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    Southwest CEO Bob Jordan Faces a Giant Crisis, 10 Months Into the Job

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    Bob Jordan, the airline’s top executive, heralded the company’s performance just weeks before the storm highlighted gaping weaknesses in its operations.After Southwest Airlines made it through Thanksgiving with few flight cancellations, Bob Jordan, the company’s chief executive, was in a celebratory mood. At a meeting with Wall Street analysts and investors this month at the New York Stock Exchange, he said the company’s performance had been “just incredible.”But a few weeks later, over the Christmas holiday, Southwest’s operations went into paralysis, forcing the company to resort to mass cancellations. The debacle has raised questions about Mr. Jordan’s performance and has prompted employees and analysts to ask why the company has been slow to fix well-known weaknesses in its operations.Other airlines fared far better during the extreme cold weather over Christmas weekend than Southwest, which after days of disruption canceled more than 2,500 flights on Wednesday, vastly more than any other U.S. airline, according to FlightAware, a flight tracking service. The airline has already canceled more than 2,300, or 58 percent, of its flights planned for Thursday.Travelers, lawmakers and even employees are increasingly demanding answers from Southwest and Mr. Jordan. While the company has repeatedly apologized for its performance, it has provided few details about how things went so wrong and what it is doing to right its operations. The company said on Wednesday that Mr. Jordan and other executives were not available for interviews.Mr. Jordan implied on Tuesday that the airline was caught out by a low-probability event after many delays and cancellations.Christopher Goodney/BloombergIn a video posted on Southwest’s website late Tuesday, Mr. Jordan, who became chief executive in February after three decades at Southwest, implied that the airline was caught out by a rare event. “The tools we use to recover from disruption serve us well 99 percent of the time,” he said, “but clearly we need to double down on our already existing plans to upgrade systems for these extreme circumstances.”Southwest has known for years that computer systems that manage customer reservations and assign pilots and flight attendants to each flight needed improvements. Union leaders and even the company’s executives have acknowledged that the systems struggle to handle large numbers of changes when the company’s operations are disrupted.Disruptions can have a cascading effect on Southwest’s flights because it operates a point-to-point system, in which planes travel from one destination to another; other large airlines use the hub-and-spoke system, with flights typically returning frequently to a hub airport.Southwest is now trying to piece together its operations after many of its crews and planes were not where they were scheduled to be because of earlier flight cancellations, the company said in an emailed statement to The New York Times. Because the company’s operations have been so thoroughly upended, the effort is expected to take days. To get crews and planes in the right places, Southwest had to reduce its schedule. This should allow the airline to bring crews to the airports where they are needed.In his video on Tuesday, Mr. Jordan appeared to acknowledge that Southwest’s model was susceptible to breaking down under stress. “Our network is highly complex, and the operation of the airline counts on all the pieces, especially aircraft and crews remaining in motion to where they’re planned to go,” he said.Many travelers have expressed frustration with Southwest, saying it has become impossible to get information from the company.Emil Lippe for The New York TimesThe company has spent years trying to overhaul its technology systems, but this latest crisis is expected to ratchet up the pressure on Southwest and Mr. Jordan to make progress faster.Union leaders said they had run out of patience with how the company had been updating the technology systems.Labor Organizing and Union DrivesU.K.’s ‘Winter of Discontent’: As Britain grapples with inflation and a recession, labor unrest has proliferated, with nurses, railway workers and others leading job actions across the country.Starbucks: The union organizing Starbucks workers declared a strike at dozens of stores, the latest escalation in its campaign to secure a labor contract.Education: The University of California and academic workers announced a tentative labor agreement, signaling a potential end to a high-profile strike that has disrupted the system for more than a month.Electric Vehicles: In a milestone for the sector, employees at an E.V. battery plant in Ohio voted to join the United Automobile Workers union, citing pay and safety issues as key reasons.“We’re at the point where we’ve given him enough grace,” Michael Santoro, vice president of the Southwest Airlines Pilots Association, said in an interview, referring to Mr. Jordan.Transport Workers Union Local 556, which represents Southwest’s flight attendants, issued a statement agreeing with the pilots. “It is not weather; it is not staffing; it is not a concerted labor effort; it is the complete failure of Southwest Airlines’ executive leadership. It is their decision to continue to expand and grow without the technology needed to handle it,” the union’s president, Lyn Montgomery, said.These statements stand out because Southwest has generally had very good relations with most of its labor unions. After the meltdown, labor leaders have grown increasingly critical of the company this week. The pilots group, for example, expressed frustration that the company had not yet shared its plan for getting its operation back to normal, something it typically does after disruptions. “We have heard zero,” Mr. Santoro said.Southwest Airlines staff members helped customers at Dallas Love Field Airport on Tuesday.Emil Lippe for The New York TimesIn the last few days, union officials, pilots and flight attendants have complained to journalists and on social media that crew members have often had to wait hours to be assigned to their next flight or be directed to hotels where they could spend the night.Customers have also expressed intense frustration with the airline, saying it had become impossible to get any information from the company. Some people have said they waited hours at baggage and ticket counters and gates to speak to Southwest agents. Others have tried and failed to get through to the company by phone or online.Howard Tutt came to Chicago’s Midway airport on Wednesday to try to retrieve a bag his son had checked for a flight to California that was ultimately canceled. He said he had waited hours with other customers to speak to someone to no avail. Nearby, dozens of bags were waiting to be reunited with travelers outside Southwest’s baggage office and near its carousels.“He had to leave in the middle of Christmas dinner because they told him the only flight he could get on was at 9 p.m. on the 25th,” Mr. Tutt, 61, said, referring to his son. “Then he got to the airport, checked his bags and was delayed for six hours before they canceled the flight.”Mr. Tutt, a resident of Orland Park, Ill., said the family had tried a variety of approaches to locate the bag, which contains Christmas gifts for his son’s girlfriend and her family. “We’ve emailed, tried via chat message, and called but cannot reach anyone.”Analysts said that, as cancellations piled up, Southwest found itself in a dire position in which it needed to almost start from scratch to rebuild. “You’ve lost control of what you expected the operation to be,” said Samuel Engel, a senior vice president and airline industry analyst at ICF, a consulting firm.The question that will loom over the company for a long time is why Southwest’s system broke down while those of other large airlines held up relatively well. Analysts say Southwest’s point-to-point network, which is quite different from the hub-and-spoke system used by its peers, made it harder to restart operations.But they also say Southwest’s technology, despite yearslong efforts to modernize it, was lacking. And Mr. Jordan is likely to be asked why he didn’t do more to make the systems strong enough to deal with weather and technology disruptions, which have dogged Southwest in recent years, including two mass flight cancellations and delays last year.Though Mr. Jordan has been chief executive for a short time, he has long been a member of Southwest’s senior leadership team, which would have given him plenty of opportunity to understand the company’s strengths and weaknesses. He started at the company as a computer programmer, helped develop its frequent flier program and aided in incorporating the planes and crews of AirTran Airways after Southwest acquired that company.Robert W. Mann Jr., a former airline executive who now runs the consulting firm R.W. Mann & Company, said Mr. Jordan was “in the hot seat right now.”But analysts were skeptical that Southwest could change quickly. They say the company’s management suffers from “Southwest exceptionalism,” or a stubborn belief that its unique approach to running an airline is best. Even though Southwest has it origins as an upstart taking on sleepy incumbents, analysts say its decision making can move at glacial speeds. “The airline has always been very cautious about change,” Mr. Engel said.Southwest’s approach works well much of the time, and it has contributed to the company’s strong financial performance over the last five decades, analysts say. It allowed, for instance, for planes to be used more quickly for their next flight. Longtime shareholders have done well. Southwest’s stock is up 217 percent over the last decade, outpacing the wider stock market and its best-performing rivals. But this month, Southwest’s stock, down by nearly a fifth, has performed worse than the market and its peers.There is no evidence that Mr. Jordan is vulnerable. But poor crisis management has severely weakened other airline executives.In February 2007 JetBlue experienced a meltdown when the airline did not act as quickly as its peers to cancel flights, hoping an ice storm on the East Coast would not have affected air travel as much as it did. At one point, nine JetBlue planes filled with passengers sat on the tarmac at Kennedy International Airport for six hours.David G. Neeleman, JetBlue’s founder and chief executive at the time, who was also a former Southwest executive, said he was “humiliated and mortified.” Months later, he agreed to step down as chief executive.Mr. Neeleman did not respond to requests for comment.Robert Chiarito More

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    Forget Stock Predictions for Next Year. Focus on the Next Decade.

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    Wall Street’s market forecasts for 2023 are worthless, our columnist says. But the long view is much clearer.The Federal Reserve raised interest rates again on Wednesday, but by less than it has in previous rounds this year. A day earlier, the government reported that the annual rate of inflation, though still painfully high, dropped a bit in November, to 7.1 percent from 7.7 percent in October.If you want to know what these, and other economic developments, mean for the stock market in the year ahead, there are plenty of forecasts coming out of Wall Street.It is December, after all, when investment strategists gear up and produce earnest, specific forecasts for where the S&P 500 will be at the end of the next calendar year.With inflation soaring, the Fed raising interest rates, Russia’s war in Ukraine and China’s decision to drop its “zero Covid” policy, a recession all but certain in Europe and increasingly likely in the United States, clear maps of the future would be particularly welcome now.But that’s not what the one-year forecasts from Wall Street are providing.These attempts at clairvoyance are stymied by a fundamental problem: It’s simply impossible to forecast the path of the markets six months or a year ahead with accuracy and consistency, as many academic studies have shown. That the financial services industry continues to label these unreliable numbers as forecasts is a triumph of breathtaking chutzpah — a technical term for shameless audacity.It goes a long way in explaining why the vast majority of active investment managers can’t regularly and convincingly outperform the market — a failure I reported in a recent column about mutual funds. If you have no idea where stocks are going, it doesn’t make much sense to place specific bets on them, as active managers do.Accepting UncertaintyThese annual reports often contain impressive erudition. I pore through this stuff compulsively in search of nuggets that I can file away for some future column.Our Coverage of the Investment WorldThe decline of the stock and bond markets this year has been painful, and it remains difficult to predict what is in store for the future.Tech Stocks Sputter: Big Tech stocks have suffered staggering losses this year. But is this a good time to buy? Maybe, if you’re in it for the long term, our columnist says.Navigating Uncertainty: There seems to be growing acceptance that some kind of a recession might be coming. Here is how investors should approach the situation.A Bad Year for Bonds: This has been the most devastating time for bonds since at least 1926. But much of the damage is already behind us and the outlook for 2023 is better.Weathering the Storm: The rout in the stock and bond markets has been especially rough on people paying for college, retirement or a new home. Here is some advice.But with a high degree of confidence, I will repeat a prediction I’ve made before: The consensus forecast this year will be wrong.Read these things if you find them interesting, but don’t rely on them — or those who produce them — to guide your investing.Instead, embrace uncertainty.Accept that you need to invest without knowing what will happen to your money over the short term. So be sure, first, to put aside enough money in a safe place, like a bank account or money-market fund, to pay the bills in the months ahead.But because the stock market tends to rise over long periods, and because bonds are now generating reasonable income (as I explained last week), it’s wise to invest for a horizon of a decade or more in low-cost index funds that track the entire stock and bond markets.Don’t base your investments on specific predictions of where the stock market is heading over the short term, because nobody knows. Making bets on the basis of these forecasts is gambling, not investing.The History. Consider how bad Wall Street forecasts have been.In 2020, I noted that the median Wall Street forecast since 2000 had missed its target by an average 12.9 percentage points a year. That error over two decades was astonishing: more than double the actual average annual performance of the stock market!Imagine a weather forecast as bad as that. A meteorologist says the high temperature the next day will be 25 degrees Fahrenheit and it will snow, so you dress for a winter storm. Actually, the temperature turns out to be 60 degrees and the skies are clear. That’s about the level of accuracy for Wall Street strategists through 2020.They continued their errant ways the next year, issuing a median forecast of 3,800 for the closing level of the S&P 500 in 2021. But the index ended the year at 4,766.18, an error of about 25 percent. In a word, the forecast was horrible.The forecasts for 2022 look inaccurate, as usual, though we won’t know for sure until the end of this month. A year ago, the Wall Street consensus was that the S&P 500 would reach 4,825 at the end of 2022, a modest increase from 2021. But at the moment, the index is hovering around 4,000. In other words, a year ago, strategists were saying that 2022 would be just fine for stocks. It hasn’t been.The FutureAfter forecasts that were too low for 2021 and too high for 2022, Wall Street strategists are holding steady for 2023. The consensus is that the S&P 500 will end the year at 4,009, roughly around where it has traded in recent days.That could be right. Who knows? But if it does turn out to be correct, it will be an accident, not the result of uncanny knowledge about 2023.This inability to forecast the future goes way beyond Wall Street. Pandemics are part of human history and we know there will be more of them. But no one was capable of anticipating the specific Coronavirus pandemic that started in 2020, or the 6.6 million deaths, 646.2 million cases, and the complex economic and financial damage it continues to cause.Wall Street didn’t know that Vladimir Putin would order Russia’s invasion of Ukraine this year — or that fossil fuel companies would end up leading the stock market in 2022. The war in Ukraine and China’s attempt to shift from its Covid lockdown policy will both influence the stock market in the United States in the year ahead. But how, exactly? We can guess, but anyone who claims to know is delusional.No doubt, enormous changes that aren’t visible yet are coming in 2023. Inflation and interest rates preoccupy financial markets now, but there is no assurance that will be the case a year from now.Lack of specific knowledge about the future is a fact of life. Guessing, or betting wildly, isn’t a prudent solution.Instead, diversify. Hedge your bets so you are prepared whether specific markets move up or down, and be ready to ride out extended losses, like those of 2022. This strategy has been painful this year, though it has paid off over longer periods.A simple, classic investment strategy — a diversified portfolio made up of broad stock and bond index funds, with 60 percent allocated to stock and 40 percent to bonds, did terribly in 2022. The Vanguard Balanced Fund, which takes just this approach (though it is limited to U.S. and not global assets, which I’d favor), has lost nearly 14 percent this calendar year.But even including this year’s awful returns, this portfolio has gained more than 6 percent annualized, over the last 20 years. At that rate, it doubles in value every 11 or 12 years. There is no guarantee that it will continue to generate those returns in the future, but Vanguard said this week that it probably would.Vanguard doesn’t bother with year-ahead market forecasts because it recognizes that they are pointless. It does make estimates for market returns over a 10-year horizon. Stock market projections of longer duration have much greater accuracy than those for the next six months or a year, as Robert Shiller, the economist, demonstrated in the 1980s. He was recognized for that insight when he received the Nobel in economic science in 2013.At the moment, Vanguard’s 10-year outlook is fairly auspicious. The falling markets of the last year have led to better stock and bond valuations.It’s possible to be intelligently optimistic about financial markets over the next few decades, without knowing where the markets are heading over the next year. I wouldn’t bet on any single financial asset just because a Wall Street expert says it is about to rise.Using your money that way — whether you are buying stocks, bonds or far less solid assets like cryptocurrency — is gambling, not investing. But if you stay humble, invest in the total stock and bond markets and manage to hang in for decades, your chances of prospering are much greater. That prediction is reliable. More

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    As the Fed Raises Rates, Worries Grow About Corporate Bonds

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    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

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    A Federal Reserve President Spoke at an Invite-Only, Off-Record Bank Client Event

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    James Bullard, who leads the Federal Reserve Bank of St. Louis, appeared at a Citigroup forum last week in Washington. Reporters were not invited.James Bullard, the president of the Federal Reserve Bank of St. Louis, spoke last Friday at an off-the-record, invitation-only forum held by Citigroup, and open to clients, on the sidelines of the World Bank and International Monetary Fund’s annual meetings in Washington.Mr. Bullard’s remarks touched on both monetary policy and issues of financial stability during a tumultuous week in the global economy. It was the kind of speaking event that the news media would typically be able to attend given the potential for market-moving news, but Mr. Bullard and his staff did not alert reporters.Mr. Bullard was not compensated for his speech, a spokesperson for the Federal Reserve Bank of St. Louis said. But he appeared behind closed doors and in front of Wall Street investors at a critical juncture for markets, when every comment a central banker makes has the potential to move stocks and bonds. It gave the attendees a behind-the-scenes snapshot into the thinking of a voting Fed policymaker and Citi a possible chance to profit from his comments, inasmuch as clients may use the bank’s services in hopes of receiving similar access in the future.“This is not normal,” said Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis. With a bank’s clients involved, he added, “the optics are terrible.”The Federal Reserve Bank of St. Louis called the discussion informal and said Mr. Bullard had participated in the event in the past. It also noted that he had given an interview to Reuters earlier in the day with remarks similar to those he made at the Citi event, and appeared at other forums in Washington on Friday and Saturday. As a result, they said, the public had access to his views.But a person who attended the speech, who spoke on the condition of anonymity because the forum was meant to be off the record, said Mr. Bullard had also suggested during his comments that based on the historical record, the market gyrations in response to the Fed’s moves had been less pronounced than might have been expected given how much rates have increased. The Reuters article did not include that observation.Mr. Bullard had shared that view on financial stability in public before, the St. Louis Fed spokesperson said.Mr. Bullard gave an interview to Reuters earlier in the day with remarks similar to those he made at the Citi event, a spokesperson at the St. Louis Federal Reserve said.Hiroko Masuike/The New York TimesAt the Citi event, Mr. Bullard also reiterated his view that another large three-quarter-point rate increase could be appropriate in December, which the Reuters article noted.This was not the first time that a Fed official had spoken before an invitation-only group of people who may have benefited from talking to him. In March 2017, Stanley Fischer, then the Fed’s vice chair, gave a closed-door speech at the Brookings Institution that drew some outcry. More commonly, Fed officials meet with economists and traders from banks and investment funds in small-group settings to exchange information about markets and the economy.Our Coverage of the Investment WorldThe decline of the stock and bond markets this year has been painful, and it remains difficult to predict what is in store for the future.A Bad Year for Bonds: This has been the most devastating time for bonds since at least 1926 — and maybe in centuries. But much of the damage is already behind us.Discordant Views: Some investors just don’t see how the Federal Reserve can lower inflation without risking high unemployment. The Fed appears more optimistic.Weathering the Storm: The rout in the stock and bond markets has been especially rough on people paying for college, retirement or a new home. Here is some advice.College Savings: As the stock and bond markets wobble, 529 plans are taking a tumble. What’s a family to do? There’s no one-size-fits-all answer, but you have options.And Fed officials regularly speak at bank events, though their remarks are typically flagged to the news media and either open to them, streamed or recorded. That was the case with a UBS event where Mr. Bullard was a speaker on Saturday..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}What we consider before using anonymous sources. Do the sources know the information? What’s their motivation for telling us? Have they proved reliable in the past? Can we corroborate the information? Even with these questions satisfied, The Times uses anonymous sources as a last resort. The reporter and at least one editor know the identity of the source.Learn more about our process.What is notable about Mr. Bullard’s Citi meeting is that it was neither an information-gathering excursion with a handful of people nor a publicly available speech. About 40 people attended the event, which had a formal agenda and was advertised to Citi clients, two people familiar with it said. Mr. Bullard spoke for 10 minutes before answering attendee questions.“It’s important, even mission-critical, that the Fed is in open dialogue with all sectors of the economy,” said Kaleb Nygaard, who studies the central bank at the University of Pennsylvania. “Much of the letter, as well as the spirit, is that the central bankers are supposed to be on the receiving end of the information.”The Citi forum also featured central bankers from outside the United States — including Anna Breman, deputy governor of Sweden’s Riksbank, and Olli Rehn of the European Central Bank’s governing council — but at least some of their appearances were flagged to the news media and some of their speeches were published.It is not clear if Mr. Bullard’s speech violated the Fed’s communication rules, but some outside experts said they seemed to tiptoe near the line.The Fed’s rules do not explicitly bar central bankers from closed-door meetings, though they do say that, “to the fullest extent possible, committee participants will refrain from describing their personal views about monetary policy in any meeting or conversation with any individual, firm or organization who could profit financially” unless those views have already been expressed in their public communications.The rules also say officials’ appearances should “not provide any profit-making person or organization with a prestige advantage over its competitors.” That Citi was able to offer a closed sit-down with a central bank official may have given it such an advantage, even if his remarks did not break major news.“Citi is flexing here” in its ability to offer “privileged access,” said Jeff Hauser, director of the watchdog group the Revolving Door Project, explaining that for investors, a chance to understand a central banker’s thinking in real life is a valuable source of financial intelligence.“There are few better sources of information on the planet than a member of the Federal Open Market Committee,” he added. “Their every utterance is treated as potentially market moving.”Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, had failed to correctly report trading activity in a managed retirement account for several years.Valerie Plesch/BloombergThe Federal Reserve Board and Citi declined to comment.The news comes just as an ethics scandal that has dogged the central bank for more than a year appears to be on the verge of bubbling back up.The Fed’s ethics rules came under scrutiny last year after three central bank officials were found to have made financial transactions during 2020, when the Fed was actively shoring up markets at the onset of the coronavirus pandemic and officials had access to market moving information.All three resigned early, though some cited unrelated reasons, and the Fed ushered in a sweeping overhaul of its trading rules. But last week, one official — Raphael Bostic, president of the Federal Reserve Bank of Atlanta — disclosed that he had failed to correctly report trading activity in a managed retirement account for several years. His retirement account had several trades on key dates in the market meltdown of 2020, though he said he had no knowledge of the specific trades, since he used an outside money manager.Norman Eisen, a senior fellow in governance studies at the Brookings Institution and an expert on law, ethics and anti-corruption, said Mr. Bostic’s trades appeared “benign” relative to those of the other officials.Of Mr. Bullard’s appearances, he said that at first glance, “it’s not an ethics violation, but it’s not a great look.” More

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    Could a Market Blowout Like the UK’s Happen in the US?

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    Federal Reserve and White House officials spent last week quizzing investors and economists about the risks of a British-style meltdown at home.WASHINGTON — Federal Reserve researchers and officials quizzed experts from Wall Street and around the world last week about a pressing question: Could a market meltdown like the one that happened in Britain late last month occur here?The answer they got back, according to four people at separate institutions who were in such conversations and who spoke on the condition of anonymity to describe private meetings, was that it probably could — though a crash does not appear to be imminent. As the Biden administration did its own research into the potential for a meltdown, other market participants relayed the same message: The risk of a financial crisis has grown as central banks have sharply raised interest rates.The Bank of England had to swoop in to buy bonds and soothe markets after the British government released a fiscal spending plan that would have stimulated an economy already struggling with punishing inflation, one that included little detail on how it would be paid for. Markets lurched, and pension funds using a common investment strategy found themselves scrambling to adjust, prompting the central bank’s intervention.While the shock was British-specific, the violent reaction has caused economists around the world to wonder if the situation was a canary in a coal mine as signs of financial stress surface around the globe.Officials at the Fed, Treasury and White House are among those trying to figure out whether the United States could experience its own market-shuddering meltdown, one that could prove costly for households while complicating America’s battle against rapid inflation.Administration officials remain confident that the U.S. financial system is unlikely to see such a shock and is strong enough to withstand one if it comes. But both they and the Fed are keeping close tabs on what is happening at a moment when conditions feel abnormally fragile.Markets have been choppy for months in the United States and globally as central banks — including the Fed — rapidly raise interest rates to bring inflation under control. That has caused abnormally large price moves in currencies and other assets because their values hinge partly on the level of interest rates and on international rate differences. Stocks have been swinging. It can be hard to quickly find a buyer for U.S. government bonds, although the market is not breaking down. And in corners of finance that involve more complicated investment structures, there’s concern that volatility could trigger a dangerous chain reaction.“In the market, there is a lot of worry, and everyone is saying it feels like something is about to break,” said Roberto Perli, an economist at Piper Sandler who used to work at the Fed and who was not part of the conversations last week. He added that it made sense that officials were checking up on the situation.President Biden at an event promoting the Inflation Reduction Act in California last week.T.J. Kirkpatrick for The New York TimesPresident Biden has repeatedly convened his top economic aides in recent weeks to discuss market flare-ups, like the one that roiled Britain.Fed officials and staff members have met with investors and economists both during normal outreach and on the sidelines of the World Bank and International Monetary Fund annual meetings last week in Washington.Fed researchers asked about three big possibilities during the meetings. They wanted to know whether there could be a trade or an investment class in the United States similar to British pension funds that could pose a significant and underappreciated threat.They also focused on whether problems overseas could spill back over to the United States financial system. For instance, Japan is one of the biggest buyers of U.S. debt. But Japan’s currency is rapidly falling in value as the country holds its interest rates low, unlike other central banks. If that turmoil caused Japan to reverse course and stop buying or even sell U.S. Treasurys — something that it has signaled little appetite for, but that some on Wall Street see as a risk — it could have ramifications for U.S. debt markets.The final threat they asked about focused on whether today’s lack of easy trading in the Treasury market could turn into a more serious problem that requires the Fed to swoop in to restore normal functioning..css-1v2n82w{max-width:600px;width:calc(100% – 40px);margin-top:20px;margin-bottom:25px;height:auto;margin-left:auto;margin-right:auto;font-family:nyt-franklin;color:var(–color-content-secondary,#363636);}@media only screen and (max-width:480px){.css-1v2n82w{margin-left:20px;margin-right:20px;}}@media only screen and (min-width:1024px){.css-1v2n82w{width:600px;}}.css-161d8zr{width:40px;margin-bottom:18px;text-align:left;margin-left:0;color:var(–color-content-primary,#121212);border:1px solid var(–color-content-primary,#121212);}@media only screen and (max-width:480px){.css-161d8zr{width:30px;margin-bottom:15px;}}.css-tjtq43{line-height:25px;}@media only screen and (max-width:480px){.css-tjtq43{line-height:24px;}}.css-x1k33h{font-family:nyt-cheltenham;font-size:19px;font-weight:700;line-height:25px;}.css-1hvpcve{font-size:17px;font-weight:300;line-height:25px;}.css-1hvpcve em{font-style:italic;}.css-1hvpcve strong{font-weight:bold;}.css-1hvpcve a{font-weight:500;color:var(–color-content-secondary,#363636);}.css-1c013uz{margin-top:18px;margin-bottom:22px;}@media only screen and (max-width:480px){.css-1c013uz{font-size:14px;margin-top:15px;margin-bottom:20px;}}.css-1c013uz a{color:var(–color-signal-editorial,#326891);-webkit-text-decoration:underline;text-decoration:underline;font-weight:500;font-size:16px;}@media only screen and (max-width:480px){.css-1c013uz a{font-size:13px;}}.css-1c013uz a:hover{-webkit-text-decoration:none;text-decoration:none;}What we consider before using anonymous sources. Do the sources know the information? What’s their motivation for telling us? Have they proved reliable in the past? Can we corroborate the information? Even with these questions satisfied, The Times uses anonymous sources as a last resort. The reporter and at least one editor know the identity of the source.Learn more about our process.None of those areas appear to be at immediate risk of snapping, analysts told officials. The pension system in the United States is different from that in Britain, and the government debt market may be choppy, but it is still functioning.Yet they also voiced reasons for concern: It is impossible to know what might break until something does. Markets are large and intertwined, and comprehensive data is hard to come by. Given how much central bank policy has shifted around the world in recent months, something could easily go wrong.There is a good reason for officials to fret about that possibility: A market meltdown now would be especially problematic.A New York City market. The Fed is rapidly raising interest rates to bring inflation under control, but a financial crash could force it to shift that plan.Elias Williams for The New York TimesA financial disaster could force the Fed to deviate from its plan to control the fastest inflation in four decades, which includes raising rates rapidly and allowing its bond portfolio to shrink. Officials have in the past bought large sums of Treasury bonds in order to restore stability to flailing markets — essentially the opposite of their policy today.Central bankers would most likely try to draw a distinction between bond buying meant to keep the market functioning and monetary policy, but that could be hard to communicate.The White House, too, has reasons to worry. Mr. Biden was scarred by his experience as vice president throughout the Great Recession, during which a financial meltdown brought on the worst downturn since the 1930s, throwing millions out of work and consuming the Obama administration’s policy agenda for years of a painstakingly slow recovery.Mr. Biden has pressed his team to estimate the likelihood that the United States could experience another 2008-style shock on Wall Street. Treasury Secretary Janet L. Yellen and her deputies have been closely monitoring developments in the market for U.S. government debt and searching for any signs of British-style stress.While administration officials noted that trading has become more difficult in the market for Treasury bonds, they also pointed out that it was otherwise functioning well. Multiple officials said this week that they expected the Fed would step in to buy bonds — as the Bank of England did — in an emergency.Other administration officials came away from their meetings in Washington last week with increased worries about financial crises sprouting in so-called emerging markets, like parts of Africa, Asia and South America, where food and energy prices have soared and where the Fed’s steady march of interest rate increases has forced governments to raise their own borrowing costs. Such crises could spread worldwide and rebound on wealthier countries like the United States.Yet administration officials say the American economy remains strong enough to endure any such shocks, buoyed by still-rapid job growth and relatively low household debt.“This is a challenging global economic moment where stability is hard to find,” said Michael Pyle, Mr. Biden’s deputy national security adviser for international economic affairs, “but the U.S. has momentum and resilience behind its economic recovery, and a trajectory that puts the U.S. in a strong position to weather these global challenges.”And there is no guarantee that something will blow up. A senior Treasury official said this week that financial risks had risen with high inflation and rising interest rates, but that a variety of data the department tracked continued to show strength in American businesses, households and financial institutions.For now, markets for short-term borrowing, which are crucial to the functioning of finance overall, look healthy and fairly normal, said Joseph Abate, a managing director at Barclays. And officials are working on safeguards to stem the fallout if a disaster should come. The Financial Stability Oversight Council, which Ms. Yellen leads, discussed the issues at its most recent meeting this month, hearing staff presentations on U.S. financial vulnerabilities.The Treasury Borrowing Advisory Committee, an advisory group of market participants, has been asked in its latest questionnaire about a possible Treasury program to buy back government debt. Some investors have taken that as a signal that they are worried about a possible problem and may want to be able to improve market functioning, especially in light of their comments and outreach.“We are worried about a loss of adequate liquidity in the market,” Ms. Yellen said last week while answering questions after a speech in Washington.And the Fed already has outstanding tools that can help to stabilize markets. Those include swap lines that can funnel dollars to banks that need it overseas, and that have been used by Switzerland and the European Central Bank in recent weeks.Mr. Abate at Barclays said the Securities and Exchange Commission, Treasury and Fed seemed to be “on top of” the situation.“It’s clear in the marketplace that liquidity is a concern,” he said. “The regulators are moving to address that.” More

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    With So Much Riding on the Fed’s Moves, It’s Hard to Know How to Invest

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    Where the markets go from here depends on whether and how deftly the Federal Reserve pivots from its hawkish stance.Making money was easy for investors when they could still plausibly believe that the Federal Reserve might back down on its aggressive campaign to subdue inflation at any cost. But harsh words from the Fed chairman, Jerome H. Powell, backed by a string of large interest rate increases, finally convinced markets that the central bank meant business, sending stock and bond prices tumbling.A nervous confidence returned as October began, with stocks experiencing a big two-day rally, but then prices sank anew. Investors at first seemed more confident that the Fed would reverse course, but anxiety returned as they worried about how much damage would be inflicted before that happened. Where the markets go from here, and how to position an investment portfolio, depends on whether and how deftly the Fed changes its strategy.“A crescendo of factors is coming together that makes me think we’re going to have another few weeks of pain before the Fed capitulates,” said Marko Papic, chief strategist at the Clocktower Group.Mr. Papic thinks a dovish turn may come soon, as the Fed signals that it would settle for inflation two or three percentage points above its 2 percent target.Others think more pain lies ahead, maybe a lot more. A prerequisite for a pivot might be a “credit event,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies, meaning a default by a large investment firm or corporate or government borrower, often with severe consequences. Mutual FundsA glance at mutual fund performance in the third quarter. More

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    Economists Nervously Eye the Bank of England’s Market Rescue

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    The Bank of England stepped in to save a critical market this week. Economists say it was necessary but also worry about the precedent.When the Bank of England announced last week that it would buy bonds in unlimited quantities in an effort to stabilize the market for U.K. government debt, economists agreed it was probably a necessary move to prevent a cataclysmic financial crisis.They also worried it could set a dangerous precedent.Central banks defend the financial stability of the nations in which they operate. In an era of highly leveraged and deeply interconnected markets, that means that they sometimes have to buy bonds or backstop lending to prevent a problem in one area from spiraling into a crisis that threatens the entire financial system.But that backstop role also means that if a government does something to generate a major shock, politicians can be fairly confident that the local central bank will step in to stem the fallout.Some economists say that is essentially what happened in the United Kingdom. Liz Truss, the new prime minister, proposed a huge package of tax cuts and spending during a period of already high inflation, when standard economic theory suggests governments should do the opposite. Markets reacted forcefully: Yields on long-term government debt shot up, and the value of the British pound fell sharply relative to the dollar and other major currencies.The Bank of England announced that it would buy long-term government debt “on whatever scale is necessary” to prevent a full-blown financial crisis. The move was particularly striking because the bank had been poised to begin selling its bond holdings — a plan that is now postponed — and has been raising interest rates in a bid to bring down inflation.Economists broadly agreed that the bank’s decision was the right one. The rapid rise in interest rates sent shock waves through financial markets and upended a typically sleepy corner of the pension fund industry, which, left unaddressed, could have carried severe consequences for millions of workers and retirees, destabilizing the country’s entire financial system.“You saw very substantial market dislocation,” said Lawrence H. Summers, a former U.S. Treasury Secretary who is now at Harvard. “It’s a recognized role of central banks to respond to that.”To some economists, that was exactly the problem: By shielding the U.K. government from the full consequences of its actions — both preventing citizens from feeling the painful aftereffects and keeping government borrowing costs from shooting higher — the policy demonstrated that central bankers stand ready to clean up messy fallout. That could make it easier for elected leaders around the world to take similar risks in the future.Those concerns eased somewhat on Monday when Ms. Truss partly backed down, reversing plans to abolish the top income tax rate of 45 percent on high earners.But she appears poised to go forward with the rest of her proposed tax cuts and spending programs, putting the Bank of England in a delicate spot.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.Mortgage Market: The uptick in interest rates roiled Britain’s mortgage market, leaving many homeowners calculating their potential future mortgage payments with alarm.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.The “partial U-turn” from Ms. Truss “still leaves the Bank of England with a set of near-impossible choices,” analysts at Evercore ISI wrote in a note to clients. “The only way to alleviate this is for the government to take much bigger steps to restore credibility — but there is little sign this is imminent.”There’s a reason that the interplay between monetary policy and politics in the United Kingdom is garnering so much attention. Central banks have for decades closely guarded their independence from politics. They set their policies to either stoke the economy or to slow it down based on what was necessary to achieve their goals — in most cases, low and stable inflation — free from the control of elected officials.The logic behind that insulation is simple. If central bankers had to listen to politicians, they might let price increases get out of control in exchange for faster short-term growth that would help the party in power.Now, that independence is being tested, and not just in the United Kingdom. Central banks around the world are raising interest rates to try to fight inflation, resulting in slower growth and making it harder for governments to borrow and spend. That is likely to lead to tension — if not outright conflict — between central bankers and elected leaders.It is already beginning. A United Nations agency on Monday warned that the Federal Reserve risked a global recession and significant harm in developing countries, for instance. But the United Kingdom’s example is stark because the elected government is carrying out policy that works against what the nation’s central bank is trying to achieve.“One always worries that actions like these can affect incentives going forward,” said Karen Dynan, a Harvard economist who served as a top official in the Treasury Department under President Obama. “It’s basic economics: People respond to incentives, and fiscal policymakers are people.”Part of the issue is that it is hard for central bankers to single-mindedly focus on controlling inflation in an era when financial markets are fragile and susceptible to disruption — including disruptions caused by elected governments.Before 2008, the Fed had never used mass long-term bond purchases to calm markets in its modern era. It has now used them twice in the span of 12 years. In addition to last week’s moves, the Bank of England also turned to mass bond purchases to calm markets in 2020.Bank of England officials have stressed that the policies they announced last week are a temporary response to an immediate crisis. The bank plans to buy long-dated bonds for less than two weeks and says it will not hold them longer than necessary. The Treasury, not the bank, will be responsible for any financial losses. The bank said it remained committed to fighting inflation, and some economists have speculated that it could raise rates even more aggressively in light of the government’s growth-stoking policies.If the bank is able to hold to that plan, it could mitigate economists’ concerns about the longer-run risks of the program. If interest rates rise again and it gets more expensive for the government to borrow, Ms. Truss will still need to grapple with the costs of her proposed programs, just without facing an imminent financial crisis.But some economists warn that the Bank of England may find the situation harder to extricate itself from than it hopes. It may turn out that the bank needs to keep buying bonds longer than expected, or that it cannot sell them without threatening another crisis. That could have the unintentional side effect of giving the British government a helping hand — and it could demonstrate that it is hard for a big central bank to remove support from its economy when the elected government wants to do the opposite.Liz Truss, Britain’s prime minister, will still need to grapple with the costs of her proposed programs, but she won’t be facing an imminent financial crisis because of the Bank of England’s actions.Alberto Pezzali/Associated PressMs. Truss’s policies — particularly before her partial reversal on Monday — would work directly against the bank’s efforts to cool growth, stoking demand through lower taxes and increased spending. The rapid rise in bond yields last week suggested that investors expected inflation to rise even further.Under ordinary circumstances, these conditions would lead the Bank of England to do even more to bring down the inflation it had already been fighting, raising interest rates more quickly or selling more of its bond holdings. Some analysts early last week expected the bank to announce an emergency rate increase. Instead, the brewing financial crisis forced the bank to do, in effect, the opposite, lowering borrowing costs by buying bonds.While lowering rates and stoking the economy was not the point — just a side effect — some economists warn that those actions risk setting a dangerous precedent in which central banks can only tighten policy to control inflation if their national governments cooperate and do not roil markets in a way that threatens financial stability. That situation puts politicians more in the driver’s seat when it comes to making economic policy.Guillaume Plantin, a French economist who has studied the interplay between central banks and governments, likened the dynamic to a game of chicken: To avoid a financial crisis, either Ms. Truss had to abandon her tax-cut plans, or the Bank of England had to set aside, at least temporarily, its efforts to raise borrowing costs. The result: “The Bank of England had to chicken out,” he said.Policymakers have known for decades that when the government steps in to rescue private companies or individuals, it can encourage them to repeat the same risky behavior in the future, a situation known as “moral hazard.” But in the private sector, there are steps governments can take to offset those risks — regulating banks to reduce the risk of collapse, for example, or wiping out shareholders if the government does need to step in to help.It is less clear what monetary policymakers can do to prevent the government itself from taking advantage of the safety net a central bank provides.“There is a moral hazard here: You are protecting some people from the full consequences of their actions,” said Donald Kohn, a former Fed vice chair and a former member of the Bank of England’s Financial Policy Committee, who agreed that it is necessary to intervene to prevent market dysfunction. “If you think about the entities that benefited from this, one was the chancellor of the Exchequer, the government.”Some forecasters have warned that other central banks might have to pull back on their own efforts to fight inflation to avoid destabilizing financial markets. Some investors are speculating that the Fed will have to end its policy of shrinking government bond holdings early or risk stirring market turmoil, for instance.Not all of those scenarios would necessarily raise the same concerns. In the United States, the Biden administration and the Fed are both focused on fighting inflation, so any reversal by the central bank would probably not look like bowing to pressure from the elected government.Still, the common thread is that financial stability issues could become a hurdle in the fight against inflation — especially where governments do not decide to go along with the push to rein in prices. And how worrying the British precedent proves will depend on whether the Bank of England is capable of backing away from bond buying quickly.“Is this just an exigent moment that they needed to respond to, or does it give the fiscal authority room to be irresponsible?” said Paul McCulley, an economist and the former managing director at the investment firm PIMCO. “The question is who blinks.”Joe Rennison More