Fed Minutes, Inflation Issues and Markets: Dwell Updates

Here’s what you need to know:

Credit…Erik S. Lesser/EPA, via Shutterstock

Federal Reserve officials were optimistic about the economy at their April policy meeting, and they began to tiptoe toward a conversation about dialing back support for the economy, as government support and business reopenings fueled consumer spending and paved the way for a rebound.

Fed policymakers have said they need to see “substantial” further progress toward their goals of inflation that averages 2 percent over time and full employment before slowing down $120 billion in monthly bond purchases. The buying is meant to keep borrowing cheap and bolster demand, hastening the recovery from the pandemic recession.

Officials said “it would likely be some time” before their desired standard was met, minutes from the central bank’s April 27-28 meeting released Wednesday showed. But they noted that a “number” of officials said that “if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

Confusing, and at times conflicting, data released since the April 27-28 gathering could make the Fed’s assessment of when to dial back support — or even to start talking about doing so in earnest — difficult. A report on the job market showed that employers added far fewer jobs than expected. At the same time, an inflation report showed that an expected increase in prices is materializing more rapidly than many economists had thought it would.

The Fed has also held interest rates near-zero since March 2020, in addition to its bond purchases.

Officials have been clear that they plan to slow down bond buying first, while leaving interest rates at rock bottom until the annual inflation rate has moved sustainably above 2 percent and the labor market has returned to full employment.

Markets are extremely attuned to the Fed’s plans for bond purchases, which tend to keep asset prices high by getting money flowing around the financial system. Central bankers are, as a result, very cautious in talking about their plans to taper those purchases. They want to give plenty of signal before changing the policy to avoid inciting gyrations in stocks or bonds.

Stocks whipsawed in the moments after the 2 p.m. release, falling in the moments after before recovering. The yield on the 10-year Treasury note climbed to 1.68 percent.

Even before the recent labor market report showed job growth weakening, Fed officials thought it would take some time to reach full employment, the minutes showed.

“Participants judged that the economy was far from achieving the committee’s broad-based and inclusive maximum employment goal,” the minutes stated. Officials also noted that business leaders were reporting hiring challenges — which have since been blamed for the April slowdown in job gains — “likely reflecting factors such as early retirements, health concerns, child-care responsibilities, and expanded unemployment insurance benefits.”

When it comes to inflation, Fed officials have repeatedly said they expect the ongoing pop in prices to be temporary. It makes sense that data are very volatile, they have said: The economy has never reopened from a pandemic before. That message echoed throughout the April minutes, and has been reiterated by officials since.

“We do expect to see inflationary pressures over the course, probably, of the next year — certainly over the coming months,” Randal K. Quarles, the Fed’s vice chair for supervision, said during congressional testimony on Wednesday. “Our best analysis is that those pressures will be temporary, even if significant.”

“But if they turn out not to be, we do have the ability to respond to them,” Mr. Quarles added.

Wall Street and corporate America have finally bought into Bitcoin, just in time for one of the ugly crashes the cryptocurrency regularly experiences.

Stocks slumped for a third day this week as a bust in the world of crypto — until recently considered a side show to actual financial activity — bled into the broader markets and hammered shares closely linked to the difficult-to-define digital assets.

Markets were also roiled by the release of the minutes of the Federal Reserve’s latest meeting, which showed that some of the central bank’s officials are considering starting to talk about pulling back on support for the economy. Concern that the Fed might begin to do this — in part as inflation picks up — has been a big driver of volatility in stock markets lately.

A move by the central bank to raise interest rates or take other measures to cool growth isn’t likely to come anytime soon, but the mention of a willingness to discuss it was enough to trigger a swoon in financial markets. Yields on government bonds jumped and the S&P 500 — which was already lower — fell further soon after the minutes were released.

But stocks recovered. The S&P 500 ended down 0.3 percent on Wednesday, bringing its losses for the week to 1.4 percent. Yields on 10-year Treasury notes rose to 1.68 percent.

The decline in the stock markets was a faint echo of the crash in the market for cryptocurrencies in recent days.

Bitcoin was down nearly 8 percent on Wednesday after recovering from an even steeper drop. Ethereum, another cryptocurrency, was down 20 percent. The tumble came after an announcement from the People’s Bank of China that seemed to effectively ban Chinese financial institutions or payment companies from offering services that touch cryptocurrencies.

As the world of cryptocurrencies has exploded over the past year, so has its impact on actual companies and therefore financial markets. Some on Wall Street have been increasingly focused on potential risks the growth of cryptocurrency could pose.

Analysts at JPMorgan recently noted that the market value of cryptocurrencies, as a share of the economy, are larger than the total outstanding amount of subprime real estate debt before the financial crisis.

A research note published this week by Bank of America Merrill saw the plurality of the nearly 200 money managers it surveyed spotlight bets that Bitcoin’s prices will rise as the most crowded trade in the markets. Crowded trades are often seen as potential signs that a downturn is coming.

Tesla tumbled 2.5 percent. The company had once positioned itself as a prominent supporter of cryptocurrencies, and in March, it announced that it would accept Bitcoin in exchange for cars, helping to set off a surge in the asset.

Last week, Elon Musk, the company’s chief executive, reversed that decision, citing concerns about the energy consumption needed used by cryptocurrencies.

The hard-drive maker Seagate Technology — which has a stake in the cryptocurrency company Ripple, the creator of the XRP currency — fell 1.6 percent. Shares of Seagate and Western Digital, another maker of hard drives, had been on a tear in recent days, as analysts spotlighted surging demand for its computer products, in part, from cryptocurrency miners. Western Digital closed down 2.7 percent.

Bitcoin wasn’t the only element moving the markets. American crude oil tumbled 3.3 percent on lingering concerns that the still-spreading coronavirus in India, as well as Thailand, Vietnam and Taiwan, could prompt new restrictions that could curtail economic activity.

Stock markets in Europe and Asia ended the day mainly lower. The Stoxx Europe 600 index was 1.5 percent lower, the FTSE 100 in Britain was down 1.2 percent, and the Nikkei in Japan dropped 1.3 percent.

Randal K. Quarles, the Federal Reserve’s vice chair for supervision and regulation, said that the central bank was monitoring inflation but that for now it expected the pickup underway to be temporary — and that reacting too soon would come at a cost.

“For me, it’s a question of risk management,” Mr. Quarles said during testimony before the House Financial Services Committee. “History would tell us that the economy is unlikely to undergo these inflationary pressures for a long period of time.”

Mr. Quarles pointed out that after the global financial crisis, the central bank lifted interest rates to guard against inflationary pressures. The expected pickup never came, and in hindsight the moves were “premature,” he said. He suggested that the central bank should avoid repeating that mistake.

“We’re coming out of an unprecedented event,” Mr. Quarles said, noting that officials have the tools to tamp down inflation if it does surprise central bankers by remaining elevated. The Fed could dial back bond purchases or lift interest rates to slow growth and weigh down prices.

He said that the key is for the central bank to be prepared, but that if it tried to stay ahead of inflation now it could end up “significantly constraining the recovery.”

Mr. Quarles’s comments came in response to repeated — and occasionally intense — questioning by Republican lawmakers, many of whom cited concerns about a recent and rapid pickup in consumer prices. The back and forth underlined how politically contentious the Fed’s patient approach to its policy could prove in the coming months. Inflation is expected to remain elevated amid reopening data quirks and as supply tries to catch up to consumer demand.

Some lawmakers pressed Mr. Quarles on how long the Fed would be willing to tolerate higher prices — a parameter the central bank as a whole has not clearly defined.

When it comes to increases, “I don’t think that we can say that one month’s, or one quarter’s, or two quarters’ or more is necessarily too long,” Mr. Quarles said. He noted that it was possible that inflation expectations could climb amid a temporary real-world price increase. But if that happened and caused a “more durable inflationary environment, then the Fed has the tools to address it,” he said.

Steve Easterbrook, the former chief executive of McDonald’s who was fired in 2019 for having a consensual sexual relationship with an employee.Credit…Brendan Mcdermid/Reuters

Despite posting robust revenue and earnings during the pandemic of the past year, executives at McDonald’s are likely to face tough questions at Thursday’s annual shareholder meeting from critics who believed they mishandled the dismissal of the former chief executive Steve Easterbrook.

On Wednesday, the institutional investor Neuberger Berman became the latest investor to say it would not vote for the re-election of Richard Lenny, a former chief executive of the Hershey Company who has been on the McDonald’s board for 16 years and was chair of the compensation committee that awarded Mr. Easterbrook more than $44 million after he was terminated in 2019 for having a consensual sexual relationship with an employee.

The board, which allowed the severance to be awarded even after determining Mr. Easterbrook had violated company policy and displayed poor judgment, later discovered he had engaged in several affairs with employees during his tenure. McDonald’s has sued Mr. Easterbrook to try to claw back the money.

The Easterbrook scandal is likely to be just one of the issues about the company’s culture brought up during the virtual meeting.

On Wednesday, McDonald’s employees in 15 cities were holding strikes organized by the group Fight for $15 in an effort to raise the fast-food chain’s minimum wage to $15 an hour. The company is also facing myriad lawsuits involving claims of racial and sexual discrimination and harassment at some of its restaurants.

McDonald’s leadership is likely to play up its strong performance during the pandemic, taking a victory lap for producing a $4.7 billion profit during a rough-and-tumble year for the restaurant industry.

McDonald’s chief executive, Chris Kempczinski, who was hired in 2015 from Kraft Foods as a strategy chief and reported directly to Mr. Easterbrook, has made several moves in recent months to address the numerous controversies.

In February, the company set new diversity goals and tied those goals to executive compensation. In April, it mandated anti-harassment training at its restaurants. And last week, it said it would raise wages at 650 company-owned restaurants, a move that does not affect the 14,000 restaurants that are independently owned.

Still, questions continue to swirl around Mr. Easterbrook’s departure in November of 2019.

In April, Scott Stringer, New York City’s comptroller who oversees its pension funds, and CtW Investment Group, which oversees union pensions, wrote a letter to McDonald’s saying they would vote against Mr. Lenny as well as Enrique Hernandez Jr., the chief executive of Inter-Con Security Systems and McDonald’s chairman. They cited their roles in the “flawed and mismanaged investigation” into Mr. Easterbrook and the determination to terminate him “without cause,” resulting in an “unnecessary and costly” lawsuit filed in an attempt to recoup the money from Mr. Easterbrook.

Whether the movement to oust Mr. Hernandez or Mr. Lenny from their seats has enough support remains unclear.

Two of the largest proxy advisory firms split their decision about the McDonald’s directors, with Glass Lewis recommending that shareholders vote against the two directors. Institutional Shareholder Services said both directors should keep their positions, giving the board credit for taking legal action to recoup the severance pay from Mr. Easterbrook.

New York, along with New Jersey and Connecticut, lifted almost all pandemic restrictions on Wednesday, a relaxation of rules that comes as the pace of coronavirus vaccinations accelerates and summer draws near.

Around New York City, the subway began operating at full service again, and barber shops, cafes and stores were given a green light to return to business as usual. Here are some scenes as life in the city takes a long-awaited step toward normalcy.

A homebound resident in the Bronx receives a dose of coronavirus vaccine. A new initiative is pushing for federally funded family and medical leave, and affordable child care and elder care.Credit…James Estrin/The New York Times

JPMorgan Chase, Spotify, Uber, McDonald’s and almost 200 other businesses have formed a coalition focused on ensuring that women are not held back in the labor force because they bear the brunt of caregiving in the United States.

The new Care Economy Business Council, the creation of which was announced on Wednesday, portrays the effort in stark economic terms, arguing that fixing the crumbling child and elder care systems is essential to the economic recovery.

Led by Time’s Up, the advocacy organization founded by powerful women in Hollywood, the council aims to bring executives together to share ways to improve workplace policies and to pressure Congress to pass policy changes that would help people — particularly women — get back to work. The council will push for federally funded family and medical leave, affordable child care and elder care, and elevated wages for caregiving workers.

“What I’m seeing now that I have not seen in the many years I’ve been working on this constellation of issues is a realization by employers that they have a stake in this,” Tina Tchen, the chief executive of Time’s Up, said.

The pandemic laid bare the faults in caregiving in the United States, particularly the problems with child care. Many child-care centers either shuttered or cut back on hours to save on costs, leaving parents without reliable and safe places for their children while they worked. The lack of child care support was a major reason that hundreds of thousands of women left the work force in the past year, bringing female labor participation rate to its lowest level since 1986.

Companies scrambled to cobble together solutions, from flexible work hours to additional child care stipends. But for many executives, the crisis made it clear that the entire system needed an overhaul.

The issue is “bigger than something we can solve on our own,” said Christy M. Pambianchi, the chief human resources officer at Verizon, which is part of the council.

President Biden’s two-part infrastructure plan proposes pumping $425 billion into expanding and strengthening child-care services and an additional $400 billion to help expand access for in-home care for older adults and those with disabilities. His plan also offers businesses a tax credit for building child-care centers in their workplaces.

Members of Congress have also introduced three separate but similar child-care bills.

A restaurant in Athens prepared to reopen earlier this month. In countries reliant on tourism, like Greece, many businesses will be burdened by accumulated debt, the European Central Bank said.Credit…Maria Mavropoulou for The New York Times

The European Central Bank warned Wednesday that the eurozone could face a rocky economic recovery from the pandemic because many companies have gone deep into debt, financial markets are overheated and climate-related catastrophes loom.

The central bank’s twice-yearly catalog of risks that could blow up the eurozone financial system rarely makes for comforting reading, but the one issued Wednesday featured a particularly long list of hazards.

“We are optimistic that financial and economic conditions will bounce back,” Luis de Guindos, the vice president of the European Central Bank, said in an introduction to the Financial Stability Review, the semiannual report. But he added: “The pandemic will leave a legacy of higher debt and weaker balance sheets, which — if unaddressed — could prompt sharp market corrections and financial stress or lead to a prolonged period of weak economic recovery.”

One big worry, the central bank said, is that many firms have been kept alive by short-term government support or loan repayment holidays. When those measures expire, the firms could go under, defaulting on their debts and putting their employees out of work. The pain will be especially acute for restaurants, hotels and entertainment venues, and in countries including Greece, Spain and Italy, where tourism is a big part of the economy.

The debt risk is aggravated by Europe’s slow recovery from the pandemic, a result of bungled vaccine programs. Market interest rates are rising in the United States because investors expect the economy to bounce back faster, and inflation to rise. The higher rates lead to higher borrowing costs in the rest of the world and increase the burden on companies and consumers.

The central bank also expressed concern about “exuberant” financial markets that have fueled speculation by inexperienced investors and by hedge funds using unusually high levels of borrowed money. The central bank singled out investments such as cryptocurrencies, as well as blank-check shell corporations known as SPACs that raise large sums of money before they have figured out how to spend it.

The bank likened investment in cryptocurrencies to the tulip mania of 1637, a famous episode in economic history when speculators drove up the price of Dutch tulip bulbs to fantastic levels, leading some to suffer horrendous losses when the price inevitably collapsed.

The central bank devoted a chapter of the report to the financial risks from climate change, an indication of the increasing focus on that issue since Christine Lagarde became president in late 2019.

Climate change is a serious risk to eurozone banks because many have lent money to mining companies, energy producers or manufacturers classified as high emitters of carbon dioxide, the main cause of global warming. Over the long term, these firms could have more trouble repaying their debts as policies force them to bear the cost of the environmental damage they cause. The companies may also have trouble getting insurance.

Only about 25 banks in the eurozone account for most of the exposure to high emitters, according to the central bank report. “A potential concentration of climate-related physical risks among a few, more vulnerable banks could have implications for financial stability,” the central bank said.

Jack Dorsey, the chief executive of Twitter, gave $12.8 million in cryptocurrency to GiveDirectly, a global aid group.Credit…Anushree Fadnavis/Reuters

Charities have an inherent interest in cryptocurrencies because, increasingly, their fates are intertwined. Nonprofit groups benefit from financial windfalls and people have recently been getting rich with crypto, the DealBook newsletter reports.

“There’s no question” that the price of cryptocurrency is linked to the volume of giving, said Joe Huston, the managing director of GiveDirectly, a global aid group. Crypto is volatile, especially in the past few days, but philanthropies have seen consistent growth in digital asset donations over time. (Bitcoin is still up 30 percent for the year, even after a torrid few trading sessions). Donations in crypto to Fidelity Charitable went to $28 million in 2020 from $13 million in 2019.

GiveDirectly has seen a “big uptick,” Mr. Huston said. The Twitter founder Jack Dorsey gave the group $12.8 million, the co-founder of the Ethereum platform Vitalik Buterin donated $4.8 million and Elon Musk of Tesla gave “some.” The cryptocurrency exchange FTX donates 1 percent of its fees and encourages traders to channel returns to charity.

But newfound riches donated in novel ways also raise questions. Mr. Buterin recently gave $1.2 billion to fund pandemic relief efforts in India. The gift was in SHIB, a crypto token named after a Shiba Inu dog that’s a derivative of the onetime joke crypto Dogecoin. These tokens were sent unbidden to Mr. Buterin to bolster their value. (To stop promoters from sending him free crypto with uncertain motives, he “burned” $6 billion worth of the tokens, taking them out of circulation permanently.)

His approach in donating tokens was “impressively lightweight and fast,” Mr. Huston said, showing how frictionless crypto-based philanthropy can be. Previously, it was unimaginable to transfer such an enormous sum without an institutional intermediary. This lack of friction also makes crypto giving prime territory for fraudsters.

“There are a lot of young people with stupid amounts of money,” said Austin Detwiler, a consultant at American Philanthropic, a consulting firm. Fund-raisers should make giving from this new generation easier, mindful that “it’s easy to start accepting crypto, but it’s volatile, so have a policy,” he said. Some donors place conditions on token gifts and some charities simply can’t tolerate the risk of holding assets that rise and fall so rapidly.

Modern Fertility’s flagship product is a $159 finger prick test that can estimate how many eggs a woman may have left, which can help determine which fertility method might be best.Credit…Modern Fertility

Ro, the parent company of Roman, the brand that is best known for delivering erectile dysfunction and hair loss medication to consumers, announced on Wednesday that it would acquire Modern Fertility, a start-up that offers at-home fertility tests for women.

The deal is priced at more than $225 million, according to people with knowledge of the acquisition who spoke on condition of anonymity because the information was not public. It is one of the largest investments in the women’s health care technology space, known as femtech, which attracted $592 million in venture capital in 2019, according to an analysis by PitchBook.

Modern Fertility was founded in 2017 with its flagship product: a $159 finger prick test that can estimate how many eggs a woman may have left, which can help determine which fertility method might be best.

“We essentially took the same laboratory tests that women would take in an infertility clinic and made them available to women at a fraction of the cost,” said Afton Vechery, a founder and chief executive of Modern Fertility, noting that her own test at a clinic set her back $1,500.

The company now also sells an at-home test, available at Walmart, to help track ovulation, as well as standard pregnancy tests and prenatal vitamins.

Ro, which was founded in 2017 with a focus on men’s health and was valued in March at about $5 billion, has in recent years expanded into telehealth, including delivering generic drugs by mail. In December, Ro acquired Workpath, which connects patients with in-home care providers, like nurses.

The global digital health market, which includes telemedicine, online pharmacies and wearable devices, could reach $600 billion by 2024, according to the consulting firm McKinsey & Company. And yet, by one estimate, only 1.4 percent of the money that flows into health care goes to the femtech industry, mirroring a pattern in the medical industry, which has historically overlooked women’s health research.

“Gender bias in health care research methods and funding has really contributed to sexism in medicine and health care,” said Sonya Borrero, director of the Center for Women’s Health Research and Innovation at the University of Pittsburgh. “I think we’re seeing again — gender bias in the venture capital sector is going to exactly shape what gets developed.”

That underinvestment was part of the reasoning behind the acquisition, said Zachariah Reitano, Ro’s chief executive. The company developed a female-focused online service in 2019 called Rory.

“We’re going to continue to invest hundreds of millions of dollars over the next five years into women’s health,” Mr. Reitano said, “because ultimately I think women’s health has the potential to be much larger than men’s health.”

A new management setup at JPMorgan Chase creates an unusual situation in which two executives competing for the top job are sharing a leadership role. Credit…Mike Segar/Reuters

The major management shuffle announced Tuesday by JPMorgan Chase renewed chatter about who will succeed Jamie Dimon as chief executive.

Marianne Lake, the bank’s head of consumer lending, and Jennifer Piepszak, its chief financial officer, were made joint heads of the consumer and community bank. The promotions solidify both women’s positions as contenders for chief executive.

The new setup also creates an unusual situation in which two executives competing for the top job are sharing a leadership role. That may be tricky to navigate, management experts say, and whether it’s a good test of leadership skills is debatable.

In a 2012 paper, Ryan Krause of the Neeley School of Business at Texas Christian University, examined how sharing power affected the performance of public companies. Estimating the relative power of co-chief executives using proxies such as tenure and stock ownership, he and his co-authors concluded that executives who had more equal levels of power performed worse than those with disproportionate power.

“We interpret this as being evidence that, basically, having co-C.E.O.s really only works if they’re not really co-C.E.O.s,” Mr. Krause said. Co-leaders of a division, he said, may be more successful because they can more easily divide responsibilities instead of sharing authority. Such setups are not uncommon at JPMorgan.

It could highlight the ability to work collaboratively, said Steve Odland, the head of the Conference Board and the former chief executive of Office Depot and AutoZone.

“Whenever you’re in a C.E.O. successor position, it’s difficult because there are a lot of things that have to go right and you’re under the microscope,” Mr. Odland said. “But to do so with your competitor, and have to compete with your co-head, at the same time you’re making it work is especially stressful. Which is why it’s an interesting test, because the person who succeeds at this should be amply able to succeed in the C.E.O. role.”

But is it a good idea? Dan Ciampa, an adviser to chief executives and directors during leadership transitions, said that he generally would not recommend such a test.

“It may make sense to have co-division leaders or co-unit leaders and maybe even co-C.E.O.s,” Mr. Ciampa said. “But to use that as a way to determine who the next person should be to run the entire organization, to me it says that the board and the sitting C.E.O. and the head of H.R. have probably not done their homework.”

  • WarnerMedia announced details of a new ad-supported streaming version of HBO Max on Wednesday. The new tier will cost $10 a month and will debut in the first week of June. The current, ad-free version costs $15. The cheaper HBO Max will include all the same shows and films with the exception of the same-day movie premieres that will play through the rest of this year. AT&T executives have long puzzled over how to compete with Netflix and others while being constrained on price. HBO Max is the highest-priced streaming service at $15 a month, a fee that is effectively locked in because of longstanding contractual agreements it has with cable providers. The announcement comes just days after parent company AT&T agreed to a mega merger in which it will spin off WarnerMedia into a new business that will merge with a rival programmer, Discovery.

  • Amazon said Tuesday that it would indefinitely prohibit police departments from using its facial recognition tool, extending a moratorium the company announced last year during nationwide protests over racism and biased policing. When Amazon announced the pause in June, it did not cite a specific reason for the change. The company said it hoped a year was enough time for Congress to create legislation regulating the ethical use of facial recognition technology. Congress has not banned the technology, or issued any significant regulations on it, but some cities have.

  • Google held its I/O developer conference on Tuesday. And, as usual, it was a dizzying two-hour procession of new features, products and services across the company’s vast array of businesses, from its smartphone software to its artificial intelligence systems. Sundar Pichai, chief executive of Google’s parent company Alphabet, revealed the company’s next so-called moonshot: Google aims to power the entire company using carbon-free energy by 2030. It will require using artificially intelligent software systems to allocate energy wisely as well as investments to tap into geothermal energy in addition to wind and solar.

Comments are closed.