What to watch at the Fed’s meeting Wednesday.
The Federal Reserve is expected to announce plans to slow its bond buying while leaving interest rates near zero. But the focus is on what comes next.
The future of Jerome H. Powell as the Fed chair is being debated within the Biden administration, complicating the decision on rates.Credit…Stefani Reynolds for The New York Times
The Federal Reserve’s November policy statement, which will be released on Wednesday afternoon, is expected to include plenty of news about the central bank’s short-term plans to scale back its purchases of government-backed bonds. Yet Wall Street is most acutely focused on what comes next.
Jerome H. Powell, the Fed chair, and his fellow policymakers are expected to announce a plan to slow their $120 billion in monthly asset purchases, which they had been using to support the economy during the pandemic. But with inflation at a three-decade high, investors are eager to hear how worried officials are about prices, and to glean what that might mean for the future of the Fed’s other monetary tool, its policy interest rate.
The Fed’s main rate is its more traditional and more powerful monetary lever, and it has been set to near zero since March 2020. While policymakers are set to leave it at rock bottom this week, other central banks around the world are moving toward rate increases as supply chain snarls and labor shortages help to fuel inflation. Economists and investors increasingly expect that America’s central bank will follow suit next year.
When and how quickly the Fed might lift borrowing costs is important for the economy, because higher rates would cool down growth by slowing borrowing and spending, weighing on business investment and home buying and weakening the job market.
Here’s what to watch for from the Fed.
The Fed’s statement. The policy-setting Federal Open Market Committee will release its statement at 2 p.m. and the central bank is widely expected to announce its plans to taper off bond purchases.
Investors will also look for an update to the Fed’s discussion about inflation. In its September policy statement, the Fed said “inflation is elevated, largely reflecting transitory factors.” The central bank noted that prices had previously run persistently below the Fed’s goal, language that suggested high prices were not a long-term threat.
Mr. Powell’s price forecast. The Fed chair has been clear that he thinks it is time to scale back its bond purchases but not to raise interest rates, and that the pace at which the Fed tapers is not meant to signal when borrowing costs are going to move up. But he and his colleagues have also sounded increasingly worried about price increases, which they had previously argued would be “transitory.” While Mr. Powell is likely to maintain that rapid price increases should fade as the economy normalizes, he will probably also stress the uncertainty around that forecast.
Mr. Powell’s take on inflation expectations. Fed officials had pointed to inflation expectations as an encouraging sign that consumers and businesses expected price gains to simmer down with time. But several price outlook gauges have now moved higher. Most are still at historically normal levels, but the continuing increases are sure to catch policymakers’ attention.
Mr. Powell’s thoughts about the inflation and jobs trade-off. The Fed is trying to avoid raising rates quickly in response to today’s hot inflation, worried that it will cool off the economy just as supply chains begin to right themselves and booming demand for goods fades — a cocktail what would naturally bring inflation back down. That could unnecessarily slow the economy, weakening hiring at time when millions of jobs remain missing compared with before the pandemic. After all, the Fed has two goals: stable prices and full employment.
The global context. High inflation isn’t a problem made in America. Prices are surging across many wealthy nations. The Bank of England could become the first major central bank to lift interest rates when it meets on Thursday. The Reserve Bank of Australia has ditched part of its economy-stoking monetary policy, and the Bank of Canada is walking back its own stimulus package.
The politics. President Biden’s White House studiously avoids commenting on Fed policy in deference to the central bank’s independence. But this is a high-stakes meeting for Mr. Powell. It could well be the last one before the administration announces whether it will keep him or replace him at the central bank’s helm after his term ends early in 2022. Some commentators expect the administration will want a Fed chair who favors growth-friendly policies, but it is also the case that the White House is focused on inflation. Mr. Biden himself has demurred when asked about his criteria and whether he has made a decision yet.
“I’m not going discuss it with you because that’s in train now, we’ll be making those announcements fairly quickly,” Mr. Biden said during a news conference Tuesday when asked about Mr. Powell’s potential renomination.
Tangled supply chains, rising costs for raw goods and soaring consumer demand have combined to push prices rapidly higher in many wealthy countries, prodding central banks around the world to start dialing back some of the extraordinary economic support measures they put in place during the pandemic.
In the United States, the Federal Reserve is expected to on Wednesday announce a plan to slow its large-scale asset purchases, a process its officials want to complete before lifting interest rates down the line. Increasingly, markets expect the Fed to start to lift interest rates from near-zero in the second half of 2022.
The Bank of England is even further along: Investors expect it could raise its main interest rate as soon as Thursday. And in Canada, Australia, Norway and elsewhere, monetary authorities have also begun dial back support or lay the groundwork for a step away from policy help.
The shift away from full-blast economic stimulus comes amid a burst in inflation that has no 21st century precedent. Price gains had been chronically weak for decades, but this year, they have rocketed above the 2 percent rate that most advanced economy central banks target, partly as government relief helped families to spend on everything from houses to furniture.
At the same time, supply has been limited after factories shut down to contain the spread of the coronavirus and shipping routes struggled to respond to rapidly changing consumption patterns. The combination has caused prices to move higher in many places. In the United States, inflation came in at 4.4 percent in the year through September.
Britain’s annual rate of inflation was 3.1 percent in September, and is expected to peak above 4 percent in the coming months. Supply bottlenecks have been exacerbated by Brexit, which has raised trade barriers and contributed to European Union workers leaving the country throughout the pandemic. And in the eurozone, inflation came in at 4.1 percent in October, matching the highest-ever rate of inflation for the bloc.
The Bank of England might become the first major central bank to raise interest rates if it meets investor expectations on Thursday. Andrew Bailey, the central bank’s top official, said the rate of inflation was concerning and that policymakers needed to prevent high inflation from becoming permanent, but the decision on Thursday is likely to split the nine-person monetary policy committee as some members haven’t expressed as much certainty that rates need to rise.
The path forward for the European Central Bank isn’t as clear cut. Last week, Christine Lagarde, the president of the bank, said higher inflation and supply chain bottlenecks would last longer than expected in the region, but would eventually ease over the course of 2022. Financial markets were wrong to expect an increase in interest rates next year, she added, because longer-term inflation expectations remain below the E.C.B.’s target.
European policymakers have taken a small step to prepare for the end of emergency-levels of support. Last month, they slowed their pandemic-era bond buying program, attributing the change to an improved outlook for the economy and higher inflation expectations.
Other central banks have been more blunt about their concerns. The Bank of Canada abruptly ended its bond-buying program last week and signaled that it could raise interest rates sooner than expected, as the forces pushing prices higher proved to be stronger and more persistent than anticipated.
Norway’s central bank has already lifted interest rates and is expected to raise them again in December. The Reserve Bank of Australia announced this week that it was ending its program to cap rates on certain types of debt, citing “earlier than expected progress” toward its inflation target.
U.S. policymakers are preparing to dial back their own bond-buying program in part because doing so will leave their policy in a more nimble position: Officials still expect inflation to fade substantially with time. If it does not, some policymakers want to be done with the bond purchases and in a position to raise interest rates to counteract heady price gains.
The inflationary moment confronting global central banks comes as a surprise. Many had spent years battling tepid inflation, trying to figure out how to coax price gains back to the levels that lay the groundwork for dynamic economies. That situation has rapidly reversed — many still expect the burst of pandemic price pressure to fade, but how quickly and how completely that will happen is perhaps the biggest question in global economics.
“The risks are clearly, now, to longer and more persistent bottlenecks and thus to higher inflation,” Jerome H. Powell, the Fed chair, said recently, adding that the Fed was “in a risk management business, not one of absolute certainty.”
Shares of the rental car company Avis Budget Group more than doubled on Tuesday, in a sudden and unexpected surge that recalled earlier trading manias in GameStop, AMC Entertainment and other so-called meme stocks. Bed Bath & Beyond, the retailer that attracted some interest during previous meme-stock episodes, also rose sharply in late trading.
The moves appeared linked to several factors, including positive corporate announcements, a surge in interest from retail investors and the squeezing of short sellers. Avis released better-than-expected earnings on Tuesday and executives hinted at plans to buy more electric cars. Bed Bath & Beyond announced a partnership with the grocery chain Kroger and updates about it stock buyback program.
More pertinently, perhaps, both companies are popular targets of short sellers, which also makes them appealing for “meme-stock” traders — who get their name because they share ideas, team up and encourage each other on social media, adopting the inscrutable, joke-laden language of viral internet trends. In a short squeeze, a rising price can force investors who had bet against a stock to buy the shares in order to close their positions, multiplying gains.
This year, the mostly amateur investors banded together to pump up the prices of a handful of companies, gaining a self-fulfilling momentum and transforming the firms’ fortunes. Caught off guard by the hyperbolic trading patterns, Congress has held hearings and regulators have issued reports about what to do, if anything, about this powerful new force in the markets.
Shares in Avis opened about 12 percent lower on Wednesday, retaining most of the previous day’s rise, while Bed Bath & Beyond rose more than 50 percent.
Algeria has stopped supplying gas through one of its main pipelines that crosses Morocco, a move that could threaten Spain with reduced supplies or higher prices for natural gas as winter approaches and energy costs are soaring.
The shutdown, which began Monday, is the result of a longstanding territorial feud between Morocco and Algeria. It is meant to deprive Morocco of natural gas, which generates about 10 percent of the country’s electricity, as well as tens of millions of dollars of transit fees paid by users of the pipeline.
But it may also have a heavy impact on Spain, which imports about half of its gas from Algeria. Spaniards, like others throughout Europe, have been struggling with higher electrical bills because of a surge in the price of natural gas. The government in Madrid has had to take emergency measures to soften the blow on consumers.
The pipeline, with a capacity of about 13 billion cubic meters a year, is not the only way for Algerian gas to reach Spain. A smaller undersea pipeline that links Algeria and southern Spain can carry about eight billion cubic meters a year, and Sonatrach, the Algerian national energy company, recently said that it hoped to increase its output to 10.5 billion cubic meters by the end of November.
Algeria is also proposing to make up for Spain’s lost gas by chartering tankers to transport liquefied natural gas across the Mediterranean, even as the cost of such shipments has surged recently.
This week’s move by the Algerian government comes after it broke off diplomatic relations with Morocco in August, in part to protest Morocco’s efforts to control the Western Sahara, a disputed territory. Since then Algeria has also closed off its airspace to Moroccan aircraft.
The dispute was rekindled last year when the Polisario Front, a Western Sahara separatist group backed by Algeria, broke off a longstanding cease-fire with Morocco.
On Sunday the Algerian government said that Sonatrach would end its commercial activities with Morocco because that country’s “hostile” actions threatened “the national unity” of Algeria.
Morocco said the gas shut-off would have an “insignificant” impact on its electricity network. Morocco had been using Algerian gas to power two electricity plants that are partly operated by Spanish companies.
After an emergency meeting in Algiers last week, Spain’s environment and energy minister, Teresa Ribera, said that she was confident that Algeria could “guarantee that everything works in the most fluid and best manner possible” to keep gas supply flowing to Spain.
Some analysts are warning that it will be a challenge for Algeria to raise the capacity of the undersea pipeline or charter more liquefied natural gas ships, given that there is a shortage of available vessels.
Gonzalo Escribano, an energy expert at the Real Instituto Elcano, a Madrid-based think tank, said that Algeria’s pipeline closing could result in Spain paying more for the gas, given the high cost and complicated logistics of shipping liquefied natural gas, but it should not pose a major supply risk ahead of the winter. Despite the latest tensions, he said, “Algeria has historically always honored its contracts and political pledges in this field.”
For Morocco, however, Mr. Escribano said, “the situation is much more complicated,” both in terms of losing Algerian gas that had fueled its electricity grid and losing the fees that it had received from the gas transiting through the pipeline.
Zillow, the real estate website known for estimating house values, said on Tuesday that it would exit the business of rapidly buying and selling houses amid heavy losses and that it planned to let go about nearly 25 percent of its employees.
The announcement was a major strategic retreat and a black eye for Richard Barton, Zillow’s chief executive, who founded the company 16 years ago and has long talked about transitioning Zillow’s popular website into a marketplace. Last year, Mr. Barton predicted Zillow Offers, which made instant offers on homes in a practice known as iBuying, could generate $20 billion a year.
On Tuesday, Zillow, which said it has 8,000 employees, said the division had been the source of huge losses and had made the company’s overall bottom line unpredictable. Zillow Offers lost more than $420 million in the three months ending in September, roughly the same amount that the company had earned in total during the prior 12 months.
“We’ve determined the unpredictability in forecasting home prices far exceeds what we anticipated,” Mr. Barton said in a statement accompanying its quarterly financials.
Mr. Barton, speaking on a conference call with analysts on Tuesday afternoon, said the decision had “weighed heavily” on him. “We could blame the current losses on exogenous market events,” Mr. Barton said. “But it would be naive to predict that unpredictable events won’t happen in the future.”
In all the company lost nearly $330 million in the third quarter, which was far worse than Wall Street analysts had predicted. The company made a $40 million profit in the same period a year ago.
Shares of Zillow have fallen more than 50 percent from a high of nearly $200 in February, when it was still a darling of investors as the housing market heated up. The stock dropped 11.5 percent on Tuesday to about $85.50 before it released its financials, and a further 7.5 percent in after-hours trading. (Even so, Zillow’s shares are worth double what they were at the beginning of the pandemic.)
Zillow’s share price
Three years ago, the company announced plans to employ its pricing estimates to buy and sell houses. Now, Zillow is sitting on thousands of houses worth less than what the company paid for them. Last month, Zillow announced it would temporarily stop buying new homes. At the time, it blamed a lack of workers to fix up and sell the houses it had bought. But on Tuesday, Mr. Barton said using its algorithm to buy and sell houses had not produced predictable profits. It is now looking to offload its remaining 7,000 houses.
It appears the company underestimated the risk of holding houses in between transactions, which was a departure from the low-risk, high-margin ad business. And it tried to quickly ramp up its home-flipping business to 5,000 transactions a month, which Mr. Barton set as a goal, in a housing market that was already low on inventory and was starting to cool off.
Zillow’s stumble also raises questions about its core product, which is built around its value estimates. Aaron Edelheit, who began buying houses in the wake of the Great Recession, tweeted his thanks to Zillow for paying “such an extremely high price” for one of his properties this summer. “It appeared they were panic buying,” Mr. Edelheit, who is leaving the real estate market to focus on cannabis, told The New York Times’s DealBook newsletter. “I didn’t get it. I should have shorted the stock.”
For the second time in under one month, workers at the agriculture equipment maker Deere & Company rejected a contract proposal negotiated by their union on Tuesday, extending a strike that began in mid-October.
Roughly 10,000 workers, primarily at plants in Iowa and Illinois, on Oct. 10 voted down an earlier agreement negotiated by the United Automobile Workers union.
“The strike against John Deere & Company will continue as we discuss next steps with the company,” the union said in a statement.
Marc A. Howze, a senior Deere official, said in a statement that the agreement would have included an investment of “an additional $3.5 billion in our employees, and by extension, our communities.”
“With the rejection of the agreement covering our Midwest facilities, we will execute the next phase of our Customer Service Continuation Plan,” the statement continued, alluding to its use of salaried employees to run facilities where workers are striking.
Many workers had complained that wage increases and retirement benefits included in the initial proposal were too weak given that the company — known for its distinctive green-and-yellow John Deere products — was on pace for a record of nearly $6 billion in annual profits.
According to a summary produced by the union, wage increases under the more recent proposal would have been 10 percent this year and 5 percent in the third and fifth years. During each of the even years of the six-year contract, employees would have received a lump-sum payment equivalent to 3 percent of their annual pay.
That was up from earlier proposed wage increases of 5 or 6 percent this year, depending on a worker’s labor grade, and 3 percent in 2023 and 2025.
The more recent proposal also included traditional pension benefits for future employees and a post-retirement health care fund seeded by $2,000 per year of service, neither of which were included in the initial agreement.
Chris Laursen, a worker at a John Deere plant in Ottumwa, Iowa, who was president of his local there until recently, said he voted in favor of the new agreement after voting to reject the previous one.
“We have the support of the community, we have the support of workers all around the country,” Mr. Laursen said. “If we turned down a 20 percent increase over a six-year period, substantial gains to our pension plan, I’m afraid we would lose that.”
But Mr. Laursen said he still had concerns about the vagueness of the company’s commitment to improving its worker incentive plan, and such concerns appeared to weigh on his co-workers, 55 percent of whom voted to reject the newer contract.
One wrinkle complicating the vote was suspicion among rank-and-file workers toward the union leadership related to a series of corruption scandals, which have led to more than 15 convictions, including two recent U.A.W. presidents.
The work stoppage at Deere was part of an uptick in strikes around the country last month that also included more than 1,000 workers at Kellogg and more than 2,000 hospital workers in upstate New York.
Overall, more than 25,000 workers walked off the job in October, versus an average of about 10,000 in each of the previous three months, according to data collected by researchers at Cornell University.
Turmoil in the auto industry, a powerful engine of the global economy, is threatening growth and sending tremors through companies and communities that depend on carmakers for money and jobs, Jack Ewing and Patricia Cohen report for The New York Times.
It’s difficult to calculate just how much auto industry problems will spread to the rest of the economy, but there is little doubt that the impact is enormous because so many other industries depend on carmakers. Auto manufacturers are big consumers of steel and plastic, and they support vast supplier networks as well as restaurants and grocery stores that feed autoworkers.
For every car or truck that does not roll off an assembly line in Detroit, Stuttgart or Shanghai, jobs are in jeopardy. They may be miners digging ore for steel in Finland, workers molding tires in Thailand or Volkswagen employees in Slovakia installing instrument panels in sport utility vehicles. Their livelihoods are at the mercy of supply shortages and shipping chokeholds that are forcing factories to curtail production.
The auto industry accounts for about 3 percent of global economic output, and in carmaking countries like Germany, Mexico, Japan or South Korea, or states like Michigan, the percentage is much higher. A slowdown in automaking can leave scars that take years to recover from.
The pain is also falling on anyone in need of an affordable car. Auto companies have been allocating scarce chips to high-end and other vehicles that generate the most profit, leading to long waits for less expensive vehicles. Used car prices are skyrocketing because of the lack of new cars.
Vehicles with high profit margins like Ford F-150 or Chevy Silverado pickups “are continuing to get pumped out,” said Ram Kidambi, a partner at the consulting firm Kearney who is based in Detroit. “But vehicles that have lower margins are getting impacted.”
The longer that shortages of parts and materials persist, the deeper the economic impact. Modern economies need vehicles to function. READ THE ARTICLE ->
A coalition of the world’s biggest investors, banks and insurers that collectively control $130 trillion in assets said on Wednesday that they were committing to use that capital to hit net zero emissions targets in their investments by 2050, in a push that would make limiting climate change a central focus of most major financial decisions for decades to come.
The group, called the United Nations Glasgow Financial Alliance for Net Zero, is made up of 450 banks, insurers and asset managers in 45 countries. It said the pledge amounted to a transformation of the global financial system and would help businesses, financial firms and entire industries undergo fundamental restructuring for a carbon-neutral future.
“We now have the essential plumbing in place to move climate change from the fringes to the forefront of finance so that every financial decision takes climate change into account,” Mark Carney, the former head of the Bank of England, who is leading the alliance, said in a statement.
The agreements are largely voluntary. But they show a commitment by a broad range of financial institutions — banks, insurers, pension funds, asset managers, export credit agencies, stock exchanges, credit rating agencies, index providers and audit firms — to have emissions slashed in the companies in which they invest, and to have their lending aligned toward the target of restricting a global temperature rise to 1.5 degrees Celsius above preindustrial levels.
The companies agreed to undergo a review every five years to measure how well they are hitting these targets. They also said they would report the emissions they finance ever year.
But critics said the pledges fell short because they don’t commit investors to stop placing money in fossil fuels.
“This announcement yet again ignores the biggest elephant in the room: fossil fuel companies,” Richard Brooks, the climate finance director of STAND.earth, an environmental group, said in a statement. “We cannot keep under 1.5 degrees if financial institutions don’t stop funding coal, oil and gas companies.”
The coalition, which was created in April, is chaired by Mr. Carney, the United Nations’ climate finance envoy. Among its members are the investment management company BlackRock, HSBC Holdings, Morgan Stanley and Deutsche Bank.
Critically, the initiative would create a new body to hold investors and companies to account on climate-related goals.
The alliance also said that nearly 40 central banks in countries generating two-thirds of the world’s emissions would introduce stress tests to gauge how financial firms are handling climate-related risks. Some, including the European Central Bank and Bank of England, plan to administer the stress tests to the banks they supervise early next year.
The alliance also pledged to scale more private capital flows to emerging and developing economies, which are among those facing the most brutal costs of climate change.
Mr. Carney said on Tuesday at the Climate Horizon Summit in Glasgow that the finance industry was moving away from just seeing global warming as a risk to their business, and instead considering how the industry could be part of the solution.