The fall of Liz Truss, Britain’s prime minister for just six tumultuous weeks, has plunged the nation into another phase of economic uncertainty.
When Ms. Truss announced her resignation on Thursday as Conservative Party leader, saying she would stand down as prime minister, the markets that had rebelled against her fiscal policies engaged in a weak and short-lived rally. Investors were left wondering who would be the new leader and what lay ahead for Britain’s economic policy. On Friday morning, government bonds were falling, pushing yields higher, and the pound was dropping.
“It’s a leap into the unknown,” said Antoine Bouvet, an interest rates strategist at ING.
Overall the initial reaction, Mr. Bouvet added, suggested that investors expect that a new prime minister will go ahead with fiscal plans generally supported by the market. But he said it was too early to be sure.
“Let’s see who gets elected leader and what they say on fiscal policy,” he said.
The next prime minister, the third this year, will face a long list of economic challenges. Annual inflation topped 10 percent last month as food prices rose at their fastest pace in more than 40 years. Wages haven’t kept up with rising prices, bringing about a cost-of-living crisis and labor unrest. There is a deepening slump in consumer spending with data on Friday showing people were buying less than before the pandemic. Interest rates are set to rise even as the economy stagnates. And Russia’s war in Ukraine is still rippling through the global economy, especially the energy market.
provoked extraordinary volatility in markets at the end of September when her first chancellor of the Exchequer, Kwasi Kwarteng, announced a plan for widespread tax cuts and huge spending, to be financed by borrowing. Amid the highest inflation in four decades and rising interest rates, markets deemed the plan, delivered without any independent assessment, a rupture in Britain’s reputation for fiscal credibility. The pound dropped to a record low, and government bond yields shot up so violently the central bank was forced to intervene to stop a crisis in the pension funds industry.
began to settle markets. However, bond yields remain noticeably higher than they were before the September tax plan was announced, as investors still demand a higher premium to lend to Britain. On Thursday, 10-year government bond yields closed at 3.91 percent, up from 3.50 percent on Sept. 22, the day before Mr. Kwarteng’s policy announcement.
Ms. Truss’s tenure as prime minister, the shortest in British history, was undone by economic policies that harked back to the trickle-down economics of the 1980s, built on the belief that tax cuts for the wealthy were fair and would lead to investment and economic growth that would benefit everyone.
fixed rates have settled higher.
More on the Situation in Britain
Meanwhile, the new government is likely to be focused on restoring the government’s fiscal credibility. Mr. Hunt is set to deliver a “medium-term fiscal plan,” with spending and tax measures, on Oct. 31. He said he expected to make “difficult” spending cuts as he planned to show that debt levels were falling in the medium term.
It will be accompanied by an independent assessment of the fiscal and economic impact of the policies by the Office for Budget Responsibility, a government watchdog.
While markets have cheered the government’s promise to have its policies independently reviewed, questions remain about how the gap in the public finances can be closed. Economists say there is very little room in stretched department budgets to make cuts. That has led to concerns of a return to austerity measures, reminiscent of the spending cuts after the 2008 financial crisis.
“There is a danger,” Mr. Chadha said, “that we end up with tighter fiscal policy than actually is appropriate given the shock that many households are suffering.” This could make it harder to support people suffering amid rising food and energy prices. But Mr. Chadha argues that it’s clear what needs to happen next: a complete elimination of unfunded tax cuts and careful planning on how to support vulnerable households.
The chancellor could also end up having a lot more autonomy over fiscal policy than the prime minister, he added.
“The best outcome for markets would be a rapid rallying of the parliamentary Conservative Party around a single candidate” who would validate Mr. Hunt’s approach and the timing of the Oct. 31 report, Trevor Greetham, a portfolio manager at Royal London Asset Management, said in a written comment.
Three days after the fiscal statement, on Nov. 3, Bank of England policymakers will announce their next interest rate decisions.
Bond investors are trying to parse how the central bank will react to the rapidly changing fiscal news. On Thursday, before Ms. Truss’s resignation, Ben Broadbent, a member of the central bank’s rate-setting committee, indicated that policymakers might not need to raise interest rates as much as markets currently expect. Traders are betting that the bank will raise rates above 5 percent next year, from 2.25 percent.
The bank could raise rates less than expected next year partly because the economy is forecast to shrink over the year. The International Monetary Fund predicted that the British economy would go from 3.6 percent growth this year to a 0.3 percent contraction next year.
That’s a mild recession compared with some other forecasts, but it would only compound the longstanding economic problems that Britain faced, including weak investment, low productivity growth and businesses’ inability to find employees with the right skills. These were among the challenges that Ms. Truss said she would resolve by shaking up the status quo and targeting economic growth of 2.5 percent a year.
Most economists didn’t believe that “Trussonomics,” as her policies were called, would deliver this economic growth. Instead, they predicted the policies would prolong the country’s inflation problem.
Despite the change in leadership, analysts don’t expect a big rally in Britain’s financial markets. The nation’s international standing could take a long time to recover.
“It takes years to build a reputation and one day to undo it,” Mr. Bouvet said, adding, “Investors will come progressively back to the U.K.,” but it won’t be quickly.
The average household in Ghana is paying two-thirds more than it did last year for diesel, flour and other necessities. In Egypt, wheat is so expensive that the government has fallen half a billion dollars short of its budget for a bread subsidy it provides to its citizens. And Sri Lanka, already struggling to control a political crisis, is running out of fuel, food and medical supplies.
A strong dollar is making the problems worse.
Compared with other currencies, the U.S. dollar is the strongest it has been in two decades. It is rising because the Federal Reserve has increased interest rates sharply to combat inflation and because America’s economic health is better than most. Together, these factors have attracted investors from all over the world. Sometimes they simply buy dollars, but even if investors buy other assets, like government bonds, they need dollars to do so — in each case pushing up the currency’s value.
That strength has become much of the world’s weakness. The dollar is the de facto currency for global trade, and its steep rise is squeezing dozens of lower-income nations, chiefly those that rely heavily on imports of food and oil and borrow in dollars to fund them.
But much of the damage is already behind us.
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“We are in a fragile situation,” Mr. El-Erian said. “Country after country is flashing amber, and some are already flashing red.”
Many lower-income countries were already struggling during the pandemic.
Roughly 22 million people in Ghana, or a third of its population, reported a decline in their income between April 2020 and May 2021, according to a survey from the World Bank and Unicef. Adults in almost half of the households with children surveyed said they were skipping a meal because they didn’t have enough money. Almost three-quarters said the prices of major food items had increased.
Then came Russia’s invasion of Ukraine. The war between two of the world’s largest exporters of food and energy led to a big surge in prices, especially for importers like Ghana. Consumer prices have gone up 30 percent for the year through June, according to data from the research firm Moody’s Analytics. For household essentials, annual inflation has reached 60 percent or more this year, the S&P data shows.
To illustrate this, consider the price of a barrel of oil in dollars versus the Ghanaian cedi. At the beginning of October last year, the price of oil stood at $78.52 per barrel, rising to nearly $130 per barrel in March before falling back to $87.96 at the beginning of this month, a one-year increase of 12 percent in dollar terms. Over the same period, the Ghanaian cedi has weakened over 40 percent against the dollar, meaning that the same barrel of oil that cost roughly 475 cedi a year ago now costs over 900 cedi, almost twice as much.
Adding to the problem are large state-funded subsidies, some taken on or increased through the pandemic, that are now weighing on government finances.
Ghana’s president cut fuel taxes in November 2021, losing roughly $22 million in projected revenue for the government — the latest available numbers.
In Egypt, spending on what the government refers to as “supply commodities,” almost all of which is wheat for its long-running bread subsidy, is expected to come in at around 7 percent of all government spending this year, 12 percent higher — or more than half a billion dollars — than the government budgeted.
As costs ballooned throughout the pandemic, governments took on more debt. Ghana’s public debt grew to nearly $60 billion from roughly $40 billion at the end of 2019, or to nearly 80 percent of its gross domestic product from around 63 percent, according to Moody’s.
It’s one of four countries listed by S&P, alongside Pakistan, Nigeria and Sri Lanka, where interest payments alone account for more than half of the government’s revenues.
“We can’t forget that this is happening on the back end of a once-in-a-century pandemic in which governments, to try and support families as best they could, did borrow more,” said Frank Gill, an analyst at S&P. “This is a shock following up on another shock.”
In May, Sri Lanka defaulted on its government debt for the first time in its history. Over the past month, the governments of Egypt, Pakistan and Ghana have all reached out to the International Monetary Fund for a bailout as they struggle to meet their debt financing needs, no longer able to turn to international investors for more money.
“I don’t think there is a lot of appetite to lend money to some of these countries,” said Brian Weinstein, co-head of credit trading at Bank of America. “They are incredibly vulnerable at the moment.”
That vulnerability is already reflected in the bond market.
In 2016, Ghana borrowed $1 billion for 10 years, paying an interest rate of just over 8 percent. As the country’s financial position has worsened and investors have backed away, the yield — indicative of what it would now cost Ghana to borrow money until 2026 — has risen to above 35 percent.
It’s an untenable cost of debt for a country in Ghana’s situation. And Ghana is not alone. For bonds that also mature in 2026, yields for Pakistan have reached almost 40 percent.
“We have concerns where any country has yields that calls into question their ability to refinance in public markets,” said Charles Cohen, deputy division chief of monetary and capital market departments at IMF.
The risk of a sovereign debt crisis in some emerging markets is “very, very high,” said Jesse Rogers, an economist at Moody’s Analytics. Mr. Rogers likened the current situation to the debt crises that crushed Latin America in the 1980s — the last time the Fed sought to quell soaring inflation.
Already this year, more than $80 billion has been withdrawn from mutual funds and exchange-traded funds — two popular types of investment products — that buy emerging market bonds, according to EPFR Global, a data provider. As investors sell, the United States is often the beneficiary, further strengthening the dollar.
“It’s by far the worst year for outflows the market has ever seen,” said Pramol Dhawan, head of emerging markets at Pimco.
Even citizens in some of these countries are trying to exchange their money for dollars, fearful of what’s to come and of further currency depreciation — yet inadvertently also contributing to it.
“For pockets of emerging markets, this is a really challenging backdrop and one of the most challenging backdrops we have faced for many years,” Mr. Dhawan said.
In its earnings report, Ally Bank, a big auto loan maker, provided data on past-due auto loans in the second quarter for borrowers at a range of income levels. Past-due loans were either at or close to prepandemic levels for borrowers with lower incomes.
Ally declined to provide the same data for earlier quarters, making it impossible to know how quickly past-due loans might have risen. On its earnings call, Jenn LaClair, Ally’s chief financial officer, said, “We have continued to invest in talent and technology to enhance our servicing and collection capabilities and remain confident in our ability to effectively manage credit in a variety of environments.”
Some analysts think the pullback in spending could spread to wealthier households.
“You’re going to see it go up the income scale as the year unfolds with people sitting there, saying, ‘I’ll go without rather than spend this much on that’ or ‘I’ll trade down to something more affordable,’” said Mr. O’Rourke, the JonesTrading strategist. He added that he was waiting for earnings from Macy’s and Nordstrom, which are scheduled to report in August, to see if that was happening.
The concern is that the heavy summer spending that has recently bolstered the earnings of the hospitality industries and the airlines is not sustainable. “There’s a faction of the market that’s quite convinced that when we get to the fall and the bills from the summer spending come home to roost, the consumer will be in a much trickier spot,” Mr. Barnhurst of PGIM said.
An exchange this earnings season reveals how chief executives and companies can keep the economy going, even when they fear that a downturn may be at hand.
Jamie Dimon, the chief executive of JPMorgan Chase, warned in May that storm clouds were gathering over the economy. On JPMorgan’s second-quarter earnings call, Mike Mayo, an analyst at Wells Fargo, asked Mr. Dimon why the bank had committed to investing such large sums this year if things could turn dire.
SAN FRANCISCO — Last year, Bolt Financial, a payments start-up, began a new program for its employees. They owned stock options in the company, some worth millions of dollars on paper, but couldn’t touch that money until Bolt sold or went public. So Bolt began providing them with loans — some reaching hundreds of thousands of dollars — against the value of their stock.
In May, Bolt laid off 200 workers. That set off a 90-day period for those who had taken out the loans to pay the money back. The company tried to help them figure out options for repayment, said a person with knowledge of the situation who spoke anonymously because the person was not authorized to speak publicly.
Bolt’s program was the most extreme example of a burgeoning ecosystem of loans for workers at privately held tech start-ups. In recent years, companies such as Quid and Secfi have sprung up to offer loans or other forms of financing to start-up employees, using the value of their private company shares as a sort of collateral. These providers estimate that start-up employees around the world hold at least $1 trillion in equity to lend against.
start-up economy now deflates, buffeted by economic uncertainty, soaring inflation and rising interest rates, Bolt’s situation serves as a warning about the precariousness of these loans. While most of them are structured to be forgiven if a start-up fails, employees could still face a tax bill because the loan forgiveness is treated as taxable income. And in situations like Bolt’s, the loans may be difficult to repay on short notice.
badly burned by loans related to their stock options.
Ted Wang, a former start-up lawyer and an investor at Cowboy Ventures, was so alarmed by the loans that he published a blog post in 2014, “Playing With Fire,” advising against them for most people. Mr. Wang said he got a fresh round of calls about the loans anytime the market overheated and always felt obligated to explain the risks.
“I’ve seen this go wrong, bad wrong,” he wrote in his blog post.
Start-up loans stem from the way workers are typically paid. As part of their compensation, most employees at privately held tech companies receive stock options. The options must eventually be exercised, or bought at a set price, to own the stock. Once someone owns the shares, he or she cannot usually cash them out until the start-up goes public or sells.
Uber and Airbnb put off initial public offerings of stock as long as they could, hitting private market valuations in the tens of billions of dollars.
That meant many of their workers were bound by “golden handcuffs,” unable to leave their jobs because their stock options had become so valuable that they could not afford to pay the taxes, based on the current market value, on exercising them. Others became tired of sitting on the options while they waited for their companies to go public.
The loans have given start-up employees cash to use in the meantime, including money to cover the costs of buying their stock options. Even so, many tech workers do not always understand the intricacies of equity compensation.
“We work with supersmart Stanford computer science A.I. graduates, but no one explains it to them,” said Oren Barzilai, chief executive ofEquitybee, a site that helps start-up workers find investors for their stock.
Secfi, a provider of financing and other services, has now issued $700 million of cash financing to start-up workers since it opened in 2017. Quid has issued hundreds of millions’ worth of loans and other financing to hundreds of people since 2016. Its latest $320 million fund is backed by institutions, including Oaktree Capital Management, and it charges those who take out loans the origination fees and interest.
So far, less than 2 percent of Quid’s loans have been underwater, meaning the market value of the stock has fallen below that of the loan, said Josh Berman, a founder of the company. Secfi said that 35 percent of its loans and financing had been fully paid back, and that its loss rate was 2 to 3 percent.
congratulatory flourish on Twitter in February, writing that it showed “we simply CARE more about our employees than most.”
The company’s program was meant to help employees afford exercising their shares and cut down on taxes, he said.
Bolt declined to comment on how many laid-off employees had been affected by the loan paybacks. It offered employees the choice of giving their start-up shares back to the company to repay their loans. Business Insider reported earlier on the offer.
Mr. Breslow, who stepped down as Bolt’s chief executive in February, did not respond to a request for comment on the layoffs and loans.
In recent months, he has helped found Prysm, a provider of nonrecourse loans for start-up equity. In pitch materials sent to investors that were viewed by The New York Times, Prysm, which did not respond to a request for comment, advertised Mr. Breslow as its first customer. Borrowing against the value of his stock in Bolt, the presentation said, Mr. Breslow took a loan for $100 million.
The Federal Reserve took its most aggressive step yet to try to tame rapid and persistent inflation, raising interest rates by three-quarters of a percentage point on Wednesday and signaling that it is prepared to inflict economic pain to get prices under control.
The rate increase was the central bank’s biggest since 1994 and could be followed by a similarly sized move next month, suggested Jerome H. Powell, the Fed chair, underscoring just how much America’s unexpectedly stubborn price gains are unsettling Fed officials.
As central bankers drive their policy rate rapidly higher, it will make buying a home or expanding a business more expensive, restraining spending and slowing the broader economy. Officials expect growth to moderate in the coming months and years and predicted that unemployment will rise about half a percentage point to 4.1 percent by late 2024 as their policy squeezes companies and workers.
economic projections they released Wednesday, which would be the highest level since 2008. They also foresee the Fed’s policy rate peaking at 3.8 percent at the end of 2023, up from 2.8 percent when projections were last released in March.
Consumer Price Index jumped 8.6 percent in May from a year earlier, the fastest increase since late 1981. The pace was brisk even after the stripping out of food and fuel prices.
While the Fed’s preferred price gauge — the Personal Consumption Expenditures measure — is climbing slightly more slowly, it remains too hot for comfort as well. And consumers are beginning to expect faster inflation in the months and years ahead, based on surveys, which is a worrying development. Economists think that expectations can be self-fulfilling, causing people to ask for wage increases and accept price jumps in ways that perpetuate high inflation.
“What we’re looking for is compelling evidence that inflationary pressures are abating, and that inflation is moving back down,” Mr. Powell said at his news conference Wednesday, noting that instead the inflation situation has worsened. “We thought that strong action was warranted.”
One Fed official, the president of the Federal Reserve Bank of Kansas City, Esther George, voted against the rate increase. Though Ms. George has historically worried about high inflation and favored higher interest rates, she would have preferred a half-point move in this instance.
Stock prices have been plummeting and bond market signals are flashing red as Wall Street traders and economists increasingly expect that the economy may tip into a recession. On Wednesday, the S&P 500 rose 1.5 percent, climbing after the release of the decision and Mr. Powell’s news conference, most likely because investors had already expected the Fed to make a large move.
The economy remains strong for now, but the Fed’s actions are beginning to have a real-world impact: Mortgage rates have risen sharply and are helping to cool the housing market; demand for consumer goods is showing signs of beginning to slow as borrowing becomes more expensive; and job growth, while robust, has begun to moderate.
While the economic path ahead may be a rocky one, the Fed’s policymakers contend that things would be worse in the long run if they did not act. As prices surge, worker pay is not keeping up. That means that families are falling behind as they try to afford gas, food and rent, even in a very strong labor market.
“You really cannot have the kind of labor market we want without price stability,” Mr. Powell said Wednesday, explaining that what officials want is a job market with lots of job opportunities and rising wages. “It’s not going to happen with the levels of inflation we have.”
The White House has been emphasizing that the Fed plays the key role in bringing down inflation, even as the Biden administration does what it can to reduce some costs for beleaguered consumers and urges companies to improve gas supply.
“The Federal Reserve has a primary responsibility to control inflation,” President Biden wrote in a recent opinion column. He added that “past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this.”
Justin Nelson’s letter, one of the thousands that arrived at the White House this month, said he was proud to vote for President Biden back in 2020. Now he had a request: Would the president please honor a campaign promise and use the enclosed pen to wipe out thousands of dollars he owes in student loans?
The letter-writing campaign — #PensForBiden — is the latest attempt to sway Mr. Biden on a high-stakes dilemma as the midterm elections approach and much of his domestic agenda remains stalled: What to do about the $1.6 trillion that more than 45 million people owe the government?
So far, Mr. Biden has extended the pandemic pause on student loan payments four times, most recently until Aug. 31. Payments have now been on hold for more than two years, over two presidential administrations.
But all that time poses problems. Many of the issues that have long bedeviled the loan system have only grown more complicated during the pause, and receiving bills again will infuriate and frustrate millions of people who feel trapped by a broken system and crushing debt.
progressive wing of his Democratic Party. He backed the idea on the campaign trail in 2020. “I’m going to make sure that everybody in this generation gets $10,000 knocked off of their student debt as we try to get out of this God-awful pandemic,” he told an audience in Miami.
Senate Democrats lack the votes to help make good on that promise, leaving executive action as the only possible pathway. But close allies say some influential members of Mr. Biden’s team have been reluctant for him to do it — some because they disagree with the idea of forgiveness and some because they don’t believe he has the authority.
“He’s got lawyers telling him he shouldn’t,” said Representative James E. Clyburn of South Carolina, the third-ranking House Democrat and a key supporter of Mr. Biden. But Mr. Clyburn, the most senior Black lawmaker in Congress, said presidential actions had brought sweeping changes before, including Abraham Lincoln’s Emancipation Proclamation and Harry Truman’s order banning segregation in the military.
“If executive orders can free slaves and integrate the armed services, it can eliminate debt,” Mr. Clyburn said.
analysis released by the Federal Reserve Bank of New York last week. A separate study by the bank found that surveyed borrowers reported a 16 percent chance of quickly missing a payment if the moratorium ended.
Mr. Nelson, a 32-year-old bank operations associate in Minneapolis, said the pause had freed up $120 a month for home repairs and other expenses.
recent Morning Consult poll found that more than 60 percent of registered voters were in favor of some level of student debt cancellation. But despite Mr. Biden’s campaign promise, his advisers have been divided, three people with knowledge of the discussions said.
Some view debt cancellation as relief for critical constituencies, said the people, who spoke on the condition of anonymity because they were not authorized to speak publicly. Others oppose it as bad policy or because they fear the economic effects of putting more money in consumers’ pockets when inflation is soaring.
But the pressure on Mr. Biden to act has only grown.
Senator Elizabeth Warren of Massachusetts, whose pledge to cancel up to $50,000 per borrower was a centerpiece of her 2020 presidential primary bid, and Senator Chuck Schumer of New York, the majority leader, led more than 90 congressional Democrats in sending Mr. Biden a letter last month asking him to “provide meaningful student debt cancellation.”
voting rights protections and Mr. Biden’s Build Back Better agenda, as reason for the president to take matters into his own hands.
The New Georgia Project, a group focusing on voter registration founded by the gubernatorial candidate Stacey Abrams, has cast debt relief as an action that would serve Mr. Biden’s pledge to put racial equity at the forefront of his presidency.
“Much of your administration’s legislative priorities have been stymied by obstructionist legislators,” the group wrote in a joint letter with the advocacy group the Debt Collective that was reviewed by The New York Times. “Student debt cancellation is a popular campaign promise that you, President Biden, have the executive power to deliver on your own.”
announcing the latest pause extension last month, Mr. Biden’s press secretary, Jen Psaki, said he “hasn’t ruled out” the idea.
But Mr. Biden’s power to act unilaterally remains an open legal question.
Last April, at Mr. Biden’s request, the Education Department’s acting general counsel wrote an analysis of the legality of canceling debt via executive action. The analysis has not been released; a version provided in response to public records requests was fully redacted.
Proponents of forgiveness say the education secretary has broad powers to modify or cancel debt, which both the Trump and Biden administrations have leaned on to carry out the payment freeze that started in March 2020.
Legal challenges would be likely, although who would have standing is unclear. A Virginia Law Review article this month argued that the answer might be no one: States, for example, have little say in the operation of a federal loan system.
scathing criticism from government auditors and watchdogs, with even basic functions sometimes breaking down.
Some problems are being addressed. The Biden administration has wiped out $17 billion in debt for 725,000 borrowers by expanding and streamlining forgiveness programs for public servants and those who were defrauded by their schools, among others. Last week, it offered millions of borrowers added credit toward forgiveness because of previous payment-counting problems.
But there’s much still to do. The Education Department was deluged by applicants after it expanded eligibility for millions of public servants. And settlement talks in a class-action suit by nearly 200,000 borrowers who say they were defrauded by their schools recently broke down, setting up a trial this summer.
will be restored to good standing.
Canceling debt could make addressing all this easier, advocates say. Forgiving $10,000 per borrower would wipe out the debts of 10 million or more people, according to different analyses, which would free up resources to deal with structural flaws, proponents argue.
“We’ve known for years that the system is broken,” said Sarah Sattelmeyer, a higher-education project director at New America, a think tank. “Having an opportunity, during this timeout, to start fixing some of those major issues feels like a place where the Education Department should be focusing its attention.”
Voters like Ashleigh A. Mosley will be watching. Ms. Mosley, 21, a political science major at Albany State University in Georgia, said she had been swayed to vote for Mr. Biden because of his support for debt cancellation.
Ms. Mosley, who also attended Alabama A&M University, has already borrowed $52,000 and expects her balance to grow to $100,000 by the time she graduates. The debt already hangs over her head.
“I don’t think I’m going to even have enough money to start a family or buy a house because of the loans,” she said. “It’s just not designed for us to win.”
Mr. Bernstein stipulated that while debt financing has its place, the White House also believes it has firm limits within its agenda. “The outcome of all this is going to be some mix of progressively raised revenues and investments in essential public goods with a high return financed by some borrowing.”
Looking Ahead, and to the Past
What would have to happen for these rock-bottom borrowing costs to rise significantly? There could be a crisis of confidence in Fed policy, a geopolitical crisis or steep increases in the Fed’s key interest rates in an attempt to kill off inflation. In a more easily imagined situation, some believe that if inflation remains near its current levels into the second half of the year, bond buyers may lose patience and reduce purchases until yields are more in tune with rising prices.
The resulting higher interest payments on debt would force budget cuts, said Marc Goldwein, the senior policy director at the Committee for a Responsible Federal Budget. Mr. Goldwein’s organization, which pushes for balanced budgets, estimated that even under this past year’s low rates, the federal government would spend over $300 billion on interest payments — more than its individual outlays on food stamps, housing, disability insurance, science, education or technology.
Last month, Brian Riedl, a senior fellow at the right-leaning Manhattan Institute, published a paper titled “How Higher Interest Rates Could Push Washington Toward a Federal Debt Crisis.” It concludes that “debt is already projected to grow to unsustainable levels even before any new proposals are enacted.”
The offsetting global and demographic trends that have been pushing rates down, Mr. Reidl writes, are an “accidental, and possibly temporary, subsidy to heavy-borrowing federal lawmakers.” Assuming that those trends will endure, he said, would be like becoming a self-satisfied football team that “managed to improve its overall win-loss record over several seasons — despite a rapidly worsening defense — because its offense kept improving enough to barely outscore its opponents.”
But at least one historical trend suggests that rates will remain tame: an overall decline in real interest rates worldwide dating back six centuries.
A paper published in 2020 by the Bank of England and written by Paul Schmelzing, a postdoctoral research associate at the Yale School of Management, found that as political and financial systems have globalized, innovated and matured, defaults among the safest borrowers — strong governments — have continuously declined. According to his paper, one ramification may be that “irrespective of particular monetary and fiscal responses, real rates could soon enter permanently negative territory,” yielding less than the rate of inflation.
For two years, the stock market has been largely able to ignore the lived reality of Americans during the pandemic — the mounting coronavirus cases, the loss of lives and livelihoods, the lockdowns — because of underlying policies that kept it buoyant.
Investors can now say goodbye to all that.
Come 2022, the Federal Reserve is expected to raise interest rates to fight inflation, and government programs meant to stimulate the economy during the pandemic will have ended. Those policy changes will cause investors, businesses and consumers to behave differently, and their actions will eventually take some air out of the stock market, according to analysts.
“It’s going to be the first time in almost two years that the Fed’s incremental decisions might force investors or consumers to become a little more wary,” said David Schawel, the chief investment officer at Family Management Corporation, a wealth management firm in New York.
At year’s end, the overarching view on Wall Street is that 2022 will be a bumpier ride, if not quite a roller coaster. In a recent note, analysts at J.P. Morgan said that they expected inflation — currently at 6.8 percent — to “normalize” in coming months, and that the surge of the Omicron variant of the coronavirus was unlikely to lower economic growth.
16 percent gain during the first year of the pandemic. The index hit 70 new closing highs in 2021, second only to 1995, when there were 77, said Howard Silverblatt, an analyst at S&P Dow Jones Indices. Shares on Friday fell slightly.
The market continued to rise through political, social and economic tensions: On Jan. 7, the day after a pro-Trump mob stormed the U.S. Capitol, the S&P set another record. Millions of amateur investors, stuck at home during the pandemic, piled into the stock market, too, buying up shares of all kinds of companies — even those that no one expects will earn money, like the video game retailer GameStop.
What to Know About Inflation in the U.S.
Wall Street also remained bullish on business prospects in China despite Beijing’s growing tension with the United States and tightening grip on Chinese companies. Waves of coronavirus variants, from Delta to Omicron, and a global death toll that crossed five million did not deter the stock market’s rise; its recovery after each bout of panic was faster than the previous one.
“2021 was a terrific year for the equity markets,” said Anu Gaggar, the global investment strategist for Commonwealth Financial Network, in an emailed note. “Between federal stimulus keeping the economy going, easy monetary policy from the Fed keeping markets liquid and interest rates low, and the ongoing medical improvement leading to surprising growth, markets have been in the best of all possible worlds.”
400 private companies raised $142.5 billion in 2021. But investors had sold off many of the newly listed stocks on the New York Stock Exchange or Nasdaq by the end of the year. The Renaissance IPO exchange-traded fund, which tracks initial public offerings, is down about 9 percent for the year.
Shares of Oatly, which makes an oat-based alternative to dairy milk, soared 30 percent when the company went public in May but are now trading 60 percent lower than their opening-day closing price. The stock-trading start-up Robinhood and the dating app Bumble, two other big public debuts, were down about 50 percent for 2021.
supply chain disruptions stemming from the pandemic. Prices for used cars skyrocketed amid a global computer chip shortage. As Covid-19 vaccination rates improved, businesses trying to reopen had to raise wages to attract and retain employees. Consumer prices climbed 5.7 percent in November from a year earlier — the fastest pace since 1982.
But even when “inflation” had become a buzzword worthy of a headline in The Onion, the stock market appeared slow to react to price increases.
“The market is on the side that inflation is transitory,” said Harry Mamaysky, a professor at Columbia Business School. “If it’s not and the Fed needs to go in and raise interest rates to tame inflation, then things could get a lot worse in terms of markets and economic growth.”
And that is what the Fed has signaled it will do in 2022.
When interest rates go up, borrowing becomes more expensive for both consumers and companies. That can hurt profit margins for companies and make stocks less attractive to investors, while sapping consumer demand because people have less money to spend if their mortgage and other loan payments go up. Over time, that tends to deflate the stock market and reduce demand, which brings inflation back under control.
loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
Mr. McBride said the values of many stocks were being supported by extremely low yields on Treasury bonds, especially the 10-year yield, which has held to about 1.5 percent.
“If that yield moves up, investors are going to re-evaluate how much they’re willing to pay for per dollar of earnings for stocks,” he said. Even if corporate profits — which were strong in 2021 — continue to grow in 2022, he added, they are unlikely to expand “at a pace that continues to justify the current price of stocks.”
quicken the pace of pulling back on that aid, set to finish in March.
“The nightmare scenario is: The Fed tightens and it doesn’t help,” said Aaron Brown, a former risk manager of AQR Capital Management who now manages his own money and teaches math at New York University’s Courant Institute of Mathematical Sciences. Mr. Brown said that if the Fed could not orchestrate a “soft landing” for the economy, things could start to get ugly — fast.
And then, he said, the Fed may have to take “very aggressive action like a rate hike to 15 percent, or wage and price controls, like we tried in the ’70s.”
By an equal measure, the Fed’s moves, even if they are moderate, could also cause a sell-off in stocks, corporate bonds and other riskier assets, if investors panic when they realize that the free money that drove their risk-taking to ever greater extremes over the past several years is definitely going away.
Sal Arnuk, a partner and co-founder of Themis Trading, said he expected 2022 to begin with something like “a hiccup.”
“China and Taiwan, Russia and Ukraine — if something happens there or if the Fed surprises everyone with the speed of the taper, there’s going to be some selling,” Mr. Arnuk said. “It could even start in Bitcoin, but then people are going to start selling their Apple, their Google.”
As Federal Reserve Chair Jerome H. Powell and Treasury Secretary Steven Mnuchin scrambled to save faltering markets at the start of the pandemic last year, America’s top economic officials were in near-constant contact with a Wall Street executive whose firm stood to benefit financially from the rescue.
Laurence D. Fink, the chief executive of BlackRock, the world’s largest asset manager, was in frequent touch with Mr. Mnuchin and Mr. Powell in the days before and after many of the Fed’s emergency rescue programs were announced in late March. Emails obtained by The New York Times through a records request, along with public releases, underscore the extent to which Mr. Fink planned alongside the government for parts of a financial rescue that his firm referred to in one message as “the project” that he and the Fed were “working on together.”
While some conversations were previously disclosed, the newly released emails, together with public calendar records, show the extent to which economic policymakers worked with a private company as they were drawing up a response to the financial meltdown and how intertwined BlackRock has become with the federal government.
60 recorded calls over the frantic Saturday and Sunday leading up to the Fed’s unveiling on Monday, March 23, of a policy package that included its first-ever program to buy corporate bonds, which were becoming nearly impossible to sell as investors sprinted to convert their holdings to cash. Mr. Mnuchin spoke to Mr. Fink five times that weekend, more than anyone other than the Fed chair, whom he spoke with nine times. Mr. Fink joined Mr. Mnuchin, Mr. Powell and Larry Kudlow, who was the White House National Economic Council director, for a brief call at 7:25 the evening before the Fed’s big announcement, based on Mr. Mnuchin’s calendars.
book on funds.
On March 24, 2020, the New York Fed announced that it had again hired BlackRock’s advisory arm, which operates separately from the company’s asset-management business but which Mr. Fink oversees, this time to carry out the Fed’s purchases of commercial mortgage-backed securities and corporate bonds.
BlackRock’s ability to directly profit from its regular contact with the government during rescue planning was limited. The firm signed a nondisclosure agreement with the New York Fed on March 22, restricting involved officials from sharing information about the coming programs.
were contracting and its business outlook hinged on what happened in certain markets.
While the Fed and Treasury consulted with many financial firms as they drew up their response — and practically all of Wall Street and much of Main Street benefited — no other company was as front and center.
Simply being in touch throughout the government’s planning was good for BlackRock, potentially burnishing its image over the longer run, Mr. Birdthistle said. BlackRock would have benefited through “tons of information, tons of secondary financial benefits,” he said.
Mr. Mnuchin could not be reached for comment. Asked whether top Fed officials discussed program details with Mr. Fink before his firm had signed the nondisclosure agreement, the Fed said Mr. Powell and Randal K. Quarles, a Fed vice chair who also appears in the emails, “have no recollection of discussing the terms of either facility with Mr. Fink.”
“Nor did they have any reason to do so because the Federal Reserve Bank of New York handled the process with great care and transparency,” the central bank added in its statement.
Brian Beades, a spokesman for BlackRock, highlighted that the firm had “stringent information barriers in place that ensure separation between BlackRock Financial Markets Advisory and the firm’s investment business.” He said it was “proud to have been in a position to assist the Federal Reserve in addressing the severe downturn in financial markets during the depths of the crisis.”
Daily Business Briefing
The disclosed emails between Fed and BlackRock officials — 11 in all across March and early April — do not make clear whether the company knew about any of the Fed and Treasury programs’ designs or whether they were simply providing market information.
Fed chair’s official schedule from that March. Those calendars generally track scheduled events, and may have missed meetings in early 2020 when staff members were frantically working on the market rescue and the Fed was shifting to work from home, a central bank spokesman said.
Mr. Powell’s calendars did show that he talked to Mr. Fink in March, April and May, and he has previously answered questions about those discussions.
“I can’t recall exactly what those conversations were, but they would have been about what he is seeing in the markets and things like that, to generally exchanging information,” Mr. Powell said at a July news conference, adding that it wasn’t “very many” conversations. “He’s typically trying to make sure that we are getting good service from the company that he founded and leads.”
BlackRock’s connections to Washington are not new. It was a critical player in the 2008 crisis response, when the New York Fed retained the firm’s advisory arm to manage the mortgage assets of the insurance giant American International Group and Bear Stearns.
Several former BlackRock employees have been named to top roles in President Biden’s administration, including Brian Deese, who heads the White House National Economic Council, and Wally Adeyemo, who was Mr. Fink’s chief of staff and is now the No. 2 official at the Treasury.
in early 2009 to $7.4 trillion in 2019. By the end of last year, they were $8.7 trillion.
As it expanded, it has stepped up its lobbying. In 2004, BlackRock Inc. registered two lobbyists and spent less than $200,000 on its efforts. By 2019 it had 20 lobbyists and spent nearly $2.5 million, though that declined slightly last year, based on OpenSecrets data. Campaign contributions tied to the firm also jumped, touching $1.7 million in 2020 (80 percent to Democrats, 20 percent to Republicans) from next to nothing as recently as 2004.
short-term debt markets that came under intense stress as people and companies rushed to move all of their holdings into cash. And problems were brewing in the corporate debt market, including in exchange-traded funds, which track bundles of corporate debt and other assets but trade like stocks. Corporate bonds were difficult to trade and near impossible to issue in mid-March 2020. Prices on some high-grade corporate debt E.T.F.s, including one of BlackRock’s, were out of whack relative to the values of the underlying assets, which is unusual.
People could still pull their money from E.T.F.s, which both the industry and several outside academics have heralded as a sign of their resiliency. But investors would have had to take a financial hit to do so, relative to the quoted value of the underlying bonds. That could have bruised the product’s reputation in the eyes of some retail savers.
fund recovery was nearly instant.
When the New York Fed retained BlackRock’s advisory arm to make the purchases, it rapidly disclosed details of those contracts to the public. The firm did the program cheaply for the government, waiving fees for exchange-traded fund buying and rebating fees from its own iShares E.T.F.s back to the New York Fed.
The Fed has explained the decision to hire the advisory side of the house in terms of practicality.
“We hired BlackRock for their expertise in these markets,” Mr. Powell has since said in defense of the rapid move. “It was done very quickly due to the urgency and need for their expertise.”
The United States Department of Agriculture said on Friday that it will begin making loan forgiveness payments in June to thousands of minority farmers as part of the Biden administration’s $4 billion debt relief program.
The initiative, part of the $1.9 trillion economic relief package that Congress passed in March, has been criticized by white farmers, who claim that it is a form of reverse discrimination, and by banks, which have complained they are losing out on profits from lost interest payments. Delays in implementing the program have frustrated Black farmer organizations, whose members have struggled financially for years and received little help from the Trump administration’s farm bailouts last year.
The U.S.D.A. will initially make debt relief payments for about 13,000 loans that were made directly by the agency to minority farmers. The next phase will apply to the approximately 3,000 loans that were made by banks and guaranteed by the U.S.D.A. That will begin “no later” than 120 days from Friday, the agency said.
“The American Rescue Plan has made it possible for U.S.D.A. to deliver historic debt relief to socially disadvantaged farmers and ranchers,” Tom Vilsack, the secretary of agriculture, said in a statement. “U.S.D.A. is recommitting itself to gaining the trust and confidence of America’s farmers and ranchers using a new set of tools provided in the American Rescue Plan to increase opportunity, advance equity and address systemic discrimination in U.S.D.A. programs.”
The U.S.D.A has said that it does not have the authority to cover the banks’ lost interest income.