How Much Can the Fed Do?

Awaiting a big move on rates

Ever since the government reported last week that inflation had sped up in May, economists and investors have been on high alert to see how the Federal Reserve would respond to the threat of surging prices.

Today, we find out. The Fed will conclude its two-day policy meeting and announce what it will do with the short-term interest rate it sets. Before the higher-than-anticipated report on price increases, economists had been predicting that the Fed would raise its benchmark rate by a half-percentage point. Now, many Wall Streeters are saying that an increase of three-quarters of a percentage point is the most likely outcome. If that happens, it would be the first time in decades that the Fed raised interest rates by that much.

The causes of inflation have become a bit clearer. Earlier this year, some economists argued that the central bank should think twice about raising interest rates to slow inflation. Rising prices, they argued, were a result of supply chains that had been snarled up by the pandemic, something interest rates can’t fix. But now that supply chain problems have eased, and prices have nonetheless continued to rise, economists are instead pointing to continued intense demand for goods and services — something the Fed has the tools to tackle.

So far, the Fed’s moves have not had much effect. The central bank began raising interest rates in March from near zero to, most recently, 0.75 percent. But prices have continued to rise. That being said, the rate increases have quickly been felt in certain parts of the economy. Mortgage rates for a 30-year fixed loan reached about 6.3 percent this week, about double what they were at the beginning of the year.

Inflation might actually be even higher than economists think. Last week, the National Bureau of Economic Research published a paper that argued we may be underestimating inflation. Larry Summers, a Harvard professor and former top Obama economic adviser, was one of its authors. Some economists have taken comfort in the idea that inflation is running at an 8.6 percent annual level, still considerably lower than the peak of just under 15 percent in 1980. But the paper’s authors point to changes that the government made to the way it tracks consumer prices in 1983. If you apply the current methodology to economic data from 1980, it shows that prices were rising at about 9 percent annually, they argue. And if you apply the 1980 method to today’s data, you will get a rate that is pretty close to the 1980 peak. Just when it seemed we had finished recycling trends from the ’80s…

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HERE’S WHAT’S HAPPENING

President Biden weighs rolling back tariffs on some Chinese goods to ease inflation. While lifting some levies on China is unlikely to make a big difference, officials have conceded that they have few other options to address surging prices. Separately, Biden, in a letter today, urged major U.S. oil companies to increase refining capacity to ease record-high gasoline prices.

The European Central Bank is holding an emergency meeting to address market turmoil. The urgency of the meeting highlights the concern about borrowing costs for some European countries, as the spread between German bonds and Italian bonds hit its widest level since 2020.

The crypto lender Celsius reportedly hires restructuring lawyers. Celsius, one of the largest crypto lenders, is turning to the law firm Akin Gump Strauss Hauer & Feld for help with its deepening financial problems, The Wall Street Journal reported, days after the company told users that it was pausing all withdrawals because of “extreme market conditions.” Bitcoin fell to an 18-month low today, and other cryptocurrencies also dropped.

JPMorgan wins a trial in London in which Nigeria sought $1.7 billion. An effort by the Nigerian government to force JPMorgan Chase to restore funds that it claimed former officials had looted from a government bank account failed after a judge ruled in favor of the bank. Nigeria had argued that JPMorgan had not done enough to safeguard the country’s money.

The real estate brokerages Compass and Redfin are laying off staff members. The two companies said in regulatory filings that they were cutting about 10 percent and about 6 percent of their employees, respectively. The moves come as rising mortgage rates have begun to dampen the U.S. housing market.

Wall Street bankers expect a rough road

Banking executives gathered in Manhattan this week at a conference hosted by Morgan Stanley. While they talked up the strength of the U.S. economy, they also spent plenty of time discussing inflation, recession and the plunging stock market.

Lananh Nguyen, who covers finance for The Times, highlighted some of the most noteworthy comments for DealBook:

The bear market for stocks and the threat of recession were top of mind. “This correction, this environment — this is what we’re paid to do. I am totally relaxed about it,” said James Gorman, Morgan Stanley’s chief executive. “I don’t think we’re falling into some massive hole over the next few years,” he said. “I think eventually the Fed will get a hold of inflation.” But Gorman warned that things would be “bumpy.”

Weaker equity markets are a bad sign. “The I.P.O. market’s completely shut down,” said Navid Mahmoodzadegan, co-president of Moelis & Company, a boutique investment bank, and so is the market for special purpose acquisition companies.

Despite the gloomy outlook, consumers are still in good financial shape. Bank of America’s clients are still spending “pretty robustly,” and sitting on more money than they had before the coronavirus pandemic, said Alastair Borthwick, the bank’s chief financial officer. Gorman said corporate balance sheets were also healthy.

Lower fees will eat into revenue. Bank of America expects to take a $750 million hit this year after it cut overdraft fees, which have drawn increased scrutiny from regulators. Wells Fargo anticipates that scrapping fees for insufficient funds will cost it $700 million, according to its finance chief, Michael P. Santomassimo.

Mortgage businesses are facing pressure. Wells Fargo’s mortgage banking income is projected to drop 50 percent this quarter compared with the first three months of the year, Santomassimo said. Given the economic uncertainty, the bank is unlikely to release any money from its rainy-day fund, he said. Terry Dolan, U.S. Bank’s chief financial officer, said he also expected revenue from mortgage banking to slide.

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“The tide has gone out in crypto, and we’re seeing that many of these businesses and platforms rested on shaky and unsustainable foundations. The music has stopped.”

— Lee Reiners, a former Fed official who teaches at Duke University’s law school. The pullback in crypto is exposing the precariousness of the structure built around digital assets.

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Uber and Lyft hit a red light in Massachusetts

Gig companies like Uber and Lyft suffered a setback yesterday when a court in Massachusetts rejected a proposed ballot measure that would have classified drivers as independent contractors rather than employees.

The unanimous ruling by a seven-judge panel halted the companies’ $17.8 million campaign to put the issue to voters. The measure would have given drivers some limited benefits but absolved the companies of the need to pay for full health care coverage, time off or other benefits that employees enjoy. The fight in Massachusetts came after a similar initiative in California in 2020 in which gig companies spent more than $200 million on a state ballot proposition. In that case, voters passed the measure, but a judge later found it unconstitutional. Still, the decision in Massachusetts is another sign that gig companies’ business models may not remain viable.

The ballot initiative might have succeeded had it not overreached. It contained a provision buried in obscure language that seemed to try to shield businesses from liability for accidents or crimes involving their drivers. This section was unrelated to the rest of the proposal, the court said, violating a state requirement that all sections of a ballot measure be related. “Policymakers should pay attention to the reality that gig companies’ march toward a future with degraded worker protections is not inevitable,” Terri Gerstein, a workers’ rights lawyer at Harvard Law School’s Labor and Worklife Program, told The Times’s Kellen Browning.

Gig companies are taking their worker classification fight state by state. They tried to strike a labor bargain in New York in 2021 and recently succeeded in Washington State. In May, Seattle passed protections for gig workers, which Uber, Lyft, DoorDash and Instacart opposed. Federal lawmakers have yet to successfully address the issues.

Labor matters aside, gig companies may find their businesses being hit hard by rising gas prices. Inflation is also pushing more workers into the gig economy as they try to make ends meet.

THE SPEED READ

Deals

• Apple won the rights to stream Major League Soccer matches in a 10-year agreement that is reportedly worth $2.5 billion. (FT)

• The Washington Post and Imagine Entertainment struck a deal to create TV and film content. (Axios)

Policy

• The head of the S.E.C. said proposed crypto legislation could undermine regulations that govern broader capital markets. (WSJ)

• Lawmakers said progress was being made on gun legislation in the Senate. (Reuters)

Best of the rest

• A hedge fund backed by the investor Julian Robertson has reportedly shut down after around 13 years of trading. (FT)

• Progressive organizations are being paralyzed by internal meltdowns. (The Intercept)

• Meta, Facebook’s parent, rolled out parental controls for Instagram and virtual reality. (NPR)

• Shares of the agency that manages the South Korean pop band BTS plunged after the band’s members said they would focus on solo projects. (Bloomberg)

• Charles Kernaghan, who showed how U.S. aid subsidized the construction of sweatshops in developing countries, is dead at 74. (NYT)

• Bill Simmons talks about building a podcasting business and trying to figure out video. (Recode)

• “Tech Hiring Is Still Bonkers” (NYT)

• The chaos at Eleven Madison Park since the restaurant’s vegan relaunch. (Insider)

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