Fed Signals It Will Soon Pull Back From Pandemic Stimulus Measures


Daily Business Briefing

Sept. 22, 2021Updated 

Sept. 22, 2021, 2:04 p.m. ET

Sept. 22, 2021, 2:04 p.m. ET

Brendan Mcdermid/Reuters

Federal Reserve officials indicated on Wednesday that they expected to soon slow the asset purchases they have been using to support the economy and predicted that they might raise interest rates next year, signs that policymakers are preparing to pivot away from full-blast monetary help as the business environment snaps back from the pandemic shock.

“If progress continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the policy-setting Federal Open Market Committee said in its September statement, released Wednesday.

The new phrasing eliminated wording that had promised to assess progress over “coming meetings,” suggesting that a formal announcement of the slowdown could come as early as the central bank’s next gathering in November.

Fed officials confront a complicated backdrop nearly 20 months after the pandemic first shook the American economy. Business has rebounded as consumers spend strongly, helped along by repeated government stimulus checks and other benefits.

But the virus persists and many adults remain unvaccinated, preventing a full return to normal. External threats also loom, including tremors in China’s real estate market that have put financial markets on edge. In the United States, partisan wrangling could imperil future government spending plans or even cause a destabilizing delay to a needed debt ceiling increase.

The Fed chair, Jerome H. Powell, and his colleagues are navigating those crosscurrents at a time when inflation is coming in high and the labor market, while healing, remains far from full strength. They are weighing when and how to reduce their monetary policy support, hoping to prevent an economic or financial market overheating while keeping the recovery on track.

“The sectors most adversely affected by the pandemic have improved in recent months, but the rise in Covid-19 cases has slowed their recovery,” the Fed said in its Wednesday statement.

The Fed has been holding interest rates at rock bottom since March 2020 and is buying $120 billion in government-backed bonds each month, policies that work together to keep many types of borrowing cheap. That has fueled lending and spending and raised economic growth. Officials have signaled that slowing bond purchases will be their first step toward a more normal policy setting.

Mr. Powell will deliver a prepared statement and take questions at a news conference this afternoon.

Melissa Phillip/Houston Chronicle, via Associated Press

The Federal Reserve chair, Jerome H. Powell, will provide an update on the state of the economy and the outlook for monetary policy at a news conference on Wednesday, but he’s likely to face tough questions on a less familiar topic: ethics at the central bank.

Two of Mr. Powell’s colleagues — Robert Kaplan, president of the Federal Reserve Bank of Dallas, and Eric Rosengren, president of the Federal Reserve Bank of Boston — have come under scrutiny for their trading activity last year, when the Fed was carrying out a sweeping market rescue in response to the onset of the coronavirus pandemic.

According to a Dallas Fed spokesperson, along with disclosures from the Boston Fed, the notable trades did not happen in late March or April, when the central bank was particularly active in markets. Yet even the possibility that Fed policymakers could make financial decisions informed by their privileged knowledge of central bank deliberations has drawn outrage and calls for changes to the rules that govern how Fed officials participate in financial markets.

“To even have to ask the question whether these critically important Fed guardians of the economy are profiteering off their official knowledge, expertise and activity is devastating to the public confidence,” said Norman Eisen, a senior fellow at the Brookings Institution who was an ethics adviser to former President Barack Obama.

Mr. Powell has asked the Fed’s staff to review ethics rules around what senior officials are allowed to invest in and buy or sell, a spokesperson for the central bank said last week. And the two officials whose trades drew attention have pledged to sell their individual security holdings and to invest in broad indexes and cash instead.

But outside groups are calling for more, saying those changes are an inadequate response to the deficiencies the episode laid bare.

The trading by the officials “reveals how grossly deficient their ethical standards and the code of conduct are,” Dennis Kelleher, president and chief executive at Better Markets, wrote in a letter to Mr. Powell this week calling for external investigations of what happened. “This requires you to take immediate, concrete and meaningful action, not just P.R. pronouncements of internal investigations and an internal review of the ethics code.”

Mr. Kaplan bought and sold millions of dollars in individual stocks and invested in stock futures, which can allow investors to make bets on whether the market will go up or down, according to his 2020 financial disclosures. Mr. Rosengren traded in financial products tied to real estate, during a year in which he regularly warned the public about risks to that sector. Both said in statements that their investments complied with Fed ethics rules.

A Fed spokesperson said the Fed’s ethics rules are consistent with what most government agencies follow and in some cases more stringent. But given the special role the Fed plays in finance, many have questioned whether it should have stricter requirements.

Fed officials tend to be sophisticated economists and bankers themselves, and their comments can have an outsize impact on financial markets. The central bank has also taken on an increasingly expansive role: Last year, it rescued or aided the short-term corporate debt market, the long-term corporate debt market, the municipal bond market and money market mutual funds.

That raises questions about what sort of securities its officials should be allowed to own. Mr. Powell, for instance, was heavily invested in index funds and municipal debt last year, based on his own disclosures. His municipal bond holdings had not been widely criticized in years past, but they have received negative attention in recent days because the Fed helped that market for the first time last year.

All this poses a conundrum for the Fed, which must weigh what its officials can reasonably invest in, given that its actions influence everything from home prices to the broad stock market.

While there are examples of very high-level officials in government who have put their savings into blind trusts — in which independent money managers buy and sell securities without communicating with the beneficiary about the details of the transactions — those are typically discouraged by the Office of Government Ethics, which calls them “highly restrictive and usually burdensome.” Ethicists tend to instead recommend divesting from individual asset holdings and investing in mutual funds or other broad-based funds.

Many Fed officials, but clearly not all, already do that.

“The system is foolish in the leeway that it gives,” said Mr. Eisen, the former ethics adviser. “The trust system is a recipe for eventual scandal.”

Nicolas Economou/Reuters

After a summer of extreme heat, wildfires and floods in Europe, the costs of climate change — human and financial — have become increasingly stark. And a new report by the European Central Bank has reaffirmed the severe consequences of delays or inaction on climate change.

Banks and companies in the eurozone risk economic loss and financial instability, the central bank said Wednesday as it published the results of its first economywide climate stress test, part of a major effort by policymakers to support the transition to a net-zero carbon world.

By the end of the century, more frequent and severe natural disasters could shrink the region’s economy by 10 percent if no new policies to mitigate climate change are introduced, the report said. By comparison, the costs of transition would be no more than 2 percent of gross domestic product.

“The short-term costs of transition pale in comparison with the costs of unfettered climate change in the medium to long term,” the report published on Wednesday said.

The European Central Bank used data from 2.3 million companies and 1,600 banks in the eurozone to analyze the impact of three scenarios on the economy. In the first, there is an orderly transition that contains global warming to 1.5 degrees Celsius compared with the preindustrial era. Then there is a “disorderly transition,” in which countries delay taking action until 2030 and then have to make abrupt and costly policy changes to contain warming to 2 degrees Celsius. The third scenario, a so-called hot house world, involves no more actions to mitigate climate change and the costs from natural catastrophes are “extremely high.”

European Union countries have already agreed to cut their collective greenhouse gas emissions by 55 percent from 1990 levels by 2030, on a path to be carbon neutral by 2050.

The European Central Bank has made climate change one of its central focuses, which will influence monetary policy and financial regulation. But it is still a hotly contested subject whether central banks should take an active approach to tackle climate change through actions such as changing the composition of asset purchases to exclude oil companies.

In July, the European Central Bank justified incorporating climate change into its monetary policy framework by arguing that “climate change and the transition towards a more sustainable economy affect the outlook for price stability.”

Under the orderly transition scenario, the average eurozone company would have slightly more leverage, less profitability and higher risk of default over the next four or five years because of the cost of complying with green policies such as carbon taxes and replacing technologies. But then the benefits of the transition kick in.

By comparison, in a disorderly transition, the company’s profitability would drop by more than 20 percent by 2050 and its probability of default would rise by more than 2 percent. In the hot house world where no climate actions are taken, profitability would slump 40 percent and probability of default would be 6 percent higher.

Banks across the eurozone have a similar exposure to the costs of transition but their exposure to physical risks vary greatly, the report said. In countries in southern Europe, such as Greece, Portugal and Spain, where there is a higher risk of extreme heat waves and wildfires, climate change represents “a major source of systemic risk,” the central bank said.

Wildfires are expected to create more damage than floods and rising sea levels, which will affect northern countries more. For example, in Greece, more than 90 percent of bank loans are classified as being associated with high physical risks from climate change. In Germany, the share of bank loans is less than 10 percent.

The European Central Bank intends to use the results of this study to inform the climate stress tests it will do on eurozone banks next year.

Fabian Bimmer/Reuters

Volkswagen’s truck unit is facing “severe difficulties” in buying semiconductors that are weighing on sales at a time when demand is rising, the company warned on Wednesday, offering the latest sign of how a global chip shortage is holding back economic growth.

Traton, the maker of Scania, MAN and Navistar trucks, said it was also suffering from shortages of other critical components.

The shortages come as the global economy is slowly rebounding as new coronavirus cases decline and consumers spend money saved during pandemic lockdowns. To meet demand, the company is cannibalizing parts from finished but unsold vehicles and installing them in trucks for which there are firm orders.

As a result, sales from July through September will be “significantly lower than planned” even though customers are clamoring for trucks, Traton said. “Supply chain difficulties will have a stronger impact than expected.” Volkswagen owns 90 percent of the truck maker, which has a separate listing on the stock market.

Raw materials like steel and aluminum have also become scarcer, in part because manufacturers did not expect demand to bounce back so quickly. The shortages are preventing the global economy from recovering from the pandemic as fast as it could otherwise.

“It is not just the semiconductor issues stretching global supply chains at the moment — it is also the shortage of numerous other products,” Matthias Gründler, the chief executive of Traton, said in a statement. He said he expected the shortages to continue into 2022.

Trucks increasingly come with autonomous driving features and other sophisticated electronics that require semiconductors. Chip makers were not prepared for the increased demand from vehicle manufacturers, and have struggled to maintain production in the face of lockdowns in places like Malaysia, an important semiconductor producer.

A top executive at Daimler’s truck unit said earlier this week that it, too, was suffering. “The situation has become more challenging for us” in the third quarter, Karin Radstrom, the head of Mercedes-Benz brand trucks, said during an online news conference on Tuesday.

“We are currently really fighting for every truck to get it out of the gate,” Ms. Radstrom said, “because the customer demand is very, very good.”

  • Stocks on Wall Street rebounded in midday trading on Wednesday, rising after four straight days of losses. The S&P 500 rose 1 percent, while the Nasdaq composite was 0.9 percent higher.

  • The Federal Reserve is finishing up its two-day policy meeting on Wednesday, and officials are expected to signal that they will soon slow their large bond-buying program. The Fed, which will release its policy statement at 2 p.m., is also expected to update its quarterly projections for growth, unemployment and inflation through 2024.

  • European stock indexes also rose, with the Stoxx Europe 600 up 1 percent.

  • FedEx fell more than 8 percent in midday trading. The shipping service said in its quarterly financial performance report that supply chain disruptions had slowed U.S. domestic parcel demand compared with the company’s earlier forecast. The company also reported an estimated $450 million year over year increase in costs because of a constrained labor market.

  • The House on Tuesday approved legislation to keep the government funded through early December, lift the limit on federal borrowing through Dec. 16, 2022. Senate Democrats are expected to take up the bill in the coming days, with expectations for Republicans to vote against it.

Erin Griffith (@eringriffith) and Erin Woo (@erinkwoo), two of our tech reporters, are covering the trial of Elizabeth Holmes, who dropped out of Stanford University to create the blood testing start-up Theranos at age 19 and built it to a $9 billion valuation and herself into the world’s youngest self-made female billionaire — only to flame out in disgrace after Theranos’s technology was revealed to have problems.

Follow along here or on Twitter as she is tried on 12 counts of wire fraud and conspiracy to commit wire fraud. The trial is generally held Tuesdays, Wednesdays and Fridays.

Erin Griffith headshot

1 hour ago

Erin Griffith

Gould’s testimony lasted around 15 minutes – From behind a clear mask, she got emotional discussing her experience finding out via Theranos tests that, after three miscarriages, her fourth pregnancy was not viable. The happy ending is that it was. She had a baby. Adjourned!

Erin Griffith headshot

2 hours ago

Erin Griffith

Defense wraps up by pointing out that Zachman’s practice had many many test results from Theranos beyond Ms. Gould that seemed to be fine. Judge Davila is eager to keep going, even though we are over on time today. Brittany Gould takes the stand.

Erin Griffith headshot

3 hours ago

Erin Griffith

Defense works to chip away at the testimony by implying that the Theranos test results simply existed on a different scale and should have been “rebaselined.” Also noted that Holmes’s brother Christian, who responded to Zachman’s complaint about the results, apologized.

Erin Griffith headshot

3 hours ago

Erin Griffith

Oh my, Theranos offered Zachman a “corrected” version of the results which simply removed a decimal point but the she says numbers still wouldn’t have made sense within the context of a viable pregnancy or a loss of one.

Erin Griffith headshot

3 hours ago

Erin Griffith

“This circumstance was very impactful to me as it stood out as such a red flag for the pregnancy.”

  • Netflix announced on Wednesday that it had acquired the Roald Dahl Story Company, which manages the rights to Dahl’s characters and stories including “Charlie and the Chocolate Factory” and “Matilda.” Dahl’s books have been translated into 63 languages and have sold more than 300 million copies worldwide. “This acquisition builds on the partnership we started three years ago to create a slate of animated TV series,” Netflix said in a statement, adding that it was seeking to build a “unique universe” across multiple platforms. Financial details were not disclosed.

  • China Evergrande Group, the real estate giant, said it could repay at least some of its debts, noting in a vaguely worded stock market filing on Wednesday that it had reached an arrangement with Chinese investors to make a payment due the following day, without offering details. It did not mention an $83.5 million payment due Thursday to foreign bondholders. The company, which owes creditors $300 billion, could miss other payments this week, with prospects for a bailout unclear.

  • Macy’s said on Tuesday that it planned to hire 76,000 full- and part-time employees at its stores, call centers and distribution and fulfillment centers during the holidays, with more than a third of those jobs expected to continue beyond the season.

  • The Justice Department filed an antitrust suit on Tuesday against American Airlines and JetBlue, saying a growing alliance between the two carriers had created a “de facto merger” in the New York and Boston markets, reducing competition and hurting consumers. The suit said the arrangement between the airlines reduced the incentive for them to compete in the Northeast and elsewhere and would “cause hundreds of millions of dollars in harm to air passengers across the country through higher fares and reduced choice.”

Nationally, car rentals have fallen 40 percent from their summer peaks

Average daily rate

Note: Excludes taxes, fees and insurance. Source: Hopper

Few markets better crystallize the topsy-turvy nature of the American economy during the pandemic than the rental car business.

The industry shows how economic decisions made in 2020 keep having serious implications in 2021, Quoctrung Bui and Neil Irwin report for The New York Times. Other industries have experienced less severe swings, but the same basic dynamics explain why inflation and product shortages jumped earlier in the year — and why they are starting to abate but are not yet close to prepandemic norms.

In the spring and summer of 2020, the industry was in a state of collapse as people stopped traveling. With a glut of cars, prices plummeted. Major rental car companies sold off hundreds of thousands of vehicles, and Hertz went bankrupt.

Fast-forward a year, and Americans were ready to travel again — but the rental car industry was stuck with its diminished fleets. And it faced challenges replenishing those fleets quickly, because automakers were facing supply constraints of their own.

“In the spring of 2020, nobody really knew what to expect,” said Neil Abrams, president of Abrams Consulting Group and a former Hertz executive. “I’ve seen cycles, recessions, peaks and valleys, but nothing quite like this.”

With demand surging and the supply of cars still depressed, rental car companies raised prices. But high prices have a funny way of fixing themselves, at least to some degree:

  • Those considering renting will toy around with different modes of transport if rental cars become very expensive.

  • Some may decide to optimize their itinerary by using a mix of Uber or public transit to get around.

  • Others may turn toward alternatives like Turo or even U-Haul for a car.

Mr. Abrams expects some of the shifts that have taken place in the industry — including higher prices — to be lasting.

“The industry has learned how to do business a different way, and I think the customer is going to get used to this paradigm shift in how cars are rented and how they’re priced,” he said.

Al Drago for The New York Times

President Biden is expected to host a series of meetings on Wednesday with Democratic lawmakers, including party leaders, as he works to smooth over deep divisions within his party about his multi-trillion-dollar domestic agenda.

In a series of Oval Office meetings throughout the day, Mr. Biden is expected to huddle with the two top Democrats, Speaker Nancy Pelosi of California and Senator Chuck Schumer of New York, the majority leader, and separately with lawmakers from across the ideological range of his party, according to people familiar with the plans, who disclosed them on condition of anonymity.

The flurry of meetings comes as both pieces of his economic agenda — a $1 trillion bipartisan infrastructure bill and a second, expansive $3.5 trillion social safety net package that supporters intend to push through with only Democratic votes — appear to be on a collision course, with moderate and liberal Democrats jockeying for leverage in a narrowly divided Congress.

In essence, Mr. Biden’s entire agenda faces a make-or-break moment, with an array of policy disagreements — over how large the domestic policy package should be and how to pay for and structure the programs it funds — standing in the way of action on any of it.

The lawmakers invited to negotiate with Mr. Biden in the Oval Office on Wednesday include centrist Representatives Josh Gottheimer of New Jersey, Mike Thompson of California and Stephanie Murphy of Florida, as well as Representative Pramila Jayapal, the chairwoman of the Congressional Progressive Caucus.

Senator Bernie Sanders, the liberal independent from Vermont who chairs the Budget Committee, Ron Wyden of Oregon, the chairman of the Finance Committee and Patty Murray of Washington, a member of Democratic leadership are also slated to head to the White House, as are Senators Jon Tester, from conservative-leaning Montana, and Mark Warner of Virginia.

Senators Joe Manchin III of West Virginia and Kyrsten Sinema of Arizona, centrists who have balked at the price tag of the social safety net plan, also plan to attend, according to their offices.

“We’ve got to do some negotiating moving forward,” Mr. Tester said on Wednesday. “I don’t think that’s a big secret.”

Liberal Democrats in the House remain adamant that they will withhold their votes for the infrastructure bill, which passed the Senate earlier this year, until that chamber approves the $3.5 trillion package. Without their backing, Democrats are almost certain to fall short of the votes they need to win approval of the infrastructure measure in the House, where Ms. Pelosi has committed to bringing it up by Monday.

Representative Ro Khanna, Democrat of California, said Wednesday morning that liberals could not negotiate a final package if more conservative Democrats would not present a counteroffer to the $3.5 trillion measure they have agreed to.

At the very least, he said, Democrats of all stripes need an ironclad, public agreement on a total spending number over 10 years and some core elements that would be in the package, such as an expanded, permanent child care tax credit, a per-child tax credit, and some aggressive climate change provisions, such as a clean energy standard.

Ms. Jayapal is preparing to make the case to Mr. Biden that linking the infrastructure bill to the social policy measure is not a matter of political horse-trading, but a substantive demand.

Liberal lawmakers, she argues, would not have agreed to a traditional infrastructure package funding roads, bridges and tunnels that will promote fossil fuel usage unless they knew a substantial climate change measure would also be enacted, to ensure the vehicles on those new highways would be electric, with a bolstered electricity infrastructure to support them.

For weeks, progressives have insisted that their support for the infrastructure package was contingent on the scope and success of the larger package, which carries most of their ambitions. Democrats plan to push through that bill under a fast-track budget process known as reconciliation that shields it from a filibuster, but because of their slim margins of control in the House and Senate, it can only pass if virtually every member of their party supports it.

With Ms. Sinema and Mr. Manchin warning that they will not back a package so large, and moderates in the House reluctant to vote on a measure that will not become law, Ms. Pelosi has said she will not proceed with the reconciliation bill until it is clear what the Senate can pass.

Robert Beatty

Today in the On Tech newsletter, Shira Ovide writes that many of the delivery businesses that have sprung up in the last few years make no financial sense and may be turning us into monsters.


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