictet Asset Management, said expectations still haven’t been adjusted to incorporate the likely risk of a recession. It may seem surprising that a recession could catch Wall Street by surprise when the conversation there is about little else. But until recently, Wall Street played down its chances and talked up the prospects of a soft landing, in which growth slows but the economy avoids major, prolonged disruption.“The odds of a recession have gone up, but the markets have not fully priced in the recession case yet,” Ms. Hoxha said. “Not only is the Fed having to correct being too dovish last year, it has to unwind its balance sheet” by selling the bonds and other securities it bought to support the economy and markets.Mutual FundsHighlights of mutual fund performance in the second quarter. More

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    Fed Raises Interest Rate Half a Percentage Point, Largest Increase Since 2000

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    #g-target-rate-recessions-box , #g-target-rate-recessions-box .g-artboard { margin:0 auto; } #g-target-rate-recessions-box p { margin:0; } #g-target-rate-recessions-box .g-aiAbs { position:absolute; } #g-target-rate-recessions-box .g-aiImg { position:absolute; top:0; display:block; width:100% !important; } #g-target-rate-recessions-box .g-aiSymbol { position: absolute; box-sizing: border-box; } #g-target-rate-recessions-box .g-aiPointText p { white-space: nowrap; } #g-target-rate-recessions-335 { position:relative; overflow:hidden; } #g-target-rate-recessions-335 p { font-family:nyt-franklin,arial,helvetica,sans-serif; font-weight:700; line-height:15px; height:auto; opacity:1; […] 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

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    Dollars or Rubles? Russian Debt Payments Are Due, and Uncertain.

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    Citing sanctions, the Russian government warned it might pay foreign debt obligations in rubles. Credit rating agencies say a default is imminent. Russia is teetering on the edge of a possible sovereign debt default, and the first sign could come as soon as Wednesday.The Russian government owes about $40 billion in debt denominated in U.S. dollars and euros, and half of those bonds are owned by foreign investors. And Russian corporations have racked up approximately $100 billion in foreign currency debt, JPMorgan estimates.On Wednesday, $117 million in interest payments on dollar-denominated government debt are due.But Russia is increasingly isolated from global financial markets, and investors are losing hope that they will see their money. As the government strives to protect what’s left of its access to foreign currency, it has suggested it would pay its dollar- or euro-denominated debt obligations in rubles instead. That has prompted credit rating agencies to warn of an imminent default.The Russian currency has lost nearly 40 percent of its value against the U.S. dollar in the past month. Even if the payments were made, economic sanctions would make it difficult for Western lenders to access the rubles if they are in Russian bank accounts.“It is not that Russia doesn’t have money,” Kristalina Georgieva, managing director of the International Monetary Fund, told reporters last week. The problem is, Russia can’t use a lot of its international currency reserves, she said, because they have been frozen by sanctions. “I’m not going to speculate what may or may not happen, but just to say that no more we talk about Russian default as an improbable event.”Last week, the chief economist of the World Bank said Russia and Belarus were squarely in “default territory,” and Fitch Ratings said a default was imminent because sanctions had diminished Russia’s willingness to repay its foreign debts.Russia last defaulted on its debt in 1998, when a currency crisis led it to default on ruble-denominated debt and temporarily ban foreign debt payments. The crisis shocked the financial world, leading to the collapse of the U.S. hedge fund Long-Term Capital Management, which required Federal Reserve intervention and a multibillion-dollar bailout. If Russia failed to make payments on its foreign currency debt, it would be its first such default since the 1917 Russian Revolution.Foreign investor interest in Russian assets fell in 2014 when sanctions were imposed after the country annexed Crimea, and never fully recovered before more sanctions were imposed by Washington in 2019. But holdings aren’t negligible. Russian government bonds were considered investment grade as recently as a few weeks ago, and were included in indexes used to benchmark other funds. JPMorgan estimates that international investors own 22 percent of Russian companies’ foreign currency debt.BlackRock, the world’s largest asset manager, has already incurred losses on Russian assets and equities.Jeenah Moon/BloombergFunds managed by BlackRock, the world’s largest asset manager, have incurred $17 billion in losses on Russian assets, including equities, in recent weeks, according to the firm. The loss in value has a number of causes, including investors selling their holdings.But so far, regulators have said the risk to global banking systems from a Russian default wouldn’t be systemic because of the limited direct exposure to Russian assets. The larger ramifications from the war in Ukraine and Russia’s economic isolation are from higher energy and food prices.Still, financial companies have been scrambling to assess their exposure, according to Daniel Tannebaum, a partner at Oliver Wyman who advises banks on sanctions.“I’m seeing a lot of clients that had exposure to the Russian market wondering what type of default scenarios might be coming up,” said Mr. Tannebaum, who is also a former Treasury Department official. In the case of a default, “those bonds become worthless, for lack of a better term,” he said.On Monday, Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.” The government has the money to meet its debt obligations, he said, but sanctions were hampering its ability to pay. Mr. Siluanov had also said over the weekend that the country had lost access to about $300 billion of its $640 billion currency reserves.The government insists investors will be paid. The finance ministry said on Monday it would send instructions to banks to issue the payment due on dollar- or euro-denominated bonds in dollars or euros, but if the banks don’t execute the order then it will be recalled and payment will be made in rubles instead. The statement also said that the payments could be made in rubles and then converted to another currency only when the country’s gold and foreign exchange reserves are unfrozen.Russia’s finance minister, Anton Siluanov, accused the countries that have frozen the country’s internationally held currency reserves of trying to create an “artificial default.”Alberto Pizzoli/Agence France-Presse — Getty Images“In any case, obligations to our investors will be met. And the ability to receive the funds in foreign currency will depend on the imposed restrictions,” Mr. Siluanov said.But the statement doesn’t provide a clear vision of what might happen on Wednesday. American sanctions allow for the receipt of payments of debt obligations until late May, and so the reasoning behind the Russian finance ministry’s claim that banks might refuse the payments is unclear. The payments due on Wednesday also have a 30-day grace period, so a default wouldn’t technically happen until mid-April. But Russia has already blocked interest payments on ruble-denominated bonds to nonresidents, a sign of its hesitancy to transfer funds abroad.While the Russian finance ministry said it could meet its obligations by paying in rubles, others disagreed.“In order to avoid a default, the only way that Russia can really navigate this is to send the full payment in dollars,” said Trang Nguyen, an emerging markets strategist at JPMorgan.Some Russian bonds issued in recent years do have provisions that allow for repayment in other currencies, including the ruble, if Russia can’t make payments in dollars for reasons “beyond its control.” The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More

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    January Fed Minutes Show Concern About Inflation's Spread

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    Officials at the Federal Reserve expressed concern about inflation at their meeting in January, in particular that it had spread beyond pandemic-affected sectors into other areas, and agreed it would be warranted to begin scaling back their support for the economy faster than they previously had anticipated, minutes of the meeting released Wednesday showed.Fed officials noted that the labor market remained strong, though the Omicron wave of the coronavirus had worsened supply chain bottlenecks and labor shortages, and that inflation continued to significantly exceed the levels the central bank targets.Most officials still expect inflation to moderate over the year as pandemic-related supply bottlenecks ease and the Fed removes some of its support for the economy. But some participants warned that inflation could continue to accelerate, pointing to factors like rising wages and rents. If inflation does not move down as they expect, most Fed officials agreed that they might need to pare back their support for the economy even more quickly, though that could carry some risk.The outlook for inflation could be worsened by China’s zero-tolerance policy toward Covid, which has led to expansive lockdowns that have shuttered factories; a clash in Ukraine that could push up global energy prices; or the spread of another variant, they said.The central bank emphasized that the pace of interest rate increases would hinge on how the economy developed. But most officials agreed that the Fed should take a faster approach to cooling the economy than it did in 2015, when it began raising rates at a slow and plodding pace in the wake of the Great Recession.“Most participants suggested that a faster pace of increases in the target range for the federal funds rate than in the post-2015 period would likely be warranted, should the economy evolve generally in line with the committee’s expectation,” the minutes read.Fed officials also agreed that it was appropriate to proceed with plans to trim the nearly $9 trillion in securities that the central bank holds. Most officials preferred to keep to a schedule announced in December, which would end such purchases starting next month, though some viewed an earlier end to the program as warranted and a way to signal that they were taking a stronger stance to fight inflation.Policymakers said the labor market had made “remarkable progress in recovering from the recession associated with the pandemic and, by most measures, was now very strong.”The January meeting solidified what markets had been anticipating: that the Fed was on track to raise interest rates in March. The question now is how quickly, and by how much. Many investors have speculated that the Fed could raise its interest rate by half a percentage point in March, instead of its usual quarter-point increase.In a statement after their two-day policy meeting in January, Fed officials laid the groundwork for higher borrowing costs “soon.” Jerome H. Powell, the Fed chair, said at a news conference after the meeting that “I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so.”Inflation has continued to run hot since the Fed’s last meeting, and wage growth remains elevated. A key inflation measure released last week showed that prices were climbing at the fastest pace in 40 years and broadening beyond pandemic-affected goods and services, a sign that rapid gains could prove longer lasting and harder to shake off.January’s Consumer Price Index showed prices jumping 7.5 percent over the year and 0.6 percent from the prior month, exceeding forecasts. A separate inflation gauge that the Fed prefers also showed that prices remained elevated at the end of 2021. Overall, prices have been climbing at the fastest pace since 1982.Wall Street is now anticipating that interest rates could rise to more than 1.75 percent by the end of the year, up from near zero now. Markets began to bet on a double-size rate increase after January’s inflation data came in surprisingly strong. But some Fed officials have been tempering those expectations, saying they need to take a steady approach.Mary C. Daly, president of the Federal Reserve Bank of San Francisco, said on Sunday that the Fed needed to get moving but that its approach ought to be “measured.”“I see that it is obvious that we need to pull some of the accommodation out of the economy,” Ms. Daly said on “Face the Nation.” “But history tells us with Fed policy that abrupt and aggressive action can actually have a destabilizing effect on the very growth and price stability we’re trying to achieve.” More