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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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    Price of Diesel, Which Powers the Economy, Is Still Climbing

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    Russia’s invasion of Ukraine is one reason that the fuel is scarce. Another is a series of yearslong, intertwined events that cover the globe.HOUSTON — Gasoline prices have dropped as much as a dollar a gallon since early summer, easing a financial strain on many people. But the price of diesel, the fuel that moves trucks, trains, barges, tractors and construction equipment, has remained stubbornly high, helping to prop up the prices of many goods and services.On Wednesday, a gallon of diesel fuel in the United States cost $5.357 on average, according to AAA. That was down from a record of $5.816 in June but well above the $3.642 it cost a year ago. (A gallon of regular gasoline now averages $3.805.)The surge in diesel costs has not garnered the attention from politicians and the public that the jump in gasoline prices did, because most of the cars in the United States run on gas. But diesel prices are a critical source of pain for the economy because they affect the cost of practically every product.“The economic impact is insidious because everything moves across the country powered by diesel,” said Tom Kloza, the global head of energy analysis at the Oil Price Information Service. “It’s an inflation accelerant, and the consumer ultimately has to pay for it.”Sherri Garner Brumbaugh, the president of Garner Trucking in Findlay, Ohio, said the weekly cost of fueling one of her heavy-duty trucks in September was $1,300, more than double the $600 she paid two years earlier. “A good portion gets passed onto my customers with a fuel surcharge,” she said.Both gasoline and diesel prices are tied to the price of oil, which is set on the global market. The price of each fuel immediately shot up after Russia invaded Ukraine in February. But their paths have diverged sharply. Over the last year, the cost of diesel has ballooned by over 40 percent, compared with 11 percent for gasoline.Diesel prices are high because the fuel is scarce worldwide, including in the United States, which in recent years became a net exporter of oil and petroleum products. Oil analysts said there were simply not enough refineries to meet the demand for diesel, especially after Russia’s energy exports fell when the United States, Britain and some other countries stopped buying them.Diesel inventories are always a bit low in the spring and fall, during agricultural planting and harvesting seasons, but this fall supplies are at their lowest level since 1982, when the government began reporting data on the fuel.The tightest market is in the Northeast, where oil refineries have closed in recent years and where the diesel crunch is complicated by winter demand for heating oil. The two fuels are virtually the same but are taxed differently. An especially cold winter could make the situation worse by increasing the demand for heating oil.In Massachusetts, for example, diesel is selling for more than $5.90 a gallon (about $2.33 more than it did a year earlier). In Texas, it costs $4.73 a gallon.Trucks, trains, barges, tractors and construction equipment all use diesel, and its price affects the cost of practically every product.Jim Watson/Agence France-Presse — Getty ImagesWhile Russia’s war in Ukraine sent diesel prices soaring, the current situation is partly the result of an interconnected, slow-building series of events that extends across the globe. Some analysts trace the roots of the U.S. diesel shortage to a fire at Philadelphia Energy Solutions in 2019, which forced the refinery to shut down, taking out one of the Northeast’s important diesel producers.But refineries have been closing elsewhere. Over the last several years, 5 percent of U.S. refinery capacity, and 6 percent of European refinery capacity, has been shut down. A few refineries closed or scaled back because of the collapse in energy demand in the early months of the coronavirus pandemic. Some older refineries were shut down because they were inefficient and their profits weren’t large enough for Wall Street investors. Other refineries were closed so that their owners could convert them to produce biofuels, which are made from plants, waste and other organic material.“Because we shut those refineries down, we don’t have enough capacity,” said Sarah Emerson, the president of ESAI Energy, a consulting firm.As much of the global economy recovered in 2021 and 2022, demand for diesel climbed quickly. But then, after Russia invaded Ukraine, the Biden administration banned Russian oil and petroleum imports, which amounted to 700,000 barrels of diesel and other fuels a day, much of it intended for the Northeast.Diesel prices have also soared so much higher than the cost of gasoline in part because of a decision by the International Maritime Organization several years ago to require most oceangoing ships to replace their high-sulfur bunker fuel with less polluting fuels starting in 2020. That has slowly increased demand for diesel over the last two years.“A substantial amount of diesel is needed in the new bunker blends, and that is a hidden demand for diesel molecules,” said Richard Joswick, the head of global oil analysis for S&P Global Platts. He estimated that the global shipping fleet was now consuming half a million barrels of diesel a day, or roughly 2 percent of the world’s supplies.At the same time, while American refiners are now making tidy profits, 30 percent of their production is being exported. Latin America has become a particularly profitable market, as American diesel replaces fuel from Venezuela, where the state-controlled oil sector has been hobbled by corruption, mismanagement and U.S. sanctions. Some American diesel also goes to Europe.The impact of exports on domestic prices has led some analysts to speculate that the Biden administration could eventually restrict exports to boost supplies at home. But energy experts said that might not have the desired effect because diesel had become a globally traded commodity. Denying Latin America fuel could also backfire because many countries in the region sell crude oil to the United States.“We have a symbiotic relationship with Latin America on diesel and crude,” said Ms. Emerson of ESAI Energy. “We can disrupt that, but it doesn’t immediately fix the problem.”The global diesel shortage was also exacerbated by labor strikes at French refineries this fall. And utilities in Europe have been stockpiling diesel in case they cannot find enough natural gas to fuel their power plants.Russian diesel has continued to flow to Europe since the war began, but stricter sanctions that the European Union plans to impose on Russia in February could potentially cause havoc to the diesel business of traders, banks, insurance companies and shippers.Still, some energy experts said prices could soon begin to ease.Help may be on the way from an unlikely source: China. In recent months, China has been loosening export controls on diesel. Its exports rose from 200,000 barrels a day in August to 430,000 barrels a day in September, and the country has the capacity to sell even more, according to estimates by ESAI Energy.Nearly a third of Chinese diesel exports went to the Netherlands in recent months, taking some pressure off the European market. And oil refineries being built in Kuwait and China could come online as early as next year, further increasing supply.Demand for diesel and its price could also fall if much of the world slides into a recession next year, as some economists and policymakers are expecting.“A deep recession would certainly cut into diesel demand,” said Mr. Joswick of S&P Global Platts. “We don’t forecast a recession, but that is certainly a possibility.” More

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    Inflation Plagues Democrats in Polling. Will It Crush Them at the Ballot Box?

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    Americans are extremely attuned to the cost of living, and as midterm election voters head to the polls, they are divided over whom to blame.Inflation has roared back onto the scene as a key issue ahead of the 2022 midterm elections, after five decades during which slow and steady price increases were a political nonissue.It was once a potent driver of politics in America, one that panicked former President Richard M. Nixon and his administration, and later helped to make Jimmy Carter a one-term president. As prices surge, inflation is again taking center stage, and could help decide who controls Congress.Household confidence has plummeted as inflation has climbed, and economic issues have shot to the top of what voters are worried about. A full 49 percent of voters overall said that the economy is an extremely important issue to them in an October Gallup survey, notably outranking abortion, crime and relations with Russia. That’s the highest level of economic concern headed into a midterm election since 2010, when the economy was coming out of the worst downturn since the Great Depression.Inflation is almost certainly the issue pushing the economy to its current prominence. Consumer prices picked up by 8.2 percent in the year through September, far faster than the roughly 2 percent annual gains that were normal in the years leading up to the pandemic. That has left many families feeling like they are falling behind, even as unemployment lingers near a 50-year low, employers hire at a solid clip and job openings abound.The disconnect between the strength of the economy and the way that voters feel about it illustrates why Democrats are barreling into the midterms on the defensive. Elected politicians have a limited role to play in fighting inflation, a job that falls mostly to the Federal Reserve. That has made talking about price increases all the more challenging.Survey data suggest that while voters disagree over whom to blame for today’s rapid price increases, a larger share of independent voters believe that Republicans would be better for the economy and their finances. And irritation over the state of the economy could be enough to prompt some people to vote for change even if the other party doesn’t offer clearly better solutions, according to political scientists. The question is less whether inflation will be a factor driving votes — and more whether it will be a decisive one.“It matters enormously to the election this week,” said Elaine Kamarck, a senior fellow in the Governance Studies program at the Brookings Institution, noting that gas and grocery prices are omnipresent realities for most families. “It is obvious what is happening in inflation every single day: Voters don’t get to forget it.”Across the political spectrum, many Americans are feeling less positive about their personal finances: An AP-NORC Center for Public Affairs Research poll from October found that 36 percent of Democrats now say their finances are in bad shape, up from 28 percent in March. Among Republicans, that number was 53 percent, up from 41 percent. Independents were fairly unchanged, with 53 percent feeling negative.That could be particularly bad for Democrats, because they are often seen as less strong on the economy.Which Party Is Better for the National Economy?Independents and Republicans both tend to rank Republicans ahead of Democrats economically, based on University of Michigan data.

    Note: Survey from September and October 2022.Source: University of MichiganBy The New York TimesNew survey data from the University of Michigan showed that 41 percent of voters felt neither party had an advantage when it came to helping their personal finances. But of those who did think there was a difference, 35 percent thought Republicans would be better — versus 20 percent for Democrats. Consumers also expected Republicans to win in national races.“By and large, respondents expect Republicans to gain control of both the House and the Senate,” Joanne Hsu, director of the University of Michigan’s consumer surveys, wrote in the Nov. 4 release.Which Party Is Better for Your Personal Finances? Republicans and Independents tend to rank Republicans higher on issues of personal finance, though many see no difference.

    Note: Survey from September and October 2022.Source: University of MichiganBy The New York TimesWhether they are right could hinge on whether inflation proves as salient for actual votes as it is in sentiment surveys.Prices may be rising quickly — annoying consumers and occupying their attention — but unemployment is very low, which Ms. Kamarck said might alleviate the angst. Plus, she said, critical groups of voters — most notably women — may focus on other issues including a Supreme Court ruling from earlier this year that overturned Roe v. Wade and ended the constitutional right to abortion.Hally Simpson Wilk, 36, from Broadview Heights, Ohio, is feeling inflation at the grocery store, but she does not think that Republicans would necessarily be better at solving the problem than Democrats. Plus, she said, the abortion ruling had “lit a fire under” her. She expects to vote Democrat.It is hard to guess whether unhappiness over rising prices will drive actual votes in part because there isn’t much recent precedent. While inflation has a history of driving politics in America, it hasn’t been a major issue in 50 years.Back in the 1970s and 1980s, inflation was even faster, touching peaks as high as 12 and 14 percent. Those price increases, and the nation’s response to them, played a big role in driving the national conversation and deciding elections during that era. Mr. Nixon in 1971 instituted wage and price caps to try to temporarily keep prices under control ahead of the 1972 election, for instance.“Inflation robs every American, every one of you,” Mr. Nixon said during his surprise announcement, which included other major economic policy changes. “Homemakers find it harder than ever to balance the family budget. And 80 million American wage earners have been on a treadmill.”.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;}Our needle is back. The needle is an innovative forecasting tool that was created by The Times and debuted in 2016. It is intended to help you understand what the votes tallied so far suggest about possible winners in key contests, before the election is called. Look for one needle on which party will control the House and one on which party will control the Senate.Here’s a deeper dive into how it works.Those wage and price caps may have been politically astute, but research since has showed they just delayed price jumps — they didn’t stop them. When Mr. Carter became president in 1977, inflation was still raging. The Fed wrestled it under control with super-high interest rates that sent unemployment soaring, a campaign that is widely credited with helping to cost Mr. Carter a second term.America’s experience during the 1970s also illustrates a harsh reality: Even if inflation drives the nation’s politics, there is relatively little politicians can do to address it, aside from trying to avoid making the problem worse by stimulating the economy. Taxing and spending policies to offset price increases mostly have comparatively small effects.The country’s main tool for fighting rapid price increases is Fed policy — and that is a painful solution. When the central bank lifts interest rates, it slows economic demand, cools hiring, moderates wage growth and eventually drags prices lower as shoppers pull back and companies find that they can no longer charge more.“There is not an easy fix for inflation — the fix is a recession,” Ms. Kamarck said. For Democrats, “it is very hard to have an economic message.”Economists typically attribute today’s rapid price increases partially to government spending, including a package that Democrats passed in 2021 that helped to fuel consumer demand. But they are also global in nature, tied partly to lingering supply issues amid the pandemic, and food and fuel market disruptions caused by Russia’s invasion of Ukraine.Many voters believe that today’s price increases are not wholly — even principally — the Democratic administration’s fault. But that assessment divides along party lines.About 87 percent of Democrats attribute inflation to factors outside of President Biden’s control, versus 48 percent of independents and 21 percent of Republicans, based on AP-NORC polling data from last month.What Is to Blame for Rapid Inflation?A poll asked voters what was to blame for higher-than usual prices: President Biden’s policies, or factors outside of his control.

    Note: Survey from October 6-10, 2022Source: AP-NORCBy The New York Times People who were already on the fence could have their minds swayed by inflation — especially in places where it is particularly painful. Price increases are reported at a metro level, and some cities in key battleground states are facing particularly rapid price increases: Inflation was at 11.7 percent in Atlanta; 13 percent in Phoenix; and 9 percent in the Seattle metro area as of the latest available data.And even if inflation is hovering near the national average in some places, it is still the fastest pace in decades.Pennsylvania’s Senate race is closely contested, and Christopher Borick, director of the Muhlenberg College Institute of Public Opinion in Allentown, Pa., thinks that rapid price increases could be one factor that is helping the Republican candidate Mehmet Oz run a competitive race despite very low favorability ratings.“We often see in midterm races that if people aren’t happy, a price is paid by the incumbent party,” Mr. Borick said. Inflation “places people in a mood that really does open up the door to alternatives that might not otherwise be acceptable.” More

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    Corporate America Has a Message for the Fed About Inflation

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    If the Federal Reserve’s chair, Jerome H. Powell, and his colleagues look at company earnings reports, these themes might catch their eye.Federal Reserve officials are battling the fastest inflation in four decades, and as they do they are parsing a wide variety of data sources to see what might happen next. If they check in on how executives are describing their companies’ latest financial results, they might have reasons to worry.It’s not because the corporate chiefs are overly gloomy about their prospects as the Fed aggressively raises interest rates to control rapid inflation. Quite the opposite: Many executives across a range of industries over the last few weeks have said they expect to see sustained demand. In many cases, they plan to continue raising prices in the months ahead.That is good for investors — the S&P 500 index gained 8 percent last month as companies began reporting quarterly profits — but not necessarily welcome news for the Fed, which has been trying hard to slow consumer spending. The central bank has already raised rates five times this year and is expected to do so again on Wednesday as part of its campaign to cool off the economy. Although companies have warned that the economy may slow and often talk about a tough environment, many are not seeing customers crack yet.“While we are seeing signs of economic slowing, consumers and corporates remain healthy,” Jane Fraser, the chief executive of Citigroup, told investors recently. “So it is all a question of what it takes to truly tame persistently high core inflation.”If companies continue to charge more and consumers are still willing to pay, inflation will be harder to stamp out. That could push the Fed to keep up its push to curb momentum — and if officials must do more to wrestle prices down, it could increase the risk of financial turmoil, higher unemployment or other bad outcomes. Although some companies are reporting a nascent slowdown, the signs are far from conclusive.Demand remains strong despite higher prices.McDonald’s expects to raise prices 10 percent at its restaurants in the United States this year, its leaders said when reporting better-than-expected sales and profits for the third quarter.“I think because of the strength of the brand and the proposition as evidenced by the results, the consumers are willing to tolerate it,” said Chris Kempczinski, the fast-food giant’s chief executive.Inflation F.A.Q.Card 1 of 5What is inflation? 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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    Lessons From Liz Truss’s Handling of U.K. Inflation

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    The sharp policy U-turn by Liz Truss, Britain’s prime minister, reveals the perils of taking the wrong path in the fight against scalding inflation.Government leaders in the West are struggling with rising inflation, slowing growth, and anxious electorates worried about winter and high energy bills. But Liz Truss, Britain’s prime minister, is the only one who devised an economic plan that unnerved financial markets, drew the ire of global leaders and the public and undermined her political standing.On Friday, battered by savage criticism, she retreated. Ms. Truss fired her top finance official, Kwasi Kwarteng, for creating precisely the package of unfunded tax cuts, billion-dollar spending programs and deregulation that she had asked for.She reinstated a scheduled increase in corporate taxes to 25 percent from 19 percent, a rise she had previously opposed. That announcement came on top of backtracking last week on her proposal to eliminate the top 45 percent income tax on the highest earners. The prime minister, in office a little over five weeks, also promised that spending would grow less rapidly than proposed, although no specifics were offered.The drama is still playing out, and it’s unclear if the Truss government will survive.In the United States, President Biden, while waging his own political battles over gas prices and inflation, has not proposed anything like the kind of policies that Ms. Truss’s government attempted, nor have any other leaders in Europe.Still, for European governments whose economies are suffering greatly from shocks and energy price surges caused by Russia’s war in Ukraine, there are timely lessons from the debacle playing out in London.One of the strongest was delivered early on by the International Monetary Fund: Don’t undermine your own central bankers. The I.M.F., which usually reserves such scoldings for developing nations, on Thursday doubled down on its message. “Don’t prolong the pain,” Kristalina Georgieva, the managing director, admonished.How to blunt the impact of inflation on the most vulnerable without further stoking inflation is the dilemma that every government is confronting.The Bank of England in London has aggressively tried to slow the sharp rise in prices by slowing the British economy.Alberto Pezzali/Associated Press“That is the question of the hour,” said Eswar Prasad, an economist at Cornell University who was attending the annual meetings of the World Bank and I.M.F. in Washington this week.Tension between the fiscal spending policies proposed by a government and the monetary policies controlled by central banks is not unusual. At the moment, though, central bankers are engaged in delicate policy maneuvers in the fight against a level of inflation not seen in decades. With the rate in Britain nearing 10 percent, the Bank of England has moved aggressively to slow down climbing prices through a series of interest rate increases aimed at crimping consumer and business spending.Any expansion of government spending is going to interfere with that aim to some degree, but Ms. Truss’s plan was far too big and too ill defined, Mr. Prasad said.“Measures to help households hit hard by energy increases, by themselves, would not have created that much of a stir,” he said. Many other countries have proposed exactly that. And the European Union has proposed a windfall tax on energy profits to help finance those subsidies.Ms. Truss, instead of coming up with a way to pay for energy assistance, pushed to eliminate a corporate tax increase and cut income taxes for the wealthiest segment of the population. The result was a reduction in government revenue and a ballooning of Britain’s debt.“Overall, the package did not have much clarity in terms of how it would support the economy in the short run without raising inflation,” Mr. Prasad said.By contrast, Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, cited the way governments and central banks worked in tandem when the pandemic struck in 2020 to keep economies from collapsing, issuing vast amounts of public debt.“Central banks printed every single dollar, euro and pound that governments spent” to support households and businesses because of the Covid crisis, Mr. Vistesen said. But now the circumstances have changed, and inflation is setting economies aflame.The actions of the Federal Reserve in the United States illustrate the switch central banks have made: In the harrowing early weeks of the global outbreak of the coronavirus, the Fed embarked on an extraordinary program to stimulate the economy and stabilize markets. This year, the Fed has been swiftly raising interest rates in a bid to slow growth.Both the United States and eurozone countries have somewhat more wiggle room than Britain, because the dollar and the euro are much more widely used around the world as currencies held in reserve than the British pound.Kwasi Kwarteng, Britain’s former chancellor of the Exchequer, left 11 Downing Street after Ms. Truss fired him on Friday.Kirsty Wigglesworth/Associated PressEven so, European governments can help households and businesses get through an energy crisis, Mr. Vistesen said, but they can’t embark on an open-ended spending spree.They also need to take account of what is happening in other economies. The richest countries that make up the Group of 7 are essentially part of the same “monetary and fiscal convoy,” said Will Hutton, president of the Academy of Social Sciences. By championing a Thatcher-era blend of steep tax cuts and deregulation, he said, the Truss government strayed too far from the rest of the flotilla and the economic mainstream.The adherence to 1980s-era trickle-down verities also revealed the risks of sticking with outdated policies in the face of changing circumstances, said Diane Coyle, a ​​public policy professor at the University of Cambridge.“The situation in 1979 was very different,” Ms. Coyle said. “There were sclerotic high taxes and an overregulated economy, but not anymore.” Today, taxes in Britain are lower, and the economy is less regulated than the average member of the Organization for Economic Cooperation and Development, a club of 38 major economies.“The character of the economy has changed,” she said. “Public investment in research and skills are more important.”In that sense, what was missing from Ms. Truss’s economic plan was as important as what was included. And what Britain is lacking, said Mariana Mazzucato, an economist at University College London, is a visionary public investment program like the trillion-dollar climate and digitalization plans adopted by the European Union or the climate and infrastructure program in the United States.A rate of Inflation nearing 10 percent in Britain has affected the price of groceries and how people spend their money.Alex Ingram for The New York Times“If you don’t have a growth plan, an industrial strategy innovation policy,” Ms. Mazzucato said, “then your economy won’t expand.”Both Ms. Mazzucato and Ms. Coyle emphasized that Britain had some specific economic handicaps that predated the Truss administration, including the 2016 vote to exit the European Union, a stubborn lack of productivity, anemic business investment, and lagging research and development.Still, Ms. Coyle offered some advice that referred pointedly to Ms. Truss. “I think the main lesson is: Don’t shoot yourself in the foot.” More

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    2023 COLA Could Strain Social Security Program

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    The Social Security Old-Age and Survivors Insurance Trust Fund could be depleted a year or two earlier than expected as a result of larger payouts.The 8.7 percent Social Security cost-of-living increase that was announced on Thursday is welcome news for retirees who are struggling to cope with surging inflation. But it could bring the social safety net program a step closer to insolvency.Annual government reports in June showed that the Social Security Old-Age and Survivors Insurance Trust Fund, which pays out retiree benefits, would be depleted in 2034. At that time, the fund’s reserves will run out, leaving the system reliant on incoming tax revenue. Those funds will provide enough money to cover only 77 percent of scheduled benefits unless Congress intervenes.Social Security is largely funded through payroll taxes, taxes levied on Social Security benefits and interest on money that the trust funds invest.Now that the program will be paying out more to help retirees keep up with rising prices, the program will be under even more pressure to sustain itself. Budget experts warn that the reserves could run out before 2034 as a result of the larger benefits.“This very large COLA increase is likely to bring the year of insolvency forward by a full year,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget, referring to the cost-of-living adjustment. “It is just another reminder that procrastinating on addressing these imbalances leaves the people who depend on Social Security particularly vulnerable to a further deterioration in its finances.”The increased outlays for retirees will be partly offset by higher taxes on Americans. Along with the bigger benefits, the maximum amount of earnings subject to the Social Security payroll tax will increase to $160,200 from $147,000. Employers and employees each contribute 6.2 percent of wages up to that salary threshold, which is adjusted every year based on average wage growth.Because wages are rising, the amount of earnings subject to the tax is rising as well.Ms. MacGuineas estimated that the Social Security Trust Fund could have been depleted as much as two years earlier without the offsetting effect of the higher tax threshold.Kathleen Romig, director of Social Security and disability policy at the Center on Budget and Policy Priorities, said the depletion date could be accelerated by as much as two years. But she added that a couple of years of high inflation probably would not fundamentally change Social Security’s long-term financing outlook.“It’s normal for Social Security’s trustees to update the expected reserve depletion date as circumstances change,” Ms. Romig said.Ms. Romig noted that more than 65 million retirees count on Social Security for most of their income and that the cost-of-living increase would ensure that older Americans did not fall into poverty as they aged.The June projections actually showed the depletion date of the fund being delayed by a year, from an earlier projection of 2033, the result of a stronger-than-expected economic recovery in 2021.Anqi Chen, assistant director of savings research at the Center for Retirement Research at Boston College, said the impact of the cost-of-living adjustment on the Social Security Trust Fund would depend on a combination of wage growth and labor force participation in the U.S. economy.“Higher wage growth would mean higher revenue for Social Security and a higher labor force participation would mean more workers contributing to the program, which also means higher revenue,” said Ms. Chen, who is also a senior research economist at the center.The future of Social Security has emerged as a major issue in the midterm elections this year. Republicans have argued that their proposals are intended to protect the long-term viability of Social Security, but Democrats and President Biden have warned that if Republicans take control of Congress they will scale back the program and curb benefits for retirees.“MAGA Republicans in Congress continue to threaten Social Security and Medicare — proposing to put them on the chopping block every five years, threatening benefits, and to change eligibility,” Karine Jean-Pierre, White House press secretary, said in a statement on Wednesday. “If Republicans in Congress have their way, seniors will pay more for prescription drugs and their Social Security benefits will never be secure.” More