After a Big Rate Increase, Markets Fear a Recession
More jumbo rate increases ahead.Credit…Jacquelyn Martin/STF, via Associated Press
The forecast calls for pain
For a third straight meeting, the Fed raised its benchmark interest rate by 75 basis points — and it’s hardly done. Count on an additional 1.25 percentage points’ worth of increases this year, the Fed chair Jay Powell said yesterday, which would bring the Fed funds rate to 4.4 percent by the end of 2022, and 4.6 percent next year.
The effects of this rapid-fire tightening — there’s a wide consensus expecting yet another 75-basis-point increase in November — will be felt across the labor, housing and stock markets, economists warn. Here’s what to watch for:
Recession: By raising borrowing costs, central banks across the developed world are hoping to cool an inflation rate that’s running at 40-year highs. “I wish there were a painless way to do that,” Powell said at yesterday’s news conference. “There isn’t.” At no point did Powell say a recession was his base-case projection, though economists at Nomura expect the U.S. to enter one this year.
Layoffs: The Fed now sees the unemployment rate rising to 4.4 percent next year, up from 3.7 percent now. That would mean the loss of 1.2 million jobs, Omair Sharif, founder of Inflation Insights, told The Times’s Jeanna Smialek. “The U.S. economy has entered a recession every time the unemployment rate has risen by at least 50bp [basis points] in the last 75 years,” Michael Gapen, the chief U.S. economist at Bank of America, wrote in a note to clients.
Falling stocks, rising bond yields: Powell’s “painless” comments triggered a widespread sell-off in risky assets yesterday, leading to a 1.7 percent drop in the S&P 500. Markets in Asia and Europe are lower this morning, and U.S. futures point to another rough open. The Dow Jones industrial average is just 184 points, or 0.6 percent, away from falling below 30,000, and the yields on 10-year Treasuries are set to climb for an eighth straight week.
A chill on the housing market: Mortgage rates this week reached 6.25 percent, a 14-year high, hitting home sales. Sellers may not like it, but Fed policymakers see it as evidence that their more hawkish policy is working. “The deceleration in housing prices that we’re seeing should help bring prices more in line with rents and other housing-market fundamentals. And that’s a good thing,” Powell said yesterday. He added that “a correction” in housing prices might be unavoidable.
HERE’S WHAT’S HAPPENING
Japan moves to shore up the yen. The nation will buy its own currency for the first time in 24 years, after its central bank’s decision to maintain low interest rates sent the price plummeting. The decision underlines the strength of the U.S. dollar against global currencies, and the problems that is causing.
New York’s attorney general accuses Donald Trump of widespread fraud. The former president, his family business and three of his children lied to lenders and insurers by fraudulently overvaluing his assets, according to Letitia James. She is seeking to bar the Trumps from running a business in New York.
Credit Suisse is reportedly thinking of splitting its investment bank into three. The Swiss bank is considering separating its advisory business and a “bad bank,” with assets to be wound down from the rest of its operations, according to The Financial Times. It’s part of Credit Suisse’s latest effort to revive its fortunes.
The Phoenix Suns and Mercury are for sale. Robert Sarver said he planned to sell the N.B.A. and W.N.B.A. teams after an N.B.A. investigation found he had mistreated team employees, leading to a year’s suspension and a $10 million fine. But the ownership structure may make a sale difficult.
BlackRock is under fire again for its E.S.G. stance
BlackRock is getting the squeeze once again from two sides of the culture war.
Earlier this month, the world’s biggest money manager defended its environmental, social and governance-based investment practices to 19 Republican state attorneys who accused it of colluding with climate activists. Now that defense has raised eyebrows with those on the left-hand side of the E.S.G. debate — in particular, the New York City comptroller, Brad Lander, who sent BlackRock’s C.E.O., Larry Fink, a letter yesterday arguing that some of the firm’s recent actions contradicted its previous climate commitments.
BlackRock wrote in its public response to the state A.G.s that it does not pressure the companies it backs to lower their emissions and that it continues to invest in the fossil fuel industry. Lander called these statements “alarming” and asked Fink to explain how BlackRock would create a portfolio that overall generates zero new greenhouse emissions. (It’s not the first time the New York City comptroller has made this sort of demand to BlackRock.)
He hinted that if BlackRock doesn’t honor its prior climate commitments, New York City, which has $44 billion invested with BlackRock in three pension funds that have made climate pledges, might take that money elsewhere.
Red states and blue states are now both using their investments to push political agendas. And both sides are taking aim at BlackRock. In recent years, Fink has more explicitly called on C.E.O.s to consider more than profits. As a result, the money manager has become a favorite target of conservative critics. It has tried to appease them through reassurances that its own research shows climate interests align with investment interests and underscoring that it still invests hundreds of billions of dollars in the fossil-fuel industry. But statements like that just restart the political pressure loop, firing up the company’s critics on the left.
How BlackRock navigates the furor may have significant business implications. For years, the pressure BlackRock faced was in the form of public shaming from protesters and nonbinding shareholder resolutions. But the risks now are to its business, particularly to the $5 trillion of pensions and other funds it manages for large institutions. Texas recently accused BlackRock of boycotting energy companies, violating a 2021 state law that aims to protect the energy industry from climate-minded investing. As a result, BlackRock could be blackballed from managing the billions in retirement funds of Texas government employees.
Republicans take aim at Google’s spam filters
Users of the world’s most popular email platform may find their inboxes flooded with campaign fund-raising messages this fall, after Google’s summer of political struggles.
In recent months, Senate Republicans have struggled with online fund-raising — falling behind Democrats ahead of the midterm elections and endangering the Republican Party’s chance to retake Congress.
Some have blamed algorithmic bias at Google, citing a March 2020 study that found Gmail’s algorithms unintentionally sent conservatives’ fund-raising emails straight to users’ spam folder. Google has said the study’s methodology is flawed; still, the company’s C.E.O., Sundar Pichai, has tried to smooth ruffled feathers in Washington over the matter.
Gmail recently started a pilot program that would change its algorithms and allow emails from approved federal campaigns to bypass spam filters. The program has approved “a small number” of campaigns from both parties and will monitor whether changes to its algorithm improve users’ experience during the election period, a Google spokesman told DealBook, adding, “Users will be in control through a more prominent unsubscribe button.”
Google says the changes are not politically motivated. At a Federal Election Commission hearing last month, a lawyer for the company said the changes were “based on commercial and not political considerations” and are “not merely for promotional consideration or to generate good will.”
But the company is under political pressure. In June, Senator John Thune of South Dakota and other Republicans introduced legislation to curb alleged algorithmic bias against political campaigns. Senator Mitch McConnell of Kentucky, the minority leader, was among many co-sponsors, approving the “push back against companies that use private-sector political censorship to quietly distort our public discourse.” Pichai reportedly visited Washington shortly afterward and floated the bypass remedy in meetings with G.O.P. leaders.
Critics say the Republican search for workarounds raises concerns. The National Taxpayers Union, a fiscally conservative nonprofit organization, argues that Thune’s bill threatens data privacy, creates onerous reporting requirements for companies and could lead to bad actors getting their hands on information about security hacks, rendering systems more vulnerable. Thune did not respond to a request for comment.
With ransomware attacks on the rise, the average annual cost of phishing to companies last year was $14.8 million, digital security researchers at the Ponemon Institute calculate. That’s up from $3.8 million in 2015, with large organizations losing almost $15 million annually, including from compromised business emails.
“If you build two kilometers of track, you can go two kilometers. If you build two kilometers of an airplane runway, you can go around the world.”
— Carlo van de Weijer, director of smart mobility at Eindhoven University of Technology in the Netherlands, on why hyperloop transportation projects may never live up to the promise as an alternative to air travel.
‘Decentralized Ponzi schemes’
JPMorgan Chase’s C.E.O., Jamie Dimon, has been on record for years as being no fan of cryptocurrencies. Though his bank has embraced elements of the crypto ecosystem, Dimon minced few words about digital tokens during a Congressional hearing yesterday.
“I’m a major skeptic on crypto tokens,” Dimon said of digital currencies like Bitcoin. “They are decentralized Ponzi schemes.” It’s a return to language that the JPMorgan chief has used before: He famously called Bitcoin a “fraud” in 2017, even threatening to fire traders who bought or sold it. (Dimon later said he regretted those comments.)
JPMorgan isn’t against crypto entirely. The Wall Street bank has incorporated blockchain technology and a custom token to handle intraday repurchase agreements, and Dimon himself said he’d follow what clients demanded.
Elsewhere, the bank continues to point out where the promise of crypto is falling short. JPMorgan’s global head of payments, Takis Georgakopoulos, said this month that demand for tokens as a form of payment has plummeted as crypto prices have tumbled.
THE SPEED READ
Wall Street lenders may be spooked from financing private-equity megadeals after three banks reportedly found themselves set to lose $500 million on the debt backing the sale of Citrix. (WSJ)
The crypto exchange FTX is said to be in talks to raise $1 billion at a $32 billion valuation. (CNBC)
Citigroup will close its British retail banking business, as part of a wider retrenchment from international consumer banking. (FT)
The Senate ratified its first climate treaty in 30 years, agreeing to phase out some greenhouse gases. (NYT)
A super PAC associated with Donald Trump raised just $40 last month. (FT)
Best of the rest
Jesse Powell is stepping down as the C.E.O. of Kraken, the crypto exchange, after clashes with employees and an investigation over sanctions violations. (NYT)
Masa Son of SoftBank will travel to Seoul to discuss a potential alliance between Arm, the chip designer SoftBank owns, and Samsung. (FT)
Kittyhawk, the air taxi start-up backed by the Google co-founder Larry Page, is shutting down. (WSJ)
Introducing the “Get Hitched Now, Pay Later” wedding. (NYT)
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