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

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

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    As U.S. and Chinese Officials Meet, Businesses Temper Their Hopes

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    Chief executives in the U.S. have long pushed for closer ties between the two countries. Now they just hope a rocky situation won’t get worse.In a meeting in Beijing on Friday, China’s leader, Xi Jinping, traded warm smiles with Bill Gates and praised Mr. Gates as “the first American friend” he had met this year.The encounters in Beijing between Secretary of State Antony J. Blinken and his Chinese counterparts, starting on Sunday, are likely to feel noticeably chillier.The high-level meetings are aimed at getting the U.S.-China relationship back on track, and many American business leaders have been pushing the Biden administration to try to restore some stability in one of the world’s most important bilateral relationships.But for business leaders, and for officials on both sides, expectations for the meetings appear modest, with two main goals for the talks. One is to restore communication between the governments, which broke down this year after a Chinese surveillance balloon flew into U.S. airspace and Mr. Blinken canceled a visit scheduled for February. The other is to halt any further decline in the countries’ relationship.There is already evidence of the impact of the fraying ties. Foreign direct investment in China has fallen to an 18-year low. A 2023 survey by the American Chamber of Commerce in China showed that companies still see the Chinese market as a priority, but that their willingness to invest there is declining.“The economic relationship has become so dismal that any sign of progress is welcome, though expectations are low for any sort of a breakthrough,” said Jake Colvin, the president of the National Foreign Trade Council, which represents multinational businesses.“The hope is that high-level dialogues like this can start to inject some certainty for business into an increasingly fraught and unpredictable trade relationship,” he said.Still, as one of the world’s largest consumer markets and home to many factories that supply global businesses, China exerts a powerful pull. This year, as it eased its travel restrictions after three years of pandemic lockdowns, a parade of chief executives made trips to China, including Mary Barra of General Motors, Jamie Dimon of JPMorgan Chase and Stephen Schwarzman of Blackstone.On a visit to China this month, Elon Musk, the chief executive of Tesla and owner of Twitter, described the American and Chinese economies as “conjoined twins” and said he opposed to efforts to split them. Apple’s chief executive, Tim Cook, traveled to China in March and lauded the company’s “symbiotic” relationship with the nation.Sam Altman, the leader of OpenAI, which makes the ChatGPT chatbot, appeared virtually at a conference in Beijing this month, saying American and Chinese researchers should continue to work together to counter the risks of artificial intelligence.The tech industry, which has forged lucrative relationships with Chinese manufacturers and consumers, has warily watched Washington’s aggressive approach to China. While industry groups acknowledge the importance of moves to safeguard national security, they have urged the Biden administration to carefully calibrate its actions.Wendy Cutler, a former diplomat and trade negotiator who is now vice president at the Asia Society Policy Institute, said the United States and China might announce some small steps forward at the end of the meetings. The governments might agree, she said, to increase the paltry number of flights between their countries or the visas they are issuing to foreign visitors.But both sides will have plenty of grievances to air, Ms. Cutler said. Chinese officials are likely to complain about U.S. tariffs on goods made in China and restrictions on U.S. firms selling coveted chip technology to China. American officials may highlight China’s deteriorating business environment and its recent move to bar companies that handle critical information from buying microchips made by the U.S. company Micron.“I’m not expecting any breakthroughs, particularly on the economic front,” Ms. Cutler said, adding, “Neither side will want to be smiling.”American officials hope Mr. Blinken’s visit paves the way for more cooperation, including on issues like climate change and the restructuring the debt loads of developing countries. Other officials, including Treasury Secretary Janet L. Yellen, are considering visits to China this year, and Mr. Xi and President Biden may meet directly at either the Group of 20 meetings in Delhi in September or an Asia-Pacific economic meeting in San Francisco in November.In recent months, Biden officials have tried to mend the rift between the countries by arguing for a more “constructive” relationship. They have echoed European officials in saying their desire is for “de-risking and diversifying” their economic relationships with China, not “decoupling.”But trust between the governments has eroded, and Chinese officials appear to be skeptical of how much the Biden administration can do to restore ties.The extensive U.S. restrictions on the semiconductor technology that can be shared with China, which were issued in October, continue to rankle officials in Beijing. The United States has added dozens of Chinese companies to sanctions lists for aiding the Chinese military and surveillance state, or circumventing U.S. restrictions against trading with Iran and Russia.Biden administration officials are weighing further restrictions on China, including a long-delayed order covering certain U.S. venture capital investments. And the White House faces intense pressure from Congress to do more to crack down on national security threats emanating from Beijing.Not all companies are pushing for improved ties. Some with less exposure to China have tried to reap political benefits in Washington from the growing competition with the country. Meta, the parent company of Facebook and Instagram, has repeatedly raised concerns about TikTok, the Chinese-owned video app that has proved a formidable competitor to Instagram.“It’s really a dispute over the degree,” said James Lewis, a senior vice president at the Center for Strategic and International Studies. “How accommodating are you? How confrontational are you?”How aggressively companies are resisting the tensions with China, Mr. Lewis said, is linked to their exposure to the country’s market.“I think a lot of this has to do with your presence in China,” he said. More

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    Fed Will Decide Next Rate Move After Bank Jitters

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    The Federal Reserve will release a policy decision on Wednesday on the heels of another bank collapse.WASHINGTON — Federal Reserve officials are widely expected to lift borrowing costs by a quarter of a percentage point on Wednesday, the 10th consecutive rate increase since March 2022. But investors and economists think that this could be the central bank’s last move before it pauses.Fed officials face a complicated backdrop going into this week’s meeting: Risks to the financial system loom large, but inflation also remains stubborn.The banking system has been in turmoil since the collapse of Silicon Valley Bank on March 10. Government officials spent this past weekend racing to find a buyer for First Republic, which had been struggling for weeks and was sold to JPMorgan Chase in a deal announced early Monday morning.Some of the banking sector tumult stems from the Fed’s rapid interest rate increases over the past year. Central bankers are expected to lift rates to just above 5 percent this week, up from near-zero as recently as March 2022. After that quick series of adjustments, many lenders are facing losses on older securities and loans, which pay relatively low interest rates compared with newer securities issued in a higher-rate world.Despite the Fed’s moves — which were meant to rein in quick inflation by slowing the economy — the job market has maintained some momentum and price increases have shown concerning staying power. Companies continue to hire at a solid clip, and data released last week showed that wages continued to climb quickly at the start of the year. While inflation has been slowing, it is increasingly driven by service price increases that have shown little sign of cooling off — which could make it difficult to wrestle price increases the whole way back to the Fed’s slow and steady goal.Policymakers will give the public a sense of how they are thinking about the fraught economic moment on Wednesday in their post-meeting statement at 2 p.m. Because the Fed will not release fresh economic projections at this meeting — those come out just once a quarter — investors will look to a news conference with the Fed chair, Jerome H. Powell, at 2:30 p.m. for clues about what comes next.The Fed could hint at a pauseWhen Fed policymakers released their economic estimates in March, they expected to raise interest rates to a range of 5 to 5.25 percent in 2023.If officials adjust policy as expected this week, they will have lifted rates to that level. The question now is whether they deem that sufficient, or whether policymakers think that the economy and inflation are resilient enough that they will need to adjust borrowing costs more to cool things down and lower inflation fully.Mr. Powell could offer some signal during his news conference, or he could opt to leave the Fed’s options open — which is what some economists expect.“They don’t need to rule anything out,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. “The worst scenario for them would be to signal that they’re done, then have the data force them to do a U-turn.”Investors expect Fed officials to stop after this week, hold rates steady for a few months and then begin to lower them — perhaps substantially, to a range of 4.5 to 4.75 percent by the end of the year.Fed policymakers, however, have been adamant that they do not expect to lower rates imminently. And some have hinted that more increases might be warranted if inflation and economic strength show staying power.“Monetary policy needs to be tightened further,” Christopher Waller, a Fed governor and one of the central bank’s more inflation-focused members, said in an April 14 speech. “How much further will depend on incoming data on inflation, the real economy and the extent of tightening credit conditions.”Bank turmoil will influence policyFed officials have been clear that the upheaval in the banking system could slow the economy — but policymakers do not know by how much.Banking trouble is different from other types of business distress, because banks are like the yeast in the sourdough starter of the economy: If they aren’t working, nothing else grows. They lend out money to would-be home buyers, people who want to buy new cars or garage additions, and businesses that want to expand and hire.It is pretty clear that banks are going to pull back their lending at least somewhat in response to the recent turmoil. Anecdotal signs are already surfacing around the country. The question is how acute that shift will be.“If the response to recent banking problems leads to financial tightening, monetary policy has to do less,” Austan Goolsbee, the president of the Federal Reserve Bank of Chicago, said in an April 11 speech. “It’s not clear by how much less.”He noted that private-sector estimates suggested that the hit to growth from the banking turmoil could be equivalent to one to three quarter-point rate increases. That estimate came well before First Republic’s demise, but after its troubles started.The economy’s resilience will be criticalOne big question for the Fed — and which will matter for everyone — is whether the U.S. economy will squeak through this episode without plunging into a painful recession.Fed staff members said at the central bank’s March meeting that they expected the economy to experience a “mild recession” in the wake of the recent banking turmoil. And Fed officials — including Mr. Powell — have suggested that a recession is possible as officials try to slow the economy enough to bring inflation under control.But if a recession hits, it is not obvious how painful it will be. Some economists warn that downturns usually build on themselves, as people respond to a little bit of economic weakness by pulling back on spending a lot: It may be hard to push the unemployment rate up just a little bit without pushing it significantly.Others point out that the post-pandemic economy is a weird one, characterized by unusually strong corporate profits and lots of job openings. Because there may be room to squeeze margins and cut unfilled positions, the economy may be able to cool down more gently than in the past — a so-called “soft landing.”Mr. Powell will get a chance to weigh in on which outcome he thinks is most likely on Wednesday. More

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    Late-Night Negotiating Frenzy Left First Republic in JPMorgan’s Control

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    The resolution of First Republic Bank came after a frantic night of deal making by government officials and executives at the country’s biggest bank.Lawmakers and regulators have spent years erecting laws and rules meant to limit the power and size of the largest U.S. banks. But those efforts were cast aside in a frantic late-night effort by government officials to contain a banking crisis by seizing and selling First Republic Bank to the country’s biggest bank, JPMorgan Chase.At about 1 a.m. Monday, hours after the Federal Deposit Insurance Corporation had been expected to announce a buyer for the troubled regional lender, government officials informed JPMorgan executives that they had won the right to take over First Republic and the accounts of its well-heeled customers, most of them in wealthy coastal cities and suburbs.The F.D.I.C.’s decision appears, for now, to have quelled nearly two months of simmering turmoil in the banking sector that followed the sudden collapse of Silicon Valley Bank and Signature Bank in early March. “This part of the crisis is over,” Jamie Dimon, JPMorgan’s chief executive, told analysts on Monday in a conference call to discuss the acquisition.For Mr. Dimon, it was a reprise of his role in the 2008 financial crisis when JPMorgan acquired Bear Stearns and Washington Mutual at the behest of federal regulators.But the resolution of First Republic has also brought to the fore long-running debates about whether some banks have become too big too fail partly because regulators have allowed or even encouraged them to acquire smaller financial institutions, especially during crises.“Regulators view them as adults and business partners,” said Tyler Gellasch, president of Healthy Markets Association, a Washington-based group that advocates greater transparency in the financial system, referring to big banks like JPMorgan. “They are too big to fail and they are afforded the privilege of being so.”He added that JPMorgan was likely to make a lot of money from the acquisition. JPMorgan said on Monday that it expected the deal to raise its profits this year by $500 million.JPMorgan will pay the F.D.I.C. $10.6 billion to acquire First Republic. The government agency expects to cover a loss of about $13 billion on First Republic’s assets.`Normally a bank cannot acquire another bank if doing so would allow it to control more than 10 percent of the nation’s bank deposits — a threshold JPMorgan had already reached before buying First Republic. But the law includes an exception for the acquisition of a failing bank.The F.D.I.C. sounded out banks to see if they would be willing to take First Republic’s uninsured deposits and if their primary regulator would allow them to do so, according to two people familiar with the process. On Friday afternoon, the regulator invited the banks into a virtual data room to look at First Republic’s financials, the two people said. The government agency, which was working with the investment bank Guggenheim Securities, had plenty of time to prepare for the auction. First Republic had been struggling since the failure of Silicon Valley Bank, despite receiving a $30 billion lifeline in March from 11 of the country’s largest banks, an effort led by Mr. Dimon of JPMorgan.By the afternoon of April 24, it had became increasingly clear that First Republic couldn’t stand on its own. That day, the bank revealed in its quarterly earnings report that it had lost $102 billion in customer deposits in the last weeks of March, or more than half what it had at the end of December.Ahead of the earnings release, First Republic’s lawyers and other advisers told the bank’s senior executives not to answer any questions on the company’s conference call, according to a person briefed on the matter, because of the bank’s dire situation.The revelations in the report and the executives’ silence spooked investors, who dumped its already beaten-down stock.When the F.D.I.C. began the process to sell First Republic, several bidders including PNC Financial Services, Fifth Third Bancorp, Citizens Financial Group and JPMorgan expressed an interest. Analysts and executives at those banks began going through First Republic’s data to figure out how much they would be willing to bid and submitted bids by early afternoon Sunday.Regulators and Guggenheim then returned to the four bidders, asking them for their best and final offers by 7 p.m. E.T. Each bank, including JPMorgan Chase, improved its offer, two of the people said.Regulators had indicated that they planned to announce a winner by 8 p.m., before markets in Asia opened. PNC executives had spent much of the weekend at the bank’s Pittsburgh headquarters putting together its bid. Executives at Citizens, which is based in Providence, R.I., gathered in offices in Connecticut and Massachusetts. But 8 p.m. rolled by with no word from the F.D.I.C. Several hours of silence followed.For the three smaller banks, the deal would have been transformative, giving them a much bigger presence in wealthy places like the San Francisco Bay Area and New York City. PNC, which is the sixth-largest U.S. bank, would have bolstered its position to challenge the nation’s four large commercial lenders — JPMorgan, Bank of America, Citigroup and Wells Fargo.Ultimately, JPMorgan not only offered more money than others and agreed to buy the vast majority of the bank, two people familiar with the process said. Regulators also were more inclined to accept the bank’s offer because JPMorgan was likely to have an easier time integrating First Republic’s branches into its business and managing the smaller bank’s loans and mortgages either by holding onto them or selling them, the two people said.As the executives at the smaller banks waited for their phones to ring, the F.D.I.C. and its advisers continued to negotiate with Mr. Dimon and his team, who were seeking assurances that the government would safeguard JPMorgan against losses, according to one of the people.At around 3 a.m., the F.D.I.C. announced that JPMorgan would acquire First Republic.An F.D.I.C. spokesman declined to comment on other bidders. In its statement, the agency said, “The resolution of First Republic Bank involved a highly competitive bidding process and resulted in a transaction consistent with the least-cost requirements of the Federal Deposit Insurance Act.” The announcement was widely praised in the financial industry. Robin Vince, the president and chief executive of Bank of New York Mellon, said in an interview that it felt “like a cloud has been lifted.”Some financial analysts cautioned that the celebrations might be overdone.Many banks still have hundreds of billions of dollars in unrealized losses on Treasury bonds and mortgage-backed securities purchased when interest rates were very low. Some of those bond investments are now worth much less because the Federal Reserve has sharply raised rates to bring down inflation.Christopher Whalen of Whalen Global Advisors said the Fed fueled some of the problems at banks like First Republic with an easy money policy that led them to load up on bonds that are now performing poorly. “This problem will not go away until the Fed drops interest rates,” he said. “Otherwise, we’ll see more banks fail.”But Mr. Whalen’s view is a minority opinion. The growing consensus is that the failures of Silicon Valley, Signature and now First Republic will not lead to a repeat of the 2008 financial crisis that brought down Bear Stearns, Lehman Brothers and Washington Mutual.The assets of the three banks that failed this year are greater than of the 25 banks that failed in 2008 after adjusting for inflation. But 465 banks failed in total from 2008 to 2012.One unresolved issue is how to deal with banks that still have a high percentage of uninsured deposits — money from customers well in excess of the $250,000 federally insured cap on deposits. The F.D.I.C. on Monday recommended that Congress consider expanding its ability to protect deposits.Many investors and depositors are already assuming that the government will step in to protect all deposits at any failing institution by invoking a systemic risk exception — something they did with Silicon Valley Bank and Signature Bank. But that’s easy to do when it is just a few banks that run into trouble and more difficult if many banks have problems.Another looming concern is that midsize banks will pull back on lending to preserve capital if they are subject to the kind of bank runs that took place at Silicon Valley Bank and First Republic. Depositors might also move their savings to money market funds, which tend to offer higher returns than savings or checking accounts.Midsize banks also need to brace for more exacting oversight from the Fed and the F.D.I.C., which criticized themselves in reports released last week about the bank failures in March.Regional and community banks are the main source of financing for the commercial real estate industry, which encompasses office buildings, apartment complexes and shopping centers. An unwillingness by banks to lend to developers could stymie plans for new construction.Any pullback in lending could lead to a slowdown in economic growth or a recession.Some experts said that despite those challenges and concerns about big banks getting bigger, regulators have done an admirable job in restoring stability to the financial system.“It was an extremely difficult situation, and given how difficult it was, I think it was well done,” said Sheila Bair, who was chair of the F.D.I.C. during the 2008 financial crisis. “It means that big banks becoming bigger when smaller banks begin to fail is inevitable,” she added.Reporting was contributed by More

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    Low Rates Were Meant to Last. Without Them, Finance Is In for a Rough Ride.

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    Economists expected inflation and rates to stay low for years. With Silicon Valley Bank’s implosion, Wall Street is starting to reckon with how wrong that prediction has proved.WASHINGTON — If a number defined the 2010s, it was 2 percent. Inflation, annual economic growth, and interest rates at their highest all hovered around that level — so persistently that economists, the Federal Reserve and Wall Street began to bet that the era of low-everything would last.That bet has gone bad. And with the implosion of Silicon Valley Bank, America is beginning to reckon with the consequences.Inflation surprised economists and policymakers by spiking after the onset of the coronavirus pandemic, and at 6 percent in February, it is proving difficult to stamp out. The Fed has lifted interest rates by 4.5 percentage points in just the past 12 months as it tries to slow the economy and wrestle price increases under control. The central bank’s decision next Wednesday could nudge rates even higher. And that jump in borrowing costs is catching some businesses, investors and households by surprise.Silicon Valley Bank is the most extreme example of an institution’s being caught off guard so far. The bank had amassed a big portfolio of long-term bonds, which pay more interest than shorter-term ones. But it wasn’t paying to sufficiently protect its assets against the possibility of an interest rate spike — and when rates jumped, it found the market value of its holdings seriously dented. The reason: Why would investors want those old bonds when they could buy new ones at more attractive rates?Those impending financial losses helped to spook investors, fueling a bank run that collapsed the institution and shot tremors across the American banking system.The bank’s mistake was a bad — and ultimately lethal — one. But it wasn’t wholly unique.Many banks are holding big portfolios of long-term bonds that are worth a lot less than their original value. U.S. banks were sitting on $620 billion in unrealized losses from securities that had dropped in price at the end of 2022, based on Federal Deposit Insurance Corporation data, with many regional banks facing big hits.Adding in other potential losses, including on mortgages that were extended when rates were low, economists at New York University have estimated that the total may be more like $1.75 trillion. Banks can offset that with higher earnings on deposits — but that doesn’t work if depositors pull their money out, as in Silicon Valley Bank’s case.“How worried should we be comes down to: How likely is it that the deposit franchise leaves?” said Alexi Savov, who wrote the analysis with his colleague Philipp Schnabl.Regulators are conscious of that potentially broad interest rate risk. The Fed unveiled an emergency loan program on Sunday night that will offer banks cash in exchange for their bonds, treating them as though they were still worth their original value in the process. The setup will allow banks to temporarily escape the squeeze they are feeling as interest rates rise.But even if the Fed succeeds at neutralizing the threat of bank runs tied to rising rates, it is likely that other vulnerabilities grew during decades of relatively low interest rates. That could trigger more problems at a time when borrowing costs are substantially higher.Impending financial losses helped to spook investors, fueling a bank run that collapsed Silicon Valley Bank and shot tremors across the U.S. banking system.Jason Henry for The New York Times“There’s an old saying: Whenever the Fed hits the brakes, someone goes through the windshield,” said Michael Feroli, chief economist at J.P. Morgan. “You just never know who it’s going to be.”America has gone through regular bouts of financial pain brought about by rising interest rates. A jump in rates has been blamed for helping to burst the bubble in technology stocks in the early 2000s, and for contributing to the decline in house prices that helped to set off the crash in 2008.Even more closely related to the current moment, a sharp rise in interest rates in the 1970s and 1980s caused acute problems in the savings and loan industry that ended only when the government intervened.There’s a simple logic behind the financial problems that arise from rising interest rates. When borrowing costs are very low, people and businesses need to take on more risk to earn money on their cash — and that typically means that they tie up their money for longer or they throw their cash behind risky ventures.When the Fed raises interest rates to cool the economy and control inflation, though, money moves toward the comparative safety of government bonds and other steady investments. They suddenly pay more, and they seem like a surer bet in a world where the central bank is trying to slow the economy.That helps to explain what is happening in the technology sector in 2023, for example. Investors have pulled back from tech company stocks, which tend to have values that are predicated on expectations for growth. Betting on prospective profits is suddenly less attractive in a higher-rate environment.A more challenging business and financial backdrop has quickly translated into a souring job market in technology. Companies have been making high-profile layoffs, with Meta announcing a fresh round just this week.That is more or less the way Fed rate moves are supposed to work: They diminish growth prospects and make access to financing tougher, curb business expansions, cost jobs and end up slowing demand throughout the economy. Slower demand makes for weaker inflation.But sometimes the pain does not play out in such an orderly and predictable way, as the trouble in the banking system makes clear.“This just teaches you that we really have these blind spots,” said Jeremy Stein, a former Fed governor who is now at Harvard. “You put more pressure on the pipes, and something is going to crack — but you never know where it is going to be.”The Fed was conscious that some banks could face trouble as rates rose meaningfully for the first time in years.“The industry’s lack of recent experience with rising and more volatile interest rates, coupled with material levels of market uncertainty, presents challenges for all banks,” Carl White, the senior vice president of the supervision, credit and learning division at the Federal Reserve Bank of St. Louis, wrote in a research note in November. That was true “regardless of size or complexity.”But it has been years since the central bank formally tested for a scenario of rising rates in big banks’ formal stress tests, which examine their expected health in the event of trouble. While smaller regional banks aren’t subject to those tests, the decision not to test for rate risk is evidence of a broader reality: Everyone, policymakers included, spent years assuming that rates would not go back up.When borrowing costs are very low, people and businesses need to take on more risk to earn money on their cash.John Taggart for The New York TimesIn their economic forecasts a year ago, even after months of accelerating inflation, Fed officials projected that interest rates would peak at 2.8 percent before falling back to 2.4 percent in the longer run.That owed to both recent experience and to the economy’s fundamentals: Inequality is high and the population is aging, two forces that mean there are lots of savings sloshing around the economy and looking for a safe place to park. Such forces tend to reduce interest rates.The pandemic’s downswing upended those forecasts, and it is not clear when rates will get back on the lower-for-longer track. While central bankers still anticipate that borrowing costs will hover around 2.5 percent in the long run, for now they have pledged to keep them high for a long time — until inflation is well on its way back down to 2 percent.Yet the fact that unexpectedly high interest rates are putting a squeeze on the financial system could complicate those plans. The Fed will release fresh economic forecasts alongside its rates decision next week, providing a snapshot of how its policymakers view the changing landscape.Central bankers had previously hinted that they might raise interest rates even higher than the roughly 5 percent that they had previously forecast this year as inflation shows staying power and the job market remains strong. Whether they will be able to stick with that plan in a world colored by financial upheaval is unclear. Officials may want to tread lightly at a time of uncertainty and the threat of financial chaos.“There’s sometimes this sense that the world works like engineering,” Skanda Amarnath, executive director of Employ America, said of the way central bankers think about monetary policy. “How the machine actually works is such a complex and fickle thing that you have to be paying attention.”And policymakers are likely to be attuned to other pockets of risk in the financial system as rates climb: Mr. Stein, for instance, had expected rate-related weakness to show up in bond funds and was surprised to see the pain surface in the banking system instead.“Whether it is stabler than we thought, or we just haven’t hit the air pocket yet, I don’t know,” he said.Joe Rennison More

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    The Pandemic’s Nerd Celebrities

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    When old rules of global commerce no longer seem to apply, masters of esoteric data — ocean shipping container times, anyone? — are thrust into the limelight.“Ship Happens: The Miniseries” is a podcast that would not exist if not for the pandemic, which prompted consumers to begin ordering couches and computer screens so voraciously that the world’s factories and ports could not keep up.But as furniture delays and car shortages began to dominate the headlines last year, Eytan Buchman and his colleagues at Freightos, a global shipping platform, saw an opportunity.“You never really pay attention to something until it’s broken,” said Mr. Buchman, chief marketing officer at the company. “Part of it was giddiness that, hey, people care.”Freightos, which started its podcast about supply chains in November, is among a spate of data providers whose wonks and once esoteric offerings have been catapulted into the spotlight by a pandemic that has rewritten the rules of global commerce and economics.Not that Mr. Buchman was happy that everything felt broken. But he saw that Freightos could help. He and his colleagues had a wealth of shipping data and expertise at their disposal, and they began to think of ways to share it with the world, producing an index of ocean container travel times, releasing the audio program and ramping up media appearances.What could have been a short moment of prominence has lasted well into 2022. Nothing — not shipping routes, not consumer spending, not the labor market and definitely not inflation — seems to be behaving the way it did before the coronavirus struck in early 2020.Inflation is running at its fastest rate in 40 years, and data next week is likely to show that prices climbed more than 8 percent over the year through March. Supply chains remain roiled, employers are desperate to fill open jobs, and Americans have surprised economists by spending right through the rapid price increases and rampant uncertainty.Researchers and policymakers are flying blind, and both they and ordinary people are turning to experts like Mr. Buchman as they try to sketch out a new map of a changed economic landscape. “A very select circle of enlightened individuals found supply chains interesting before, but it was not a widely shared passion,” said Phil Levy, chief economist at Flexport, a freight forwarding and customs brokerage company — displaying the sort of supply chain deadpan that bigger audiences, relatively speaking, are now enjoying.According to a profile kept by Bloomberg, Mr. Levy has racked up 26 unique media mentions so far this year, after 26 in all of 2021 and 15 in 2020. Suddenly, every economist and economics writer seems to be a trade analyst, trying to suss out what might happen to supplies and prices.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.“Normally, when one does forecasting, you look at past experiences,” Mr. Levy said. “That changed with the pandemic.”The revolution started in the toilet paper aisle. At the onset of the pandemic, consumers abruptly started to shop differently. Nobody needed coffee to go or manicures; everyone wanted new home-office furniture.As the government sent out repeated stimulus checks and offered more generous unemployment insurance and families spent more time at home, Americans spent the money on goods rather than the services that consumed a big chunk of their budgets before the pandemic. Even as the aid has faded and business has returned to something approaching normal, demand for things has remained unusually strong.The world’s ships, ports and factories fell behind early in the pandemic, and they have been unable to fully catch up. The situation has only been intensified by unanticipated disruptions like a giant cargo ship’s getting stuck in the Suez Canal. The Ever Given spent six immobile days, drawing global attention to the precariousness of supply chains and ocean commerce — and increasing demand for experts who could explain it.“That was a turning point in freight fame,” Mr. Buchman recalled fondly.For Mr. Levy and his colleagues, the situation was not funny, per se — the blockage was poised to cause problems for customers — but it did spark a flurry of memes in Flexport’s internal Slack messaging channels. (One that sticks in his memory was a photo of the stranded ship superimposed with the words “I told you not to listen to the Waze directions.”)Ever Given stands as a symbol of a larger phenomenon in the pandemic economy: Disruptions keep surfacing, throwing an already struggling system even further out of whack. The mismatch between supply and demand has stoked inflation, which has surprised policymakers both because it has been so rapid and because it has proved long-lasting.And the upheaval extends beyond the world of shipping.Companies cannot find enough workers, in part because the pandemic appears to have accelerated a demographic shift. Baby boomers, who were entering retirement age, left the labor market in large numbers — and it is unclear if they will return. Parents coping with unpredictable child care also left the work force. Employers are grappling with the possibility that workers are in the midst of a “Great Resignation,” possibly encouraged by savings amassed during the pandemic. The labor market shortages have given them a chance to ask for higher pay and better workplace conditions.As the coronavirus era enters its third year, the economic mysteries are many: Will those workers come back? Will America’s appetite for new couches ever be sated? Is there any price that consumers will not pay for cars?Fiona Greig doesn’t know all of the answers. But she has data that might allow her — and others — to come closer than they otherwise would.“I’m now receiving inbound requests from asset managers in Germany, from all walks — our own Federal Reserve Bank, the White House, et cetera,” said Ms. Greig, director of consumer research and co-president at the JPMorgan Chase Institute.The economic data amassed by Fiona Greig at the JPMorgan Chase Institute has become closely watched.Melissa Lyttle for The New York TimesEarly in the pandemic, the institute focused on one metric that was of great interest to a lot of people: what people could spend. The now widely cited graphic uses Chase data to show how much cash households in different income bands have in their checking accounts in near real time, and policymakers and Wall Street econometricians alike have been using it to gauge the spending power of different groups of consumers.Inflation F.A.Q.Card 1 of 6What is inflation? 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