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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

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    Carried Interest Is Back in the Headlines. Why It’s Not Going Away.

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    Changes demanded by Senator Kyrsten Sinema will preserve a tax loophole that Democrats have complained about for years.For years, Democrats and even some Republicans such as former President Donald J. Trump have called for closing the so-called carried interest loophole that allows wealthy hedge fund managers and private equity executives to pay lower tax rates than entry-level employees.Those efforts have always failed to make a big dent in the loophole — and the latest proposal to do so also faltered this week. Senate leaders announced on Thursday that they had agreed to drop a modest change to the tax provision in order to secure the vote of Senator Kyrsten Sinema, Democrat of Arizona, and ensure passage of their Inflation Reduction Act, a wide-ranging climate, health care and tax bill.An agreement reached last week between Senator Chuck Schumer, the majority leader, and Senator Joe Manchin III, Democrat of West Virginia, would have taken a small step in the direction of narrowing carried interest tax treatment. However, it would not have eliminated the loophole entirely and could still have allowed rich business executives to have smaller tax bills than their secretaries, a criticism lobbed by the investor Warren E. Buffett, who has long argued against the preferential tax treatment.The fate of the provision was always in doubt given the Democrats’ slim control of the Senate. And Ms. Sinema had previously opposed a carried interest measure in a much larger bill called Build Back Better, which never secured the 50 Senate votes needed — Republicans have been unified in their opposition to any tax increases.Had the legislation passed in the form that Mr. Schumer and Mr. Manchin presented it last week, the shrinking of the carried interest exception would have brought Democrats a tiny bit closer to realizing their vision of making the tax code more progressive.What is carried interest?Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent.The 2017 tax law passed by Republicans largely left the treatment of carried interest intact, after an intense business lobbying campaign, but did narrow the exemption by requiring private equity officials to hold their investments for at least three years before reaping preferential tax treatment on their carried interest income.What would the Manchin-Schumer agreement have done?The agreement between Mr. Manchin and Mr. Schumer would have further narrowed the exemption, in several ways. It would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to game the system and pay the lower 20 percent tax rate.Senate Democrats say the changes would have raised an estimated $14 billion over a decade, by forcing more income to be taxed at higher individual income tax rates — and less at the preferential rate.The longer holding period would have applied only to those who made $400,000 per year or more, in keeping with President Biden’s pledge not to raise taxes on those earning less than that amount.The tax provision echoed a measure that was initially included in the climate and tax bill that House Democrats passed last year but that stalled in the Senate. The carried interest language was removed amid concern that Ms. Sinema, who opposed the measure, would block the overall legislation.Why hasn’t the loophole been closed by now?Many Democrats have tried for years to completely eliminate the tax benefits private equity partners enjoy. Democrats have sought to redefine the management fees they get from partnerships as “gross income,” just like any other kind of income, and to treat capital gains from partners’ investments as ordinary income.Such a move was included in legislation proposed by House Democrats in 2015. The legislation would also have increased the penalties on investors who did not properly apply the proposed changes to their own tax filings.The private equity industry has fought back hard, rejecting outright the basic concepts on which the proposed changes were based.“No such loophole exists,” Steven B. Klinsky, the founder and chief executive of the private equity firm New Mountain Capital, wrote in an opinion article published in The New York Times in 2016. Mr. Klinsky said that when other taxes, including those levied by New York City and the state government, were accounted for, his effective tax rate was between 40 and 50 percent.What would the change have meant for private equity?The private equity industry has defended the tax treatment of carried interest, arguing that it creates incentives for entrepreneurship, healthy risk-taking and investment.The American Investment Council, a lobbying group for the private equity industry, described the proposal as a blow to small business.“Over 74 percent of private equity investment went to small businesses last year,” said Drew Maloney, chief executive of the council. “As small-business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on the private capital that is helping local employers survive and grow.”The Managed Funds Association said the changes to the tax code would hurt those who invested on behalf of pension funds and university endowments.“Current law recognizes the importance of long-term investment, but this proposal would punish entrepreneurs in investment partnerships by not affording them the benefit of long-term capital gains treatment,” said Bryan Corbett, the chief executive of the association.“It is crucial Congress avoids proposals that harm the ability of pensions, foundations and endowments to benefit from high-value, long-term investments that create opportunity for millions of Americans.”Jim Tankersley More

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    Start-Up Funding Falls the Most It Has Since 2019

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    SAN FRANCISCO — For the first time in three years, start-up funding is dropping.The numbers are stark. Investments in U.S. tech start-ups plunged 23 percent over the last three months, to $62.3 billion, the steepest fall since 2019, according to figures released on Thursday by PitchBook, which tracks young companies. Even worse, in the first six months of the year, start-up sales and initial public offerings — the primary ways these companies return cash to investors — plummeted 88 percent, to $49 billion, from a year ago.The declines are a rarity in the start-up ecosystem, which enjoyed more than a decade of outsize growth fueled by a booming economy, low interest rates and people using more and more technology, from smartphones to apps to artificial intelligence. That surge produced now-household names such as Airbnb and Instacart. Over the past decade, quarterly funding to high growth start-ups fell just seven times.But as rising interest rates, inflation and uncertainty stemming from the war in Ukraine have cast a pall over the global economy this year, young tech companies have gotten hit. And that foreshadows a difficult period for the tech industry, which relies on start-ups in Silicon Valley and beyond to provide the next big innovation and growth engine.“We’ve been in a long bull market,” said Kirsten Green, an investor with Forerunner Ventures, adding that the pullback was partly a reaction to that frenzied period of dealmaking, as well as to macroeconomic uncertainty. “What we’re doing right now is calming things down and cutting out some of the noise.”The start-up industry still has plenty of money behind it, and no collapse is imminent. Investors continue to do deals, funding 4,457 transactions in the last three months, up 4 percent from a year ago, according to PitchBook. Venture capital firms, including Andreessen Horowitz and Sequoia Capital, are also still raising large new funds that can be deployed into young companies, collecting $122 billion in commitments so far this year, PitchBook said.The State of the Stock MarketThe stock market’s decline this year has been painful. And it remains difficult to predict what is in store for the future.Grim Outlook: The stock market is on track for its worst first six months of the year since at least 1970. And that’s only part of the horror story for investors and companies this year.Advice for Investors: Bear markets and recessions are far more common than many people realize. Being prepared can minimize hardship and even offer investing opportunities, our columnist says.Recession Risks: As investors focus on the threat that inflation and higher interest rates pose to the economy, they are betting that volatility is here to stay.Crypto Meltdown: Amid a dire period for digital currencies, crypto companies are laying off staff and freezing withdrawals, raising questions about the health of the ecosystem.Start-ups are also accustomed to the boy who cried wolf. Over the last decade, various blips in the market have led to predictions that tech was in a bubble that would soon burst. Each time, tech bounced back even stronger, and more money poured in.Even so, the warning signs that all is not well have recently become more prominent.Venture capitalists, such as those at Sequoia Capital and Lightspeed Venture Partners, have cautioned young firms to cut costs, conserve cash and prepare for hard times. In response, many start-ups have laid off workers and instituted hiring freezes. Some companies — including the payments start-up Fast, the home design company Modsy and the travel start-up WanderJaunt — have shut down.Shares of Bird Global, the scooter start-up, have tumbled from a high last year.Tara Pixley for The New York TimesThe pain has also reached young companies that went public in the last two years. Shares of onetime start-up darlings like the stocks app Robinhood, the scooter start-up Bird Global and the cryptocurrency exchange Coinbase have tumbled between 86 percent and 95 percent below their highs from the last year. Enjoy Technology, a retail start-up that went public in October, filed for bankruptcy last week. Electric Last Mile Solutions, an electric vehicle start-up that went public in June 2021, said last month that it would liquidate its assets.Kyle Stanford, an analyst with PitchBook, said the difference this year was that the huge checks and soaring valuations of 2021 were not happening. “Those were unsustainable,” he said.The start-up market has now reached a kind of stalemate — particularly for the largest and most mature companies — which has led to a lack of action in new funding, said Mark Goldberg, an investor at Index Ventures. Many start-up founders don’t want to raise money these days at a price that values their company lower than it was once worth, while investors don’t want to pay the elevated prices of last year, he said. The result is stasis.“It’s pretty much frozen,” Mr. Goldberg said.Additionally, so many start-ups collected huge piles of cash during the recent boom times that few have needed to raise money this year, he said. That could change next year, when some of the companies start running low on cash. “The logjam will break at some point,” he said.David Spreng, an investor at Runway Growth Capital, a venture debt investment firm, said he had seen a disconnect between investors and start-up executives over the state of the market.“Pretty much every V.C. is sounding alarm bells,” he said. But, he added, “the management teams we’re talking to, they all seem to think: We’ll be fine, no worries.”The one thing he has seen every company do, he said, is freeze its hiring. “When we start seeing companies miss their revenue goals, then it’s time to get a little worried,” he said.Still, the huge piles of capital that venture capital firms have accumulated to back new start-ups has given many in the industry confidence that it will avoid a major collapse.“When the spigot turns back on, V.C. will be set up to get back to putting a lot of capital back to work,” Mr. Stanford said. “If the broader economic climate doesn’t get worse.” More

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    E. Gerald Corrigan, Who Helped Ease ’87 Stock Crash, Dies at 80

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    As president of the Federal Reserve Bank of New York, he favored flooding the financial system with cash to restore confidence among investors.E. Gerald Corrigan, who as the aggressive president of the New York Federal Reserve Bank helped cushion Wall Street’s crash in the late 1980s, died on May 17 in a memory-care center in Dedham, Mass. He was 80.The cause was complications of Alzheimer’s disease, his daughter Elizabeth Corrigan said.As president of the Federal Reserve Bank in Minneapolis from 1980 to 1984 and then of the New York Fed from 1985 to 1993, Mr. Corrigan used his prerogatives as a regulator to help resolve national and global financial crises, and to remedy some of the causes of episodic market instability.“He played a crucial role providing the psychological reassurance for a few critical days after the stock market crash,” Paul A. Volcker, the former Federal Reserve Board chairman, said when Mr. Corrigan retired from the Fed in 1993, referring to his actions after the Dow Jones industrial average dropped more than 22 percent in a single day in October 1987.In that upheaval, Mr. Corrigan urged the Fed chairman, Alan Greenspan, to reassure the markets that the Federal Reserve would pump whatever money was necessary into the financial system to reduce volatility. He also played vital roles in other crises: He helped the Fed to address the collapse of the investment bank Drexel Burnham Lambert in 1989 and of Salomon Brothers in 1991, and to deal with rising inflation, emerging market debt and the need to regulate worldwide credit risk.After Mr. Corrigan retired from the Fed, he joined Goldman Sachs, where he became managing director in 1996 and later chairman of the firm’s international advisers, co-chairman of its business standards committee and the first nonexecutive chairman of its commercial bank, now known as Goldman Sachs Bank. He retired from Goldman in 2016.Edward Gerald Corrigan, known as Jerry, was born on June 13, 1941, in Waterbury, Conn. His father, Edward, was a restaurant manager. His mother, Mary (Hardy) Corrigan, was a librarian.He earned a Bachelor of Social Science degree in economics from Fairfield University in Connecticut in 1963. At Fordham University in New York, he received a master’s degree in economics in 1965 and a doctorate in the same subject in 1971. (Years later, he donated $5 million to each university to establish professorships.)After teaching for a year at Fordham, he joined the Federal Reserve Bank of New York as a researcher in 1968 while still working on his doctorate. When Mr. Volcker, the New York Fed’s president, became chairman of the Federal Reserve Board in 1979, he recruited Mr. Corrigan as a special assistant.During his tenure at the Fed, Mr. Corrigan was named chairman of the Basel Committee on Banking Supervision by the governors of the world’s central banks, a position he held from 1991 to 1993. He also served as vice chairman of the Federal Open Market Committee from 1984 to 1993. In 1992 he was named a co-chairman of the Russian-American Bankers Forum, which helped the former Soviet Union develop a market-driven banking and financial system.In addition to his daughter Elizabeth, Mr. Corrigan is survived by another daughter, Karen Corrigan Tate, from his marriage to Linda Barlow, which ended in divorce; his wife, Cathy Minehan, who was president of the Federal Reserve Bank of Boston from 1994 to 2007; his stepchildren, Melissa Minehan Walters and Brian Minehan; a sister, Patricia Carlascio; and five grandchildren.Mr. Corrigan’s romance with Ms. Minehan raised questions of a possible conflict of interest when she was at the Fed and he was at Goldman Sachs in the mid-1990s, but he said at the time that they had consulted lawyers to prevent leaks of sensitive information that might benefit his company.During his stewardship, the Fed was criticized for failing to curb abuses by the scandal-scarred Bank of Credit and Commerce International. But Mr. Corrigan said when he retired that “if it wasn’t for the Fed, there is a pretty good chance that B.C.C.I. would still be in business.”In his remarks in 1993, Mr. Volcker said Mr. Corrigan had “a good conceptual understanding of the financial world, but most importantly he knows how to get things done.”“That’s a rare quality in the bureaucratic world in which he has grown up,” Mr. Volcker added.When the market crashed in 1987, for example, Fed officials planned to deliver a turgid technical response.“I said that’s the last damn thing we need,” Mr. Corrigan was quoted as saying in Sebastian Mallaby’s “The Man Who Knew: The Life and Times of Alan Greenspan” (2016). “What we need is a statement that has about 10 words in it.”Mr. Greenspan took Mr. Corrigan’s advice, saying (in 30 words) that the Fed would make available whatever money was needed while Mr. Corrigan importuned major banks to continue lending to undergird the markets.When Mr. Corrigan retired from the Fed, he said he would take a job in private industry where “I’ll try to limit myself to working six days a week, instead of seven.” The aftermath of the market crash in 1987, he said, had been his most memorable moment.“In terms of my pulse rate,” he said, “that one takes the prize.”Mr. Corrigan at a meeting of a European Union committee in Brussels in 2010 to discuss the Greek economy. George Gobet/AFP — Getty Images More

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    Stocks Return to Earth, With the S&P 500 Nearing a Bear Market

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    Until very recently, the stock market seemed to defy gravity, producing double-digit returns that provided many Americans with financial comfort even as everything else crumbled around them.When the pandemic began upending society, the market sank for a few weeks and then recorded one of the greatest rallies in history. Stock prices rose the day rioters breached the U.S. Capitol, and they were up during the week that protests roiled many American cities after the murder of George Floyd. During this time of great upheaval, the market seemed to flash a contrarian signal that things were going to be OK — economically, at least.But real world problems have finally crashed the stock market’s party. Soaring inflation, fueled by rising food prices and the war in Ukraine, has prompted the Federal Reserve to raise interest rates significantly for the first time in many years, which has sent stock prices plummeting to earth.Stocks rose 2.4 percent on Friday, but not enough to make up for a week of declines. It was the sixth consecutive week of losses for the stock market, the first time that has happened since 2011. The S&P 500, which has been flirting with a bear market, or a drop of 20 percent, is down more than 16 percent since its peak in January. It may fall further as inflation persists and a recession looms.Even after the bleeding stops, stock market investors, who include more than 50 percent of Americans, could face years of relatively meager returns that will leave them with substantially less money to pay for their children’s college education and support themselves in retirement.This reckoning comes just months before the midterm elections, deepening problems for Democrats who are already struggling to convince voters that their party and President Joseph R. Biden are steering the economy on the right track.Former President Donald J. Trump often took credit for the stock market’s meteoric rise. Now, Mr. Biden and his party will almost certainly take some of the blame for its recent fall.In reality, the stock market is not a perfect measure of the real economy. Unemployment is low and consumer spending is still holding up, but more than a month of punishing losses can damage the country’s financial psyche.“People look at the stock market as a barometer of the economy and how they are faring financially,” said Mark Zandi, chief economist at Moody’s Analytics. “They feel good when they see green on the screen and crummy when they see red.”Years of low rates have been rocket fuel for stock prices, partly because other investments, like bonds, that are pegged to interest rates produce such minimal returns. The stock market became one of the few places where investors could make big money.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what the increases mean for consumers.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.During the pandemic, rates went even lower, as policymakers sought to support businesses and consumers through the shutdowns — and it worked. Investors piled into companies’ stocks and kept them flush with capital, which allowed them to keep hiring, paying rent, ramping up production and, of course, rewarding shareholders with ample dividends and stock buybacks.But inflation, which puts a heavy burden on families trying to make ends meet, also helped kill the market’s mood. Steadily rising food costs and record high gasoline prices prompted the Fed to raise rates and try to slow the economy.The stock price of Alphabet, Google’s parent, is down about 20 percent since the start of the year.Laura Morton for The New York TimesWall Street has been expecting this moment to come for a long time. But the market’s reaction — which some refer to as a “reset” and others call a necessary “comeuppance” for stock investors — is painful nonetheless.“I don’t think people recognized how fragile of a foundation the stock market was resting on,” said Emily Bowersock Hill, founder of Bowersock Capital Partners and chairwoman of the investment committee of the Kansas Public Employees Retirement System, a pension fund with more than $20 billion.Ms. Hill said some of the declines were probably good for the market because it was clearing out the froth that created the conditions for “meme stocks”: companies with dubious business prospects like AMC Theatres, BlackBerry and Bed Bath & Beyond, whose share prices were driven up by speculators.But the downdraft has sunk the share prices of companies that represent innovation and the future, too; Amazon is down more than 30 percent since the start of the year and Alphabet, Google’s parent, is off about 20 percent, as investors rethink those companies’ real value.Virtually no stocks have been spared from losses. The market decline has “gone on and on, and it’s depressing,” Ms. Hill said.Perhaps no one understood that emotional symbolism of the market better than Mr. Trump.“The reason our stock market is so successful is because of me,” Mr. Trump said in November 2017 — one of many statements in which he boasted about rising stock prices or publicly pressured the Fed to further lower interest rates to juice the economy.Early in the pandemic, in April 2020 — with stores, offices and churches shut, children marooned at home attempting remote school, and morgues running out of space for virus victims — Mr. Trump tweeted that the United States had “the biggest Stock Market increase since 1974.”While a majority of Americans have some money invested in the stock market, it remains a rich person’s game. According to an analysis by the New York University economics Professor Edward Wolff, the top 5 percent of American wealth holders own 72 percent of all stocks.But the stock market’s symbolic value matters. “It’s the one story that makes the news every night,” said Richard Sylla, a professor emeritus of economics at New York University’s Stern School of Business.Is the market up or down? Are we winning or losing today, this week, this year, this presidency?On Friday, the University of Michigan’s consumer sentiment index fell lower than expected, a drop that some economists attribute partly to stock market losses. The index is now 13 points below the low when Covid first hit, noted Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics. Such deep pessimism “suggests that people have short memories,” Mr. Shepherdson wrote in a research note.It also suggests trouble for the Biden administration. Not only is the stock market party ending under President Biden’s watch, it could be a while before another one gets going.“Now nobody is going to be getting much richer from stocks,” one market historian predicts.Gili Benita for The New York TimesMr. Sylla, who co-wrote a book about the history of interest rates and tracked two centuries of stock market returns, correctly predicted in September 2011 that the coming decade would produce high returns.Inflation F.A.Q.Card 1 of 5What is inflation? More