Tag: public finance agencies and treasuries

What to expect from this week’s Fed meeting | CNN Business

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The Federal Reserve is expected to raise interest rates by half a point at the conclusion of its two-day policy meeting on Wednesday, an indication that the central bank is pulling back on its aggressive stance as signs begin to emerge that inflation may be easing.

Although that increase would be smaller than the three-quarter-point hikes announced at the past four Fed meetings, it’s nothing to scoff at.

It’s still double the Fed’s customary quarter-point hike, and a sizable increase that will likely cause economic pain for millions of American businesses and households by pushing up the cost of borrowing for homes, cars and other loans.

The Fed’s anticipated action would increase the rate that banks charge each other for overnight borrowing to a range of between 4.25% and 4.5%, the highest since 2007.

Federal Reserve Chairman Jerome Powell confirmed last month that smaller rate hikes could be expected, saying: “The time for moderating the pace of rate increases may come as soon as the December meeting.”

But while inflation is unlikely to slow dramatically any time soon, partly due to continued pressure on wages amid a shortage of workers, Wall Street appears to believe the Fed will eventually be forced to pivot away from, or even reverse its regimen of rate hikes. Traders are largely pricing in rate cuts in the second half of 2023.

The Fed will conclude its rate hike regimen by the second quarter of next year, predicted JPMorgan analysts in a recent note. “With inflation continuing to fade and fiscal policy likely on hold, the Fed is likely to end its tightening cycle early in the new year and inflation could begin to ease before the end of 2023,” they wrote. The analysts expect two quarter-point hikes in the first half of 2023.

But the average period between peak interest rates and the first reductions by the Fed is 11 months, which could mean that even if the central bank stops actively hiking rates, they could remain elevated into 2024.

Investors will closely read the Fed’s economic outlook, the Summary of Economic Projections, which is also due out Wednesday. And they will watch Powell’s press conferences for clues about what’s to come — though they may end up sorely disappointed.

”We expect Fed Chair Powell will insist on the need to hold policy at a restrictive level for some time to bring inflation down toward the 2% target,” wrote Gregory Daco, chief economist at EY-Parthenon, in a note to clients Monday. “This will serve to push back against current market pricing … Powell will stress that history cautions strongly against prematurely loosening policy.”

The Fed has increased its benchmark lending rate six times this year in an attempt to discourage borrowing, cool the economy and bring down historically high inflation that peaked at 9.1% over the summer.

Even if interest rate hikes do ease off, they will remain high, and economists are largely expecting that the US economy will endure a recession next year. Powell said in November that there is still a chance the economy avoids recession but the odds are slim, noting: “To the extent we need to keep rates higher longer, that’s going to narrow the path to a soft landing.”

In an interview that aired on CBS on Sunday, Treasury Secretary Janet Yellen — Powell’s predecessor at the Fed — said there is “a risk of a recession. But it certainly isn’t, in my view, something that is necessary to bring inflation down.”

And the economy has so far withstood the Fed’s aggressive rate hikes. The job market is healthy, wages are growing, Americans are spending and GDP is strong. Business is also good: Companies are largely beating revenue expectations and reporting positive earnings results.

The Fed isn’t acting alone, it’s just one of nine central banks expected to make a rate announcement this week. Landing softly on the ever-narrowing path between high inflation and recession is a global concern as central banks across the world contend with similar economic problems.

The European Central Bank, the Bank of England and the Swiss National Bank are expected to follow the United States with half-point moves of their own on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.

The Federal Reserve announces its rate hike decision Wednesday at 2 p.m., followed by a press conference with Chair Powell at 2:30 p.m.

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December 13, 2022
The Fed will raise rates again. But it’s playing with fire | CNN Business

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The Federal Reserve is all but guaranteed to announce Wednesday that it will once again raise interest rates. But investors are hopeful it will be a smaller increase than the last four hikes.

Traders are betting on just a half-point increase. Federal funds futures on the Chicago Mercantile Exchange show an 80% probability of a half-point hike.

The Fed bumped up rates by three-quarters of a percentage point in the past four meetings (June, July, September and November). That followed two smaller rate hikes earlier this year. The central bank’s key short-term interest rate, which sat at zero at the beginning of the year, is now at a range of 3.75% to 4%.

The hope is that inflation pressures are finally starting to abate enough that the Fed can pivot — Fed-speak for a series of smaller rate hikes -— to avoid crashing the economy into a recession.

But it may not be that simple. The government reported Friday that a key measure of wholesale prices, the Producer Price Index, rose 7.4% over the past 12 months through November. That was a bit higher than the expected rate of 7.2% but a marked slowdown from the 8% increase through October.

The more widely watched Consumer Price Index data for November comes out Tuesday, just a day before the Fed announcement. CPI rose 7.7% year-over-year through October.

As long as inflation remains a problem, the Fed is going to have to tread cautiously.

“Inflation has probably peaked but it may not come down as quickly as people want it to,” said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.

Jones still thinks the Fed will raise rates by only half a point this week and may look to hike them just a quarter point in early 2023. But she conceded that the Fed is now sort of “making it up as they go along.”

The other problem: The Fed’s rate hikes this year have had limited impact on the economy so far. Yes, mortgage rates have spiked and that has severely hurt demand for housing, but the job market remains strong. Wages are growing, and consumers are still spending. That can’t last indefinitely.

“The cumulative impact of higher rates are just beginning. Hence, the Fed has to step down its pace a bit,” Jones said.

So investors are going to need to pay attention not to just what the Fed says in its policy statement about rates and what Powell talks about in his press conference. The Fed also will release its latest projections for gross domestic product growth, the job market and consumer prices Wednesday.

In September, the Fed’s consensus forecasts called for GDP growth of 1.2% in 2023, an unemployment rate of 4.4% and an increase in personal consumption expenditures, the Fed’s preferred measure or inflation, of 2.8%. It seems likely that the Fed will cut its GDP target and raise its expectations for the jobless rate and consumer prices.

The likelihood of an economic downturn is increasing, and the Fed’s projections may reflect that. But the Fed is not expected to start cutting interest rates until 2024 at the earliest, so it may be too late for the central bank to prevent a recession.

“A pivot or pause is not a cure-all for this market,” said Keith Lerner, co-chief investment officer at Truist Advisory Services. “Rate cuts may be too late. Recession risks are still relatively high.”

The US economy isn’t in a recession yet. But are American shoppers tapped out? We’ll get a better sense of that Thursday after the government reports retail sales figures for November.

Economists are actually forecasting a small dip of 0.1% in retail sales from October. But it’s important to put that number in context. Retail sales surged 1.3% from September and 8.3% over the past 12 months.

So it’s possible consumers were simply getting a head start on holiday shopping. Inflation has an effect on the numbers too, since retail sales have been impacted (positively) by the fact that people have to spend more money for stuff.

One market strategist also pointed out that as long as price increases continue to slow, consumers will feel more confident as well.

“Everybody has been talking about inflation this year. Going forward, it will be more about disinflation in 2023 or 2024,” said Arnaud Cosserat, CEO of Comgest Global Investors.

What does that mean for investors? Cosserat said people should be looking for quality consumer companies that still have pricing power and can maintain their profit margins. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes

(HESAF) and cosmetics giant L’Oreal

(LRLCF).

Monday: UK monthly GDP; earnings from Oracle

(ORCL)

Tuesday: US Consumer Price Index; Germany economic sentiment

Wednesday: Fed meeting; EU industrial production; UK inflation; earnings from Lennar

(LEN) and Trip.com

(TCOM)

Thursday: US retail sales; US weekly jobless claims; ECB and Bank of England rate decisions; earnings from Jabil

(JBL)

Friday: Eurozone PMI; UK retail sales; earnings from Accenture

(ACN), Darden Restaurants

(DRI) and Winnebago

(WGO)

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December 11, 2022
Fed officials crushed investors’ hopes this week | CNN Business

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Investors sleuthing for clues about what the Federal Reserve will decide during its December policy meeting got quite a few this week. But those hints about the future of monetary policy point to an outcome they won’t be very happy about.

What’s happening: Federal Reserve officials made a series of speeches this week indicating that aggressive interest rate hikes to fight inflation would continue, souring investors’ hopes for a forthcoming central bank policy shift. On Thursday, St. Louis Federal Reserve President James Bullard said the central bank still has a lot of work to do before it brings inflation under control, sending the S&P 500 down more than 1% in early trading. It later pared losses.

Bullard, a voting member on the rate-setting Federal Open Market Committee (FOMC), said that the moves the Fed has made so far to fight inflation haven’t been sufficient. “To attain a sufficiently restrictive level, the policy rate will need to be increased further,” he said.

Those comments come a day after Kansas City Fed President Esther George, a voting member of the FOMC, said to The Wall Street Journal that she’s “looking at a labor market that is so tight, I don’t know how you continue to bring this level of inflation down without having some real slowing, and maybe we even have contraction in the economy to get there.”

San Francisco Fed President Mary Daly added on Wednesday that a pause in rate hikes was “off the table.”

A numbers game: Fed officials should increase interest rates to somewhere between 5% and 7% to tamp inflation, Bullard said Thursday. Those numbers shocked investors, as they would require a series of significant and economically painful hikes which increase the chance of a hard landing.

The current interest rate sits between 3.75% and 4% and the median FOMC participant projected a peak funds rate of 4.5-4.75% in September. If those numbers hold steady, Fed members would only raise rates by another three-quarters of a percentage point.

But Fed Chair Powell said at the November meeting that the projections are likely to rise in December and if Bullard is correct, that means investors can expect another one to three percentage points in rate hikes.

Dreams of a pivot: October’s softer-than-expected CPI and producer price reading bolstered investors’ hopes that the Fed might ease its aggressive rate hikes and sent markets soaring to their best day since 2020 last week.

But messaging from Fed officials this week has brought Wall Street back down to earth.

That’s because market rallies help to expand the economy, said Liz Ann Sonders, Managing Director and Chief Investment Strategist at Charles Schwab, which is the opposite of what the Fed is trying to do with its tightening policy. Fed officials could be attempting to do some “jawboning” via excessively hawkish speeches in order to bring markets down, she said.

The bottom line: Investors listen closely to Bullard’s comments because he’s known for having looser lips than other Fed officials, Peter Boockvar, chief investment officer of Bleakley Financial Group, wrote in a note Thursday. But his hawkish predictions may have been “overboard,” especially since he won’t be a voting member of the FOMC next year.

Still, Wall Street analysts are listening. Goldman Sachs raised its peak fed funds rate forecast on Thursday to 5-5.25%, up from 4.75-5%.

A series of high-profile layoffs have rattled Big Tech this month.

Amazon confirmed that layoffs had begun at the company and would continue into next year, just days after multiple outlets reported the e-commerce giant planned to cut around 10,000 employees. Facebook-parent Meta recently announced 11,000 job cuts, the largest in the company’s history. Twitter also announced widespread job cuts after Elon Musk bought the company for $44 billion.

The series of high-profile layoff announcements prompted fears that the labor market was weakening and that a recession could be around the corner.

Those fears aren’t unwarranted: The Federal Reserve is actively working to slow economic growth and tighten financial conditions to rebalance the white-hot labor market. Further layoffs in both tech and other industries are likely inevitable as the Fed continues to raise interest rates.

But this wave of layoffs isn’t as significant as headlines might lead Americans to believe. Thursday’s weekly jobless claims actually fell by 4,000 to 222,000 in spite of the surge in tech job cuts.

In a note on Thursday Goldman Sachs analysts outlined three reasons why the layoffs may not point to a looming recession in the US.

First off, the tech industry accounts for a small share of aggregate employment in the US. While information technology companies account for 26% of the S&P 500 market cap, it accounts for less than 0.3% of total employment.

Second, tech job openings remain well above their pre-pandemic level, so laid-off tech workers should have good chances of finding new jobs.

Finally, tech worker layoffs have frequently spiked in the past without a corresponding increase in total layoffs and have not historically been a leading indicator of broader labor market deterioration, Goldman analysts found.

“The main problem in the labor market is still that labor demand is too strong, not too weak,” they concluded.

Mortgage rates dropped sharply last week following a series of economic reports that indicated inflation may finally be easing, reports my colleague Anna Bahney

The 30-year fixed-rate mortgage averaged 6.61% in the week ending November 17, down from 7.08% the week before, according to Freddie Mac, the largest weekly drop since 1981.

But that’s still significantly higher than a year ago when the 30-year fixed rate stood at 3.10%.

“While the decline in mortgage rates is welcome news, there is still a long road ahead for the housing market,” said Sam Khater, Freddie Mac’s chief economist. “Inflation remains elevated, the Federal Reserve is likely to keep interest rates high and consumers will continue to feel the impact.”

Affording a home remains a challenge for many home buyers. Mortgage rates are expected to remain volatile for the rest of the year. And prices remain elevated in many areas, especially where there is a very limited inventory of available homes for sale.

Meanwhile, inflation and rising interest rates mean many would-be buyers are also facing tightened budgets.

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November 18, 2022
Britain is bringing back austerity. Here’s why | CNN Business

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The last time a British finance minister revealed tax and spending plans, markets went haywire and the country’s prime minister ultimately lost her job. The new government is not looking for a repeat performance.

On Thursday, Chancellor Jeremy Hunt is due to unveil a budget that will aim to restore confidence in the United Kingdom’s ability to manage its public finances. But that may be easier said than done.

The country is staring down the barrel of a grueling recession, and investors remain on edge as interest rates rise. That requires Hunt, who has acknowledged that Britain faces “extremely difficult” decisions, to pull off a delicate balancing act.

Media reports indicate that the government is looking to come up with between £50 billion ($59 billion) and £60 billion ($70 billion) through a mix of tax increases and spending cuts, many of which may not take effect until after the next election in 2024.

“If you do too much, too soon, you risk worsening the recession,” said Ben Zaranko, a senior research economist at the Institute for Fiscal Studies. “If you delay everything until after the next election, you risk not being seen as credible.”

A new wave of austerity could help restore the government’s reputation with financial markets after the budget from former Prime Minister Liz Truss — which featured an unorthodox combination of major tax cuts and ramped-up borrowing — unleashed panic.

But it will do little to ease fears about the country’s grim economic prospects. The United Kingdom is one of two G7 economies to have contracted in the third quarter. It’s now smaller than it was before the coronavirus pandemic. The Bank of England is forecasting a lengthy recession, which could stretch into 2024.

New cuts could make matters worse. When the government adopted an austerity program in 2010 on the heels of the Great Recession, it shaved 1% off the country’s GDP, according to the UK budget watchdog. Just four years ago, former Prime Minister Theresa May pledged to bring nearly a decade of austerity to a close.

Now, tax rises could further depress consumer confidence — already near a record low — and spending cuts risk placing further strain on public services that are already buckling under enormous pressure.

Still, Hunt intends to show he has a plan to reduce government debt as a proportion of GDP in the medium-term. It currently stands at 98%. The Office for Budget Responsibility said in July that it could reach nearly 320% in 50 years.

“We do have to do some tax rises, do some spending cuts, if we’re going to show we’re a country that pays our way,” Hunt told Sky News on Sunday.

How did the United Kingdom get here? There’s no shortage of finger pointing.

Part of the problem is global in nature. Interest rates have risen rapidly around the world as central banks attempt to rein in inflation. That’s pushed up borrowing costs for the government, dealing a shock after years in which money was cheap.

At the same time, skyrocketing energy costs, exacerbated by Russia’s war in Ukraine, have compelled governments to step in to cushion the blow of crippling energy bills — shortly after they spent significant sums helping households and businesses through the pandemic.

Hunt has scrapped plans to cap energy bills for typical households at £2,500 ($2,981) for the next two years. Instead, support will only be guaranteed until next spring. But the measures will still prove costly.

The government can’t blame all its problems on the rest of the world, however.

“You can just look at how the UK is performing relative to every other country in Europe, and it’s obvious there’s a UK-specific element to this,” Zaranko said.

The United Kingdom’s exit from the European Union has weighed on trade and contributed to shortages of workers in key industries.

“The UK economy as a whole has been permanently damaged by Brexit,” former Bank of England official Michael Saunders told Bloomberg TV this week. “If we hadn’t had Brexit, we probably wouldn’t be talking about an austerity budget this week. The need for tax rises, spending cuts wouldn’t be there.”

And while inflation in the United States cooled more than expected in October, falling to 7.7%, it’s still rising sharply in the United Kingdom, reaching a 41-year high of 11.1% last month.

That’s bolstering expectations that the Bank of England will need to keep raising interest rates and could hold them higher for longer, though recession may complicate those forecasts.

The country’s labor market also remains extremely tight, with an employment rate lower than before the coronavirus hit and a record number of people who aren’t working due to long-term illness.

“The UK does stand out in that labor supply has been very constrained, perhaps more so than in other countries,” said Ruth Gregory, senior UK economist at Capital Economics.

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November 16, 2022
Interest rates will keep rising. How high will they go? | CNN Business

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What will the Federal Reserve do at its meeting in December? Analysts can speculate all they want, but Fed officials say they will be using hard economic data to make their next decision.

That means key housing, labor, and inflation reports will likely have outsized effects on the market as investors speculate about what they might mean for the future of interest rates.

What’s happening: No one can move markets like Federal Reserve Chair Jerome Powell — with just a few words on Wednesday he crushed investors’ hopes of an interest rate pivot and sent stocks plunging. “We have a ways to go,” said Powell of the Fed’s current hiking regime meant to fight persistent inflation. “It’s very premature, in my view, to think about or be talking about pausing.”

But Powell did add an important caveat. The Fed could start to slow the pace of those painful hikes as soon as December. “Our decisions will depend on the totality of incoming data and their implications for the outlook for economic activity and inflation,” Powell said on Wednesday.

So what will the Fed be looking at between today and its next policy decision on December 14?

The labor market: The Fed’s biggest worry is the super-tight US labor market, and Friday’s jobs report isn’t likely to soothe any nerves.

The government report is expected to show the economy added another 200,000 positions in October — down from last month, but still a very solid number as demand for employment continues to outpace the supply of labor.

That means more inflation. Businesses have to pay higher wages to attract employees and are able to charge more for their goods and services. The Fed will be looking closely at hourly wage growth in the report. In September, wages rose by 5% from a year ago.

There is a possible upside: Another jobs report in December is expected ahead of the Fed meeting. If both reports show a downward trajectory in employment, that could be enough to placate Fed officials, even if the unemployment rate remains historically low.

Inflation data: Expect new data from two major indexes that measure the pace of inflation ahead of the next Federal Reserve meeting.

The Consumer Price Index (CPI) for October, which tracks changes in the prices of a fixed set of goods and services, is out on November 10.

Core CPI prices, which exclude oil and food, rose 0.6% in September month-over-month, matching August’s pace and coming in well above expectations of a 0.4% increase, not a great sign for the Fed. And analysts expect to see another large 0.5% increase in October.

The Fed will also get to see October data from its favored measure of inflation, Personal Consumption Expenditures (PCE), on December 1.

PCE reflects changes in the prices of goods and services purchased by consumers in the United States. The Fed believes the measure is more accurate than CPI because it accounts for a wider range of purchases from a broader range of buyers.

Core PCE climbed by 5.1% on an annual basis in September, higher than the August rate of 4.9% but below the consensus estimate of 5.2%, per Refinitiv.

Housing: The housing market has been deeply impacted by the Fed’s efforts to fight inflation, and is one of the first areas of the economy to show signs of cooling.

The 30-year fixed-rate mortgage averaged 6.95% last week, up from 3.09% just a year ago, and elevated borrowing costs are leading to a decline in demand.

“The housing market was very overheated for the couple of years after the pandemic as demand increased and rates were low,” said Powell on Wednesday. “We do understand that that’s really where a very big effect of our policies is.”

October’s new and existing home sales numbers, due on November 18 and 23, will show the continued impact of that policy ahead of the next meeting.

The US economy is still standing strong in the face of rising interest rates, but things are softening much more quickly across the pond.

The United Kingdom will face hard economic times and elevated interest rates well into next year, officials warned this week.

The Bank of England raised interest rates by three-quarters of a percentage point on Thursday, the biggest hike in 33 years, as it attempts to fight soaring inflation.

But the bank also issued a stark warning. It said that economic output is already contracting and that it expects a recession to continue through the first half of 2024 “as high energy prices and materially tighter financial conditions weigh on spending.”

A two-year recession would be longer than the one that followed the 2008 global financial crisis, though the Bank of England said that any declines in GDP heading into 2024 would likely be relatively small.

The central bank also doesn’t think inflation will start to fall back until next year. That will require more interest rate hikes in the coming months, warned policymakers.

Elon Musk has been busy over at Twitter HQ. Aside from tweeting and deleting a conspiracy theory, he’s talked about implementing some big changes at his $44 billion acquisition. Here’s what’s happened so far:

Layoffs begin: Elon Musk began laying off Twitter employees on Friday morning, according to a memo sent to staff. The email sent Thursday evening notified employees that they will receive a notice by 12 p.m. ET Friday that informs them of their employment status.

The email added that “to help ensure the safety” of employees and Twitter’s systems, the company’s offices “will be temporarily closed and all badge access will be suspended.”

Twitter had around 7,500 employees prior to Musk’s takeover.

Several Twitter employees have already filed a class action lawsuit claiming that the layoffs violate the federal Worker Adjustment and Retraining Notification Act.

The WARN Act requires any company with over 100 employees to give 60 days’ written notice if it intends to cut 50 jobs or more at a “single site of employment.”

Consolidating strength: In less than a week since Musk acquired Twitter, the company’s C-suite appears to have almost entirely cleared out, through a mix of firings and resignations.

Twitter’s board of directors was also dissolved last week, according to a securities filing.

The company filing states that all previous members of Twitter’s board, including recently ousted CEO Parag Agrawal and chairman Bret Taylor, are no longer directors “in accordance with the terms of the merger agreement.” That makes Musk, according to the filing, “the sole director of Twitter.”

Cashing blue checks’ checks: Musk on Tuesday said he planned to charge $8 a month for Twitter’s subscription service, called “Twitter Blue,” with the promise to let anyone pay to receive a coveted blue check mark to verify their account. That’s a steep haircut from his original plan to charge users $19.99 a month to get or keep a verified account.

In a tweet, the world’s richest man used an expletive to describe his assessment of “Twitter’s current lords & peasants system for who has or doesn’t have a blue checkmark.” He added: “Power to the people! Blue for $8/month.”

Advertisers hit pause: Elon Musk wrote an open letter to advertisers just hours before cementing his acquisition of Twitter, explaining that he didn’t want the platform to become a “free-for-all hellscape.” But that attempt at reassuring the advertising industry, which makes up the vast majority of Twitter’s business, doesn’t appear to be working.

General Mills

(GIS), Mondelez International

(MDLZ), Pfizer

(PFE) and Audi

(AUDVF) have reportedly joined a growing list of companies hitting pause on their Twitter advertising in the wake of Musk’s acquisition.

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November 4, 2022
The econ Nobel offers a timely warning about central banks’ power | CNN Business

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CNN Business
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The Nobel in economics is sort of the step-cousin of the Nobel family.

It came about nearly 70 years after its literature and sciences counterparts, in 1969, and is technically called the “Sveriges Riksbank Prize in Economic Sciences.” It is awarded by the Swedish central bank, in honor of the namesake renaissance man Alfred Nobel who established the prizes.

Some scholars really dislike the economics prize, including one of Nobel’s own descendants, who dismissed it as a “PR coup by economists.”

But hey, it still comes with a cash prize. And it’s also pretty useful in reminding the world that economics as an academic field is, frankly, a barely understood hodge-podge of studies that is constantly evolving and so variable it’s almost useless outside of academia. (And I mean that with the utmost respect to economists, who, not unlike journalists, knew what they were doing when they chose their life of suffering.)

Here’s the thing: Ben Bernanke, the former Federal Reserve chairman who guided the US economy through the 2008 financial crisis and subsequent recession, was awarded the Nobel in economics along with two other economists, Douglas Diamond and Philip Dybvig. (Congrats to all the winners, with apologies to Doug and Phil, who will forever be referred to in headlines about the Nobel as “and two other economists.”)

Bernanke, who previously taught at Princeton and earned his Ph.D from MIT, received the award for his research on the Great Depression. In short, his work demonstrates that banks’ failures are often a cause, not merely a consequence, of financial crises.

That was groundbreaking when he published it in 1983. Today, it’s conventional wisdom.

WHY IT MATTERS

The timing is everything here. The Nobel committee has been known to play politics (see: that time Barack Obama was awarded the Nobel Peace Prize after being in office for just eight months). And right now, it is using its spotlight to call attention to the high-stakes gamble playing out at central banks around the world, most notably the Fed.

The rapid run-up in interest rates, led by the US central bank, is causing markets around the world to go haywire. And it’s especially bad news for emerging economies.

Monetary tightening — especially when it is aggressive and synchronized across major economies — could inflict worse damage globally than the 2008 financial crisis and the 2020 pandemic, a United Nations agency warned earlier this month. It called the Fed’s policy “imprudent gamble” with the lives of those less fortunate.

LESSONS FROM HISTORY

On Monday, Diamond, one of the three newly minted Nobel laureates, acknowledged that the rate moves around the world were causing market instability.

But he believes the system is more resilient than it used to be because of hard lessons learned from the 2008 crash, my colleague Julia Horowitz reports.

“Recent memories of that crisis and improvements in regulatory policies around the world have left the system much, much less vulnerable,” Diamond said.

Let’s hope he’s right.

Oh hey, speaking of the Fed inflicting pain: We’re about to see big job losses, according to Bank of America.

Under the rate hikes imposed by Jay Powell & Co, the US economy could see job growth cut in half during the fourth quarter of this year. Early next year, the bank expects to see losses of about 175,000 jobs a month.

The litigation between Elon Musk and Twitter is officially on hold. The two sides now have until October 28 to work out a deal or once again gear up for a courtroom battle.

The big question now is all about the money.

Here’s the deal: Not even the world’s richest person has this kind of cash just lying around. Musk’s wealth is tied up in Tesla stock, which he can’t easily offload for a whole bunch of reasons. He needs to borrow the money, which means he’s got to get banks to pony up.

By most accounts, he’ll be able to make it happen. But the Twitter deal is a harder pitch to make now than it was back in April, when Musk said he’d lined up more than $46 billion in financing, including two debt commitment letters from Morgan Stanley and other unnamed financial institutions, my colleague Clare Duffy writes.

Musk has spent the past several months trashing Twitter as he sought to renege on his offer. Meanwhile, tech stocks have been hammered, ad revenues are declining, and the global economy has inched closer to a recession, sapping investor appetite for risk.

Musk’s legal team said last week the banks that had committed debt financing previously were “working cooperatively to fund the close.”

Twitter is, understandably, skeptical, given the many curve balls Musk has thrown at them since he got involved with the company earlier this year. The company raised concerns last week that a representative for one of the banks testified that Musk had not yet sent a borrowing notice and “has not otherwise communicated to them that he intends to close the transaction, let alone on any particular timeline.”

What’s Musk’s endgame?

No one knows, perhaps least of all Musk. But many legal experts following the case say Musk understood he’d likely lose at trial and then be forced to buy Twitter anyway. He’d rather buy the entire company than be deposed by Twitter’s lawyers and do further damage to Twitter in a trial.

And the banks may not be able to walk away even if they want to.

“The only way they could get out of it is to claim a material adverse effect and that Twitter has changed so much since they agreed to the deal that they no longer want to finance the deal,” said George Geis, professor of strategy at the UCLA Anderson School of Management.

Even if the banks succeeded there, Musk may not be off the hook. The judge in the case could rule that Musk was at fault for the financing falling through — not a far-fetched notion after all the trash-talking — and order him to sue Morgan Stanley to provide the funds or close the deal without it.

Bottom line, it seems like Musk will end up owning Twitter one way or another. And given his only vague musings about what he’d actually do with it, there are a whole host of unknowns lurking in Twitter’s future.

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October 10, 2022
How meltdown in a $1 trillion market brought the UK to the brink of a financial crisis | CNN Business

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London
CNN Business
—

Pension funds are designed to be dull. Their singular goal — earning enough money to make payouts to retirees — favors cool heads over brash risk takers.

But as markets in the United Kingdom went haywire last week, hundreds of British pension fund managers found themselves at the center of a crisis that forced the Bank of England to step in to restore stability and avert a broader financial meltdown.

All it took was one big shock. Following finance minister Kwasi Kwarteng’s announcement on Friday, Sept. 23 of plans to ramp up borrowing to pay for tax cuts, investors dumped the pound and UK government bonds, sending yields on some of that debt soaring at the fastest rate on record.

The scale of the tumult put enormous pressure on many pension funds by upending an investing strategy that involves the use of derivatives to hedge their bets.

As the price of government bonds crashed, the funds were asked to pony up billions of pounds in collateral. In a scramble for cash, investment managers were forced to sell whatever they could — including, in some cases, more government bonds. That sent yields even higher, sparking another wave of collateral calls.

“It started to feed itself,” said Ben Gold, head of investment at XPS Pensions Group, a UK pensions consultancy. “Everyone was looking to sell and there was no buyer.”

The Bank of England went into crisis mode. After working through the night of Tuesday, Sept. 27, it stepped into the market the next day with a pledge to buy up to £65 billion ($73 billion) in bonds if needed. That stopped the bleeding and averted what the central bank later told lawmakers was its worst fear: a “self-reinforcing spiral” and “widespread financial instability.”

In a letter to the head of the UK Parliament’s Treasury Committee this week, the Bank of England said that if it hadn’t interceded, a number of funds would have defaulted, amplifying the strain on the financial system. It said its intervention was essential to “restore core market functioning.”

Pension funds are now racing to raise money to refill their coffers. Yet there are questions about whether they can find their footing before the Bank of England’s emergency bond-buying is due to end on Oct. 14. And for a wider range of investors, the near-miss is a wake-up call.

For the first time in decades, interest rates are rising quickly around the world. In that climate, markets are prone to accidents.

“What the previous two weeks have told you is there can be a lot more volatility in markets,” said Barry Kenneth, chief investment officer at the Pension Protection Fund, which manages pensions for employees of UK companies that become insolvent. “It’s easy to invest when everything’s going up. It’s a lot more difficult to invest when you’re trying to catch a falling knife, or you’ve got to readjust to a new environment.”

The first signs of trouble appeared among fund managers who focus on so-called “liability-driven investment,” or LDI, for pensions. Gold said he started to receive messages from worried clients over the weekend of Sept. 24-25.

LDI is built on a straightforward premise: Pensions need enough money to pay what they owe retirees well into the future. To plan for payouts in 30 or 50 years, they buy long-dated bonds, while purchasing derivatives to hedge these bets. In the process, they have to put up collateral. If bond yields rise sharply, they are asked to put up even more collateral in what’s known as a “margin call.” This obscure corner of the market has grown rapidly in recent years, reaching a valuation of more £1 trillion ($1.1 trillion), according to the Bank of England.

When bond yields rise slowly over time, it’s not a problem for pensions deploying LDI strategies, and actually helps their finances. But if bond yields shoot up very quickly, it’s a recipe for trouble. According to the Bank of England, the move in bond yields before it intervened was “unprecedented.” The four-day move in 30-year UK government bonds was more than twice what was seen during the highest-stress period of the pandemic.

“The sharpness and the viciousness of the move is what really caught people out,” Kenneth said.

The margin calls came in — and kept coming. The Pension Protection Fund said it faced a £1.6 billion call for cash. It was able to pay without dumping assets, but others were caught off guard, and were forced into a fire sale of government bonds, corporate debt and stocks to raise money. Gold estimated that at least half of the 400 pension programs that XPS advises faced collateral calls, and that across the industry, funds are now looking to fill a hole of between £100 billion and £150 billion.

“When you push such large moves through the financial system, it makes sense that something would break,” said Rohan Khanna, a strategist at UBS.

When market dysfunction sparks a chain reaction, it’s not just scary for investors. The Bank of England made clear in its letter that the bond market rout “may have led to an excessive and sudden tightening of financing conditions for the real economy” as borrowing costs skyrocketed. For many businesses and mortgage holders, they already have.

So far, the Bank of England has only bought £3.8 billion in bonds, far less than it could have purchased. Still, the effort has sent a strong signal. Yields on longer-term bonds have dropped sharply, giving pension funds time to recoup — though they’ve recently started to rise again.

“What the Bank of England has done is bought time for some of my peers out there,” Kenneth said.

Still, Kenneth is concerned that if the program ends next week as scheduled, the task won’t be complete given the complexity of many pension funds. Daniela Russell, head of UK rates strategy at HSBC, warned in a recent note to clients that there’s a risk of a “cliff-edge,” especially since the Bank of England is moving ahead with previous plans to start selling bonds it bought during the pandemic at the end of the month.

“It might be hoped that the precedent of BoE intervention continues to provide a backstop beyond this date, but this may not be sufficient to prevent a renewed vigorous sell-off in long-dated gilts,” she wrote.

As central banks jack up interest rates at the fastest clip in decades, investors are nervous about the implications for their portfolios and for the economy. They’re holding more cash, which makes it harder to execute trades and can exacerbate jarring price moves.

That makes a surprise event more likely to cause massive disruption, and the specter of the next shocker looms. Will it be a rough batch of economic data? Trouble at a global bank? Another political misstep in the United Kingdom?

Gold said the pension industry as a whole is better prepared now, though he concedes it would be “naive” to think there couldn’t be another bout of instability.

“You would need to see yields rise more quickly than we saw this time,” he said, noting the larger buffers funds are now amassing. “It would require something of absolutely historic proportions for that not to be enough, but you never know.”

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October 8, 2022
The bond market is crumbling. That’s bad for Wall Street and Main Street | CNN Business

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A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

New York
CNN Business
—

The global bond market is having a historically awful year.

The yield on the 10-year US Treasury bond, a proxy for borrowing costs, briefly moved above 4% on Wednesday for the first time in 12 years. That’s a bad omen for Wall Street and Main Street.

What’s happening: This hasn’t been a pretty year for US stocks. All three major indexes are in a bear market, down more than 20% from recent highs, and analysts predict more pain ahead. When things are this bad, investors seek safety in Treasury bonds, which have low returns but are also considered low-risk (As loans to the US government, Treasury notes are seen as a safe bet since there is little risk they won’t be paid back).

But in 2022’s topsy-turvy economy, even that safe haven has become somewhat treacherous.

Bond returns, or yields, rise as their prices fall. Under normal market conditions, a rising yield should mean that there’s less demand for bonds because investors would rather put their money into higher-risk (and higher-reward) stocks.

Instead markets are plummeting, and investors are flocking out of risky stocks, but yields are going up. What gives?

Blame the Fed. Persistent inflation has led the Federal Reserve to fight back by aggressively hiking interest rates, and as a result the yields on US Treasury bonds have soared.

Economic turmoil in the United Kingdom and European Union has also caused the value of both the British pound and the euro to fall dramatically when compared to the US dollar. Dollar strength typically coincides with higher bond rates as well.

So while we’d normally see a rising 10-year yield as a signal that US investors have a rosy economic outlook, that isn’t the case this time. Gloomy investors are predicting more interest rate hikes and a higher chance of recession.

What it means: Portfolios are aching. Vanguard’s $514.5 billion Total Bond Market Index, the largest US bond fund, is down more than 15% so far this year. That puts it on track for its worst year since it was created in 1986. The iShares 20+ Year Treasury bond fund

(TLT) (TLT) is down nearly 30% for the year.

Stock investors are also nervously eyeing Treasuries. High yields make it more expensive for companies to borrow money, and that extra cost could lower earnings expectations. Companies with significant debt levels may not be able to afford higher financing costs at all.

Main Street doesn’t get a break, either. An elevated 10-year Treasury return means more expensive loans on cars, credit cards and even student debt. It also means higher mortgage rates: The spike has already helped push the average rate for a 30-year mortgage above 6% for the first time since 2008.

Going deeper: Still, investors are more nervous about the immediate future than the longer term. That’s spurred an inverted yield curve – when interest rates on short-term bonds move higher than those on long-term bonds. The inverted yield curve is a particularly ominous warning sign that has correctly predicted almost every recession over the past 60 years.

The curve first inverted in April, and then again this summer. The two-year treasury yield has soared in the last week, and now hovers above 4.3%, deepening that gap.

On Monday, a team at BNP Paribas predicted that the inverted gap between the two-year and 10-year Treasury yields could grow to its largest level since the early 1980s. Those years were marked by sticky inflation, interest rates near 20% and a very deep recession.

What’s next: The bond market may face fresh volatility on Friday with the release of the Federal Reserve’s favored inflation measure, the Personal Consumption Expenditure Price Index for August. If the report comes in above expectations, expect bond yields to move even higher.

The Bank of England held an emergency intervention to maintain economic stability in the UK on Wednesday. The central bank said it would buy long-dated UK government bonds “on whatever scale is necessary” to prevent a market crash.

Investors around the globe have been dumping the British pound and UK bonds since the government on Friday unveiled a huge package of tax cuts, spending and increased borrowing aimed at getting the economy moving and protecting households and businesses from sky-high energy bills this winter, reports my colleague Mark Thompson.

Markets fear the plan will drive up already persistent inflation, forcing the Bank of England to push interest rates as high as 6% next spring, from 2.25% at present. Mortgage markets have been in turmoil all week as lenders have struggled to price their loans. Hundreds of products have been withdrawn.

“This repricing [of UK assets] has become more significant in the past day — and it is particularly affecting long-dated UK government debt,” the central bank said in its statement.

“Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”

Many final salary, or defined-benefit, pension funds were particularly exposed to the dramatic sell-off in longer dated UK government bonds.

“They would have been wiped out,” said Kerrin Rosenberg, UK chief executive of Cardano Investment.

The central bank said it would buy long-dated UK government bonds until October 14.

Steep drops in bond prices may be signaling doom and gloom for the economy, but some analysts say short-term bonds are still looking more attractive than equities right now.

“Record low yields have kept fixed income in the shadow of equities for decades,” said analysts at BNY Mellon Wealth Management in a research note. “But the aggressive shift in Fed policy is beginning to change this.”

Central banks around the globe have responded to elevated inflation by hiking interest rates– and bond yields have increased alongside them. The two-year US Treasury bond is currently yielding nearly 4%. That’s still a relatively low return, but better than the S&P 500’s dividend yield of around 1.7%.

“For the first time in several years, bonds are attractive investment options. In addition to providing diversification versus equities…you now get paid for owning them,” wrote Barry Ritholtz of Ritholtz Wealth Management on Wednesday.

Consider the alternative: the S&P is down more than 20% year to date.

The US Bureau of Economic Analysis releases its third estimate for Q2 GDP and US weekly jobless claims.

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October 5, 2022
The UK is gripped by an economic crisis of its own making | CNN Business

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London
CNN Business
—

A week ago, the Bank of England took a stab in the dark. It raised interest rates by a relatively modest half a percentage point to tackle inflation. It couldn’t know the scale of the storm that was about to break.

Less than 24 hours later, the government of new UK Prime Minister Liz Truss unveiled its plan for the biggest tax cuts in 50 years, going all out for economic growth but blowing a huge hole in the nation’s finances and its credibility with investors.

The pound crashed to a record low against the US dollar on Monday after UK finance minister Kwasi Kwarteng doubled-down on his bet by hinting at more tax cuts to come without explaining how to pay for them. Bond prices collapsed, sending borrowing costs soaring, sparking mayhem in the mortgage market and pushing pension funds to the brink of insolvency.

Financial markets were already in a febrile state because of the rising risk of a global recession and the gyrations caused by three outsized rate increases from a US central bank on the warpath against inflation. Into that “pressure cooker” stumbled the new UK government.

“You need to have strong, credible policies, and any policy missteps are punished,” said Chris Turner, global head of markets at ING.

After verbal assurances by the UK Treasury and Bank of England failed to calm the panic — and the International Monetary Fund delivered a rare rebuke — the UK central bank pulled out its bazooka, saying Wednesday it would print £65 billion ($70 billion) to buy government bonds between now and October 14 — essentially protecting the economy from the fallout of the Truss’ growth plan.

“While this is welcome, the fact that it needed to be done in the first place shows that the UK markets are in a perilous position,” said Paul Dales, chief UK economist at Capital Economics, commenting on the bank’s intervention.

The emergency first aid stopped the bleeding. Bond prices recovered sharply and the pound steadied Wednesday against the dollar. But the wound hasn’t healed.

The pound tumbled 1%, falling back below $1.08 early Thursday. UK government bonds were under pressure again, with the yield on 10-year debt climbing to 4.16%. UK stocks fell 2%.

“It wouldn’t be a huge surprise if another problem in the financial markets popped up before long,” Dales added.

The next few weeks will be critical. Mohamed El-Erian, who once helped run the world’s biggest bond fund and now advises Allianz

(ALIZF), said that the central bank had bought some time but would need to act again quickly to restore stability.

“The Band-Aid may stop the bleeding, but the infection and the bleeding will get worse if they do not do more,” he told CNN’s Julia Chatterley.

The Bank of England should announce an emergency rate hike of a full percentage point before its next scheduled meeting on November 3. The UK government should also postpone its tax cuts, El-Erian said.

“It is doable, the window is there, but if they wait too long, that window is going to close,” he added.

The UK government has previewed rolling announcements in the coming weeks about how it plans to change immigration policy and make it easier to build big infrastructure and energy projects to boost growth, culminating in a budget on November 23 at which it has promised to publish a detailed plan for reducing debt over the medium term.

But it shows no sign of backing away from the fundamental policy choice of borrowing heavily to fund tax cuts that will mainly benefit the rich at a time of high inflation. And the UK Treasury says it won’t bring forward the November announcement.

Truss, speaking publicly for the first time since the crisis erupted, blamed global market turmoil and the energy price shock from Russia’s invasion of Ukraine for this week’s chaos.

“This is the right plan that we’ve set out,” she told local radio on Thursday.

One big problem identified by investors, former central bankers and many leading economists is that her government only set out half a plan at best. It went ahead without an independent assessment from the country’s budget watchdog of the assumptions underlying the £45 billion ($48 billion) annual tax cuts, and their longer term impact on the economy. It fired the top Treasury civil servant earlier this month.

Charlie Bean, former deputy governor at the Bank of England, told CNN Business that the government was guilty of “really stupid” decisions. His former boss at the bank, Mark Carney, accused the government of “undercutting” UK economic institutions, saying that had contributed to the “big knock” suffered by the country’s financial system this week.

“This is an economic crisis. It is a crisis… that can be addressed by policymakers if they choose to address it,” he told the BBC.

British newspapers have started to speculate that Truss will have to fire Kwarteng, her close friend and political soulmate, if she wants to regain the political initiative and prevent her government’s dire poll ratings from plunging even further.

“Every single problem we have now is self-inflicted. We look like reckless gamblers who only care about the people who can afford to lose the gamble,” one former Conservative minister told CNN.

But for now she’s trying to tough it out, and cling onto the Reaganite experiment.

“Raising, postponing, or abandoning tax cuts will be avoided by Truss at all costs as such a reversal would be humiliating and could leave her looking like a lame duck prime minister,” wrote Mujtaba Rahman and Jens Larson at political risk consultancy Eurasia Group.

The only alternative left to balance the books would be to slash government spending, and that would prove equally politically difficult as the country enters a recession with its public services under enormous strain and a restive workforce that has shown it’s ready to strike in large numbers over pay.

“Truss and Kwarteng are now facing a severe economic crisis as the world’s financial markets wait for them to make policy changes that they and the Conservative party will find unpalatable,” the Eurasia analysts wrote.

The foreign investors who keep the British economy solvent are left scratching their heads for another eight weeks, leaving plenty of time for doubts to surface again about the UK government’s commitment to responsible fiscal policymaking.

“The message of financial markets is that there is a limit to unfunded spending and unfunded tax cuts in this environment and the price of those is much higher borrowing costs,” Carney said.

That leaves the Bank of England in a tight spot. A week ago it was pressing the brakes on the economy to take the heat out of price increases, even as the government tried to juice growth. The task got even harder this week when it was forced to dust off its crisis playbook and bail out the government.

It may not be long before it has to intervene again, this time with an emergency rate hike.

“[Wednesday’s] intervention is designed to stabilize UK government bond prices, keep the bond market liquid and prevent financial instability but that won’t necessarily stop sterling falling further, with its attendant inflationary consequences,” Bean, the former central banker, told CNN Business.

“I think there is still a good chance they will need to act ahead of the November meeting,” he added.

— Julia Horowitz, Luke McGee, Anna Cooban, Rob North, Livvy Doherty and Morgan Povey contributed to this article.

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September 29, 2022
Debt default could occur in early June, forecasters say, backing Yellen | CNN Politics

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CNN
—

Two new analyses are backing Treasury Secretary Janet Yellen’s forecast that the nation could default on its debt – and unleash economic chaos – as soon as early June if Congress doesn’t act.

The projections, which are roughly in line with those issued last week by Yellen and the Congressional Budget Office, add to the pressure on House Republicans and President Joe Biden, who may have only a few weeks to hammer out their vast differences over addressing the debt ceiling. Biden is meeting with congressional leaders Tuesday to work on a deal, the first movement in months.

A weaker-than-expected tax season, spurred in part by disaster-related filing extensions for much of California and parts of Alabama and Georgia, has increased the odds that Treasury won’t have enough funds to pay the federal government’s bills in early June, according to an updated estimate released Tuesday by the Bipartisan Policy Center.

“The coming weeks are critical for assessing the strength of government cash flows,” said Shai Akabas, the center’s director of economic policy. “If a solution is not reached before June, policymakers may be playing daily Russian roulette with the full faith and credit of the United States, risking financial disaster for their constituents and the country.”

The so-called X-date, when the US could default, could arrive between early June and early August, according to the center. In February, it projected the default could take place during the summer or early fall.

Meanwhile, Moody’s Analytics last week pegged the default date at June 8, significantly earlier than its prior projection of August 18. But the X-date could hit as soon as June 1 or as late as early August, according to that analysis.

Cumulative income tax receipts are tracking more than 30% below collections a year ago, in part because of weaker capital gains revenue as a result of last year’s stock market declines, Moody’s said.

Tax receipts are running $150 billion below government projections for fiscal year 2023, which began in October, according to a report issued Monday by the Penn Wharton Budget Model, an independent research organization. This is due mainly to a drop in capital gains income and weakening corporate profit margins.

In Yellen’s letter to House Speaker Kevin McCarthy last week, she said the exact date of default is impossible to pinpoint since the amount of revenue the federal government collects and the amount it spends is variable. She noted it could come as early as June 1 but could be a number of weeks later.

Even if the Treasury Department doesn’t completely run out of funds, it could be difficult for the agency to manage its payments and stay below the debt ceiling when it only has a tiny cash balance, Akabas said. How much revenue the agency collects in the next three weeks is critical to whether the nation will default next month.

“Treasury is skating on very thin ice in the month of June. If it’s $10, $20, $30, $40 billion below what we anticipate, that means that they’re really going to be in a crunch situation,” he said of revenue.

Unable to keep borrowing to pay the nation’s obligations, the Treasury Department has been using cash and “extraordinary measures” to avoid default since the US hit its $31.4 trillion debt ceiling in January.

If government collections wind up being enough to keep Treasury’s coffers flush through early June, then it’s likely the government won’t default until later in the summer. The agency will get another injection of funds from second quarter estimated tax payments, which are due June 15, and from an extraordinary measure that becomes available at the end of that month.

Investors are growing skittish about the debt ceiling impasse and a potential default.

Last week, the Treasury Department sold $50 billion of four-week securities scheduled to mature on June 6 at a record 5.84%, the highest yield for any Treasury Department bill auction since 2000, Akabas noted.

“Even now, the looming deadline is raising costs to the government and therefore, to all taxpayers,” he said.

If the government was to default for the first time, it would trigger an economic meltdown in the US and send shock waves through the global financial system.

If the default lasts for about a week, then close to 1 million jobs would be lost, including in the financial sector, which would be hard hit by the stock market declines, according to Moody’s. Also, the unemployment rate would jump to about 5% and the economy would contract by nearly half a percent.

But if the impasse dragged on for six weeks, then more than 7 million jobs would be lost, the unemployment rate would soar above 8% and the economy would decline by more than 4%, according to Moody’s. The effects would still be felt a decade from now.

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April 12, 2021
Inside the Treasury Department team monitoring early economic warning signs as default threat looms | CNN Politics

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CNN
—

Nearly five months before the US was projected to hit the debt ceiling, a small team inside the Treasury Department began alerting top officials to early effects already being felt in the US financial system.

The cost of insuring US debt, as measured by the price of credit-default swaps, was rising – a sign that investors were beginning to view US bonds and other securities as increasingly risky.

That early warning – and subsequent ones over the last month as the swaps pricing has surged – came out of the Treasury Department’s Markets Room and its eponymous team of nine financial analysts who are responsible for monitoring and analyzing global financial markets to inform the policy work of top Treasury Department and White House officials.

As the US rapidly approaches a potential default date in early June, top US officials are increasingly relying on the Markets Room to monitor for signs of disruption in the financial markets.

“In the same way that a doctor wants to understand the vital signs of a patient as they’re thinking about how to treat them, at Treasury keeping abreast of understanding the various ways in which the economy is healthy or unhealthy. And part of that is understanding the market,” Deputy Treasury Secretary Wally Adeyemo told CNN in an interview.

“So, we’re spending a lot of time with them better understanding what the costs are today, in order to make sure that we’re in a position to share that information with Congress, in order to prevent us from getting into a position where for the first time in our history, we’re unable to pay all of our obligations on time.”

That work begins each day before dawn, when staffers take turns waking up around 3:30 a.m. ET to compile data about overnight market developments and begin making calls to contacts working in European and Asian markets.

At around 7 a.m. ET, those data and insights land in the inboxes of top policymakers at the White House and Treasury Department.

At 9 a.m. ET, before the US markets open, Treasury Secretary Janet Yellen and her senior leadership team huddle virtually with the Markets Room and other key Treasury Department aides for a briefing on the state of the financial markets and issues to watch for that day.

“Almost every American is influenced by what’s happening around the globe and global markets either through your 401(k), or your attempt to borrow money for your small business or for your home. So, this team of individuals, every morning, provides us a briefing and an update on what’s happening around the world,” Adeyemo said.

In recent weeks, that daily briefing has heavily focused on reverberations of the debt limit standoff, from updates on auctions of Treasury bills to market reactions and commentary from market analysts and economists.

Much of the rest of the day is spent monitoring developments in the financial markets and fielding inquiries from top policymakers at Treasury and the White House for analysis on those developments.

And at the end of the day, the Markets Room also helps policymakers digest the biggest developments in the financial markets with another widely read one-page memo delivered after the US markets close and before the Asian markets open.

Beyond the Treasury Department, a White House spokesperson said the unit’s twice-daily memos are “a valuable asset” for officials at the National Economic Council and Council of Economic Advisers.

“Those offices also rely on the Markets Room’s real-time updates – either in memos or meetings – when more regular monitoring is warranted,” the spokesperson said.

Officials say the Markets Room is focused on monitoring the global economy’s recovery from the pandemic-induced recession, lingering inflation and the trajectory of the global economy.

Albert Lee, the Markets Room director, described the unit as an early warning system on the global financial system for top US policymakers.

In the early days of the coronavirus pandemic, the team was among the first to sound alarm bells inside the federal government about early shocks in pockets of the financial system and predicting rate cuts from the Federal Reserve.

The team also played a critical role during the banking crisis earlier this year, tracking the sharp selloff of stock and outflows of deposit at Silicon Valley Bank that ultimately triggered the bank’s collapse.

As the Treasury Department acted to address the second-largest bank failure in US history and prevent any spillover effects in the banking sector, top Treasury Department officials leaned on the Markets Room team to track the feedback of their policy actions.

“It was critically important for us to understand how markets were interpreting the actions that we took that made clear to the American people that your deposits were safe,” Adeyemo said. “We were monitoring signs of distress in the banking sector.”

With one week until the government can potentially no longer pay its bills, the US stock market is only just beginning to show signs of concern about a potential default and Treasury officials say the team is focused on tracking further reactions from the stock market as well as the Treasury securities market.

The stock market’s reaction has, up until now, been relatively muted – especially as compared to the 17% drop the S&P 500 suffered amid the 2011 debt ceiling crisis. But Treasury officials say volatility in the securities market is already affecting the federal government, raising the cost to borrow.

Yields on short-term Treasury securities have surged and recent auctions for securities are leaving a heftier price tag for the federal government, which Adeyemo said recently incurred $80 million in additional costs for a recent auction of Treasury bills.

“So, the cost of borrowing has already gotten more expensive when it comes to us borrowing in the short term for the US government,” Adeyemo said. “So as the debt limit manufactured crisis goes on, and costs go up for the government, it also means that costs will go up for the American people as well.”

Adeyemo declined to disclose what contingencies are being prepared should the US default. But when the US faced a similar standoff on the debt in 2011, Federal Reserve officials and Treasury Department officials quietly prepared a plan to prioritize payments on US debt and delay paying other government bills and obligations, like Social Security and payments to veterans, according to transcripts of a central bank meeting released in 2017.

“The most important thing for the American people, for our country, for our credibility, not only with our creditors, but with the American people is to pay all of our bills on time. That’s what our system is built to do,” Adeyemo said. “I’ve spent a good part of a decade working here at the Treasury Department. What I can tell you is that there’s no plan that would allow us to meet all of our commitments other than Congress, raising the debt limit.”

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April 12, 2021