1 big thing: The economic abyss

Illustration of a man standing on the edge of an extremely large hundred dollar bill staring over the edge into a dark void. 

2. Energy intensity, down

3. Gas station productivity

4. How Pimco won the Global Financial Crisis

5. Lobsterflation!

Situational awareness: How volatile are financial markets in a time of warfare in Eastern Europe? There have been five trading sessions since the start of February in which the S&P 500 moved more than 2% in either direction — compared to seven in all of 2021.

This week in Capital, we look at the gloomy economic possibilities for the wartime economy, New Jersey's weird gas stations, a bond king's masterful financial crisis maneuvering, and the lobster (or price inflation thereof). All in 1,435 words, a 5-minute read. 📈🦞

Have a good weekend and enjoy your clam rolls, everybody.

National

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green

Learn about all the ways that money drives the world

Axios Capital

1 big thing: The virtues of slow and steady growth

Illustration of a stack of cash repeated three times, over green shapes and a blue zigzag line.

2. Public opinion on the economy: Still not great!

3. Mortgage rates go boom

4. How paper money won the Civil War

5. Good writing matters

Illustration of four unique hands with pens contributing to the same hand-written scribble

Situational awareness: Our long national nightmare of an understaffed Federal Reserve Board led by an acting chair is on track to end soon, after the Senate Banking Committee advanced the nominations of Jerome Powell, Lael Brainard, Lisa Cook, and Philip Jefferson late Wednesday.

This week in Capital: We look at how people dislike rapid economic expansions nearly as much as they hate slow ones. Then we'll examine the impact of higher mortgage rates, some Civil War financial history, and the value of good writing, all in 1,387 words, a 5-minute read. ✍️📃

Here's wishing that your work always be well-edited, and your expansions neither too-fast nor too-slow.

1 big thing: Attack of the killer MBAs

2. Rough quarter for the 60/40 portfolio

3. What the yield curve is really telling us

4. The un-retirement revolution

5. A gold-plated economy warning

Situational awareness: March jobs numbers are out tomorrow morning. The date will be April 1. We're declaring a pre-emptive moratorium on any hackneyed "April Fool's" headlines, tweets or cable news chyrons.

This week in Capital: The questionable record of business education, a look at the weak performance of a commonly-held portfolio, and a potential economic canary in the coal mine that happens to live in a gilded cage. All that in 1,478 words, a 6-minute read. 🐥⛏⚱️

Maybe RH needs to hire more MBAs. Or fewer. Who's to say.

1 big thing: Globalization corrosion

Illustration of scissors about to cut into flight paths on a map. 

2. End of the divine coincidence

Former Bank of England Governor Mark Carney

3. The $24 trillion pool of money

4. The world's worst central banking job

Elvira Nabiullina, governor of the Central Bank of Russia

5. First cousin advantage

Situational awareness: A mere 187,000 Americans filed new claims for unemployment benefits last week, the Labor Department said this morning, the lowest since 1969. That's a mighty tight labor market.

This week in Capital, we look at divine versus malign coincidences, how much wealth Americans accumulated since the pandemic, the toughest central banking job on Earth, and the hidden advantage of being an older cousin. All in 1,402 words, a 5-minute read. 

P.S.: Your newsletter-writer is the eldest of five cousins on his mother's side and the middle of five cousins on his father's side, which would appear to mean he has no excuse for his mediocre grades in school.

Axios Capital: Corrosion of globalization

1 big thing: The dollar supremacy

Illustration of a world map tearing to reveal a hundred dollar bill

2. That '70s show

3. Banks' Russia exposure

4. How Trump picked Powell

5. WNBA charter flights

Situational awareness: Tomorrow morning the jobs report comes out, which would normally captivate the world of economy watchers but, if we're being frank, is hard to get too excited about amid armed conflict in Eastern Europe.

Welcome to another week of Capital, as we try to unpack some of the economic and financial implications of war in Ukraine. The fog of war, we are reminded this week, extends to the financial sphere. We unpack some key issues, along with womens' pro basketball charter flights, in 1,385 words, a 5-minute read. 🏀🛩

Here's hoping they at least spring for Economy Plus. Have a good weekend.

Data: Federal Reserve; Chart: Axios Visuals

If you took out a mortgage over the last couple of years, there's a good chance the holder of that loan is America's central bank — a consequence of its monetary stimulus efforts throughout the pandemic.

Why it matters: The Fed will face a series of political and economic headaches as it attempts to move away from subsidizing home lending by shrinking its portfolio of mortgage-backed securities.

The problem: Extracting itself from this market risks crashing the housing industry and creating intense political blowback for incurring financial losses.

By the numbers: Back in February 2020, the Fed owned $1.4 trillion in mortgage-backed securities, and the number was falling rapidly. But when the pandemic took hold, the central bank began a new round of bond purchases (known as "quantitative easing"), swelling that number to $2.7 trillion.

The policy contributed to ultra-low mortgage rates that stimulated home buying and refinancing activity until recently.

State of play: Now, as the Fed seeks to tighten monetary policy to combat inflation, it wants to shrink that portfolio. It may turn out to be easier said than done.

The Fed says that by September it will reduce the mortgage portfolio by up to $35 billion per month. Emphasis on "up to."

In fact, the numbers will probably undershoot that. 

The reason: For now, the Fed is just looking to let its holdings shrink as securities get paid off. But with mortgage rates way up in recent months, people have little incentive to sell their home or refinance a mortgage — so these mortgages are likely stay on the Fed's books longer.

That will leave the Fed with unappealing options. It could simply accept that it will continue to have an outsized role in the housing market and a bigger balance sheet than it might prefer.

Or it could begin selling the securities on the open market — a possibility that the minutes of its March policy meeting said could happen down the road.

What they're saying: "Let's get the program we've got underway and up to speed, but then once we've got it underway, I think it'll be worth taking a look at what is happening to the mortgage-backed [securities] on our balance sheet," Thomas Barkin, president of the Federal Reserve Bank of Richmond, tells Axios.

"I'm certainly open to a targeted and disciplined way to sell into the market if we're not headed toward the primarily Treasury balance sheet that we've said we want," he said.

Yes, but: That will create its own problems. If the Fed sells mortgage securities that pay low rates at a time when prevailing rates are much higher, it will incur big financial losses that reduce the funds the central bank returns to the Treasury.

In that scenario, expect officials to face tough questions from Capitol Hill to explain why they've lost billions of dollars on behalf of the American people.

Plus, the selling would likely push mortgage rates up further, at a time the housing industry is already starting to groan under the pressure of rising rates. Homebuilders, real estate agents, and other influential industry groups will make their unhappiness known to elected officials.

The bottom line: The Fed's pandemic actions fueled a housing boom. As it tries to withdraw that support, it could be bad news for housing — and the Fed's standing on Capitol Hill.

The Fed's $2.7 trillion mortgage problem

Shrinking its massive portfolio of home loans won't make for easy economics or politics

Federal Reserve

Economy & Business

Federal Reserve chair Jerome Powell was confirmed to a second term on Thursday, putting him in charge of the central bank for another four years as it grapples with the highest inflation in decades and with financial markets in tumult.

The big picture: Powell received bipartisan support, with the Senate voting 80-19 in favor of confirmation. He faces the challenge of withdrawing the Fed's extraordinary pandemic stimulus implemented in his first term rapidly enough to contain inflation without tanking the economy.

Powell's second term will involve a gantlet of political and economic cross-pressures.

One of the Fed's primary jobs is to ensure stable prices, and by Fed officials' own accounting, they are currently failing, with 8.3% inflation over the past year.

To fight inflation, the Fed has embarked on its most aggressive campaign of monetary tightening in decades, planning multiple half-percentage point rate increases in a row and a drawdown of its $9 trillion balance sheet.

But that tightening campaign is causing cracks to appear in financial markets and sharply higher rates for mortgages and other forms of borrowing. It could lead to economic distress in the months ahead and put the Fed under pressure both for inflation and the negative side effects of higher rates.

Yes, but: Powell, a 69-year-old former private equity executive, is a savvy political operator skilled at building bridges across partisan lines — as reflected in his appointments to Fed positions by three presidents and his bipartisan Senate confirmation vote.

While Powell's appointment represents continuity in the leadership of the central bank, this is also a time of many new faces at the top ranks of the Fed.

The Senate also voted to confirm Philip Jefferson and Lisa Cook as Fed governors this week, and the nomination of Michael Barr to be vice-chair in charge of financial regulation is pending.

New presidents of the Fed regional banks in Boston (Susan M. Collins) and Dallas (Lorie Logan) are set to take over this summer, and there will soon be vacancies at the helm of the Chicago and Kansas City Fed due to mandatory retirements.

The bottom line: Powell will have the benefit of experience and bipartisan credibility but faces an exceptionally difficult task in undoing his own first-term policies and reduce inflation without excessive collateral damage.

Editor's note: This story has been corrected to show Powell was confirmed on Thursday, not Wednesday.  

Fed chair Jerome Powell confirmed to second term

He is tasked with leading the central bank as it tries to battle surging inflation and financial markets in tumult..

Jerome Powell

Federal Reserve chair Jerome Powell was confirmed to a second term on Thursday, putting him in charge of the central bank for another four years as it grapples with the <a class="gtmContentClick" data-vars-link-text="highest inflation in decades" data-vars-click-url="https://www.axios.com/2022/05/11/inflation-remained-high-april" data-vars-content-id="17b25a8f-b493-43d8-aca5-44fe84d75bd4" data-vars-headline="Fed chair Jerome Powell confirmed to second term" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/05/11/inflation-remained-high-april" target="_self">highest inflation in decades</a> and with <a class="gtmContentClick" data-vars-link-text="financial markets in tumult" data-vars-click-url="https://www.axios.com/2022/05/09/markets-free-fall-investors-sell-everything" data-vars-content-id="17b25a8f-b493-43d8-aca5-44fe84d75bd4" data-vars-headline="Fed chair Jerome Powell confirmed to second term" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/05/09/markets-free-fall-investors-sell-everything" target="_self">financial markets in tumult</a>.The big picture: Powell received bipartisan support, with the Senate voting 80-19 in favor of confirmation. He faces the challenge of withdrawing the Fed&#x27;s extraordinary pandemic stimulus implemented in his first term rapidly enough to contain inflation without <a class="gtmContentClick" data-vars-link-text="tanking the economy" data-vars-click-url="https://www.axios.com/2022/04/30/fed-inflation-blame-game" data-vars-content-id="17b25a8f-b493-43d8-aca5-44fe84d75bd4" data-vars-headline="Fed chair Jerome Powell confirmed to second term" data-vars-event-category="story" data-vars-sub-category="story" data-vars-item="in_content_link" href="https://www.axios.com/2022/04/30/fed-inflation-blame-game" target="_self">tanking the economy</a>.

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

Economic growth is on track to slow way down in the months ahead, according to an emerging consensus among forecasters. And that may be exactly what the U.S. economy needs.

Why it matters: If earlier projections of continued speedy growth were coming true, it would be mean rising, rather than falling, inflation pressures. The latest round of forecasts is more consistent with the economy downshifting toward normal.

The bad news is that slower growth leaves the economy more vulnerable to recession, especially if some unlucky negative shocks show up.

The good news is that it offers a possibility of falling inflation paired with lower, but still positive, growth.

By the numbers: In a survey out today from the National Association for Business Economics, the median forecaster expects 2022 GDP to rise 1.8%, compared with a median projection of 2.9% in February. (GDP growth was 5.5% in 2021.)

That meshes with other measures of economic consensus. For example, the Philadelphia Fed's Survey of Professional Forecasters showed 2.5% expected 2022 GDP growth in a May 13 release, down from 3.7% in February.

Those revised forecasts reflect all that has happened inz the last three months. Financial markets have started to price in more aggressive monetary tightening from the Federal Reserve, and the negative effects of the Ukraine war and China's COVID lockdowns.

It's also clear that the risk of a recession has increased lately. Some 77% of participants in the NABE survey see risks tilted to the downside, and more than half see the odds of a recession in the next year at over 25%.

But the downgrade in growth forecasts is just what policymakers are seeking as they try to bring inflation down.

The intuition: In the long run, economic growth is limited by the number of workers and gains in productivity. Fed leaders, for example, think the long-run potential growth rate of the U.S. is around 1.8%.

Growth can surge above that for short periods, like when people are coming back to work after a recession. It can also change depending on things like immigration policies (that can bring in more workers) or technological advancements (that generate higher productivity).

But in an economy like 2022's, with the labor market already extremely tight, growth along the lines of the 2.9% forecasters expected months ago would imply yet more of the overheating that has fueled higher prices and discontent over shortages.

What they're saying: "The expected growth slowdown should deliver more benign inflation outcomes," wrote JPMorgan economists in a research note last week. They cut their forecast for growth in the second half of the year to 2.4%, from 3% previously.

They acknowledged that the link between inflation and GDP has been tenuous lately. "But directionally at least, subpar growth increases our confidence that inflation will gradually move back down toward 2%."

Plausibly, growth could slow to something close to its 1.8% trend and stay there for a while. That would enable the labor market, housing market, and markets for goods and services to come into better balance without the economy tipping into contraction.

The bottom line: Recession risk is real, but the pullback in growth that forecasters are seeing now looks like a healthy thing.

Economists are lowering growth forecasts — and that's good news

Slower growth is needed to help cool inflation.

Illustration of suited hand holding binoculars with negative and positive stock arrows

Economy

Economic growth is on track to slow way down in the months ahead, according to an emerging consensus among forecasters. And that may be exactly what the U.S. economy needs.Why it matters: If earlier projections of continued speedy growth were coming true, it would be mean rising, rather than falling, inflation pressures. The latest round of forecasts is more consistent with the economy downshifting toward normal.

Thomas Barkin, the president of the Federal Reserve Bank of Richmond, spoke with Axios recently about the outlook for interest rates, a volatile stock market, and why people hate inflation so much.

Lightly edited excerpts of the conversation, which took place at the bank's headquarters in Richmond, Virginia on May 12, are below.

On whether the Fed might raise interest rates by 0.75 percentage points at a time, instead of 0.5 points as it did this month:

"Jay [Powell, the Fed chair] laid out in his press conference what seemed to me like a pretty rational potential path forward. And I think we'll just have to see where it goes. The things I focus on, first and foremost, are the combination of demand and inflation."

Right now we're in a world with extremely strong and robust demand, but extraordinarily high and broad and persistent inflation. And in that world, the path of policy is actually quite straightforward to me, which is normalize as fast as reasonable without breaking anything."

On what he's watching to shape his policy decisions:

"What I'm monitoring are the two pieces of that puzzle. Does demand stay this robust? If it stays this robust, that makes a case for [being] expeditious. If it backs off, that makes a case for perhaps being a little more careful.

On the volatile stock market and whether financial conditions have tightened too much:

"I try hard not to spend too much time looking at the stock market. My biggest concern is that a lot of people in the economy believe that the stock market is the same as the economy. And so I do talk to people, including some pretty sophisticated people, who say something like, 'the stock market's down, we're going into a recession.'

"To me, it's not the same as the economy. I try to look hard at the economy. And so the worry would be that a stock market that fell too fast, too far, could cause people to pull back [too much]."

"The tricky part about what we're trying to do is we're trying to quiet demand, without overly damaging demand. That's a very hard thing to do."

On what his contacts are saying about demand trends:

"Products and services bought by higher-end consumers are still full speed ahead. The combination of excess savings and stronger net worth, even after all this, has those consumers continuing to purchase and spend at levels that feel much higher than historic or normal levels.

"They're starting to see some quieting in lower-end consumer segments, starting to see trade down in consumer goods for lower-income folks. That's where I think you're starting to see it."

On what he's focused on in the inflation data:

"First and foremost, the overall numbers. And the reason I say that is not because the overall numbers are the only insight you're going to get, but in a world where you want to make sure you keep inflation expectations anchored, I do think the headline number and the core number on an overall basis are signals to the population in terms of what's happening. 

"We're past the era where you look through an item or two. We're in the era where you need to see the number come down."

"I don't just want to see the number come down, I want to make sure it's not just driven by one-time things."

"My theory of the case is that in the headline number, you've got escalation because of what's happening in Ukraine. Wheat, oil and natural gas. If and when that settles, some of those rates of increase will back off."

"Then you've got escalation in goods prices driven by excess demand during the pandemic. As we raise rates, as supply chains normalize, the price of goods should come down. And then on the flip side, you want to make sure that in the rotation to services, and as wages continue to rise, you're not seeing an over-escalation in services prices that more than offsets the goods."

"One thing I'm really struck by is how much people thoroughly dislike inflation. There's not a ledger out there where people go 'okay, wages went up 5%. Prices went up 5%. That seems pretty fair.'"

That's not how the public thinks. That's not how workers think. That's not how businesses think. Businesses think they got higher prices because they have a better product, and that they're paying more money because their suppliers are screwing up."

"A lot of these businesses had the best year of their history last year. They don't feel like it. Small business sentiment is very low, consumer sentiment is very low. It's the unfairness, it's the uncertainty, all those things really are wearing on people. So we've got to do something about it."

Fed's Barkin: I try not to pay too much attention to the stock market

Richmond Fed President Thomas Barkin on his views on interest rates and inflation

Thomas Barkin, president of the Federal Reserve Bank of Richmond

Richmond Fed President Thomas Barkin. Photo: Federal Reserve Bank of Richmond

Thomas Barkin, the president of the Federal Reserve Bank of Richmond, spoke with Axios recently about the outlook for interest rates, a volatile stock market, and why people hate inflation so much.

An exceptionally robust job market. The Federal Reserve raising interest rates at a rapid clip. Overheated financial markets starting to correct themselves, with the frothiest sectors bearing the brunt.

That's the situation today — and was also the situation in the spring of 2000, when the dot-com bubble started to burst. A recession followed, but not until a year later.

Why it matters: The year 2000 offers important lessons for the nature of the risks the economy is facing — and what to watch to understand just how bumpy the ride from here could be.

Flashback: The stock market peaked in March 2000. But as the year progressed, the signs mounted that the good times were nearing an end for money-burning internet companies.

The layoffs started as a trickle and became a gush. IPOs were shelved, and the companies that had gone public saw their share prices dwindle. Websites popped up to track the burn rate and layoff plans of "F*d" companies.

Yes, but: The overall economy actually held up great through that year. The vast majority of people, after all, did not work for dot-com firms, and corporate America as a whole was still fundamentally bullish on investment and hiring.

The number of people filing new jobless claims reached a multi-decade low in April 2000 and didn't begin rising seriously until the tail end of the year. The unemployment rate finished the year at 3.9%, only one-tenth above its April low.

Inflation reached its highest level in a decade of 3.8% that March, and the Fed raised interest rates a half-percent in May to try to rein in inflation.

It was only in 2001 that the wheels started to come off the broader economy, as companies curtailed growth plans and layoffs became more widespread. Economists would eventually date the beginning of a recession to March 2001 — a full year after the stock market peak.

What's more, it was an unusually mild recession — and may not have been counted as a recession at all if the September 11, 2001 terrorist attacks hadn't happened. The attacks sent an already shaky economy into a temporary tailspin — a reminder that geopolitical events can cause more economic pain when the situation is already precarious.

The big picture: If you take the parallels between then and now seriously, it has some important implications for how the economy will fare in the coming months — and what to watch to know if an all-out recession is taking place.

Watch carefully whether corporate behavior starts to change outside the companies most directly affected by the stock market selloff and crypto collapse. It doesn't matter much for the overall economy if Robinhood or Coinbase lay people off — but it's a different story if the full gamut of  companies start doing the same, or cutting capital spending plans. 

Consumer demand propelled the economy forward and was the reason the recession was so mild in 2001; there was not a single quarter that year in which personal consumption spending declined. That looks likely to be true in this episode as well, given strong household balance sheets and rising wages.

Pay more attention to corporate debt markets than the stock market. The real economic problems of 2001 came as losses in the telecom sector caused a wave of bankruptcies and led investors to sell off all types of corporate bonds — tightening the flow of credit in the economy, a key feature of the 2001 recession.

One more thing: Be ready for the recriminations. The receding economic tide two decades ago exposed deep rot at companies far from the dot-com boom, like energy trading firm Enron and industrial company Tyco International.

The bottom line: The U.S. may well escape a recession this time around. But when the market sentiment reverses, like it did 22 years ago and is doing now, it becomes more vulnerable to whatever bad news may arrive. 

The economy and markets have that year 2000 feeling

That has big implications for recession risk as markets nosedive

Illustration of a stock chart trend line that writes out the number 2000.

Recession

An exceptionally robust job market. The Federal Reserve raising interest rates at a rapid clip. Overheated financial markets starting to correct themselves, with the frothiest sectors bearing the brunt.That&#x27;s the situation today — and was also the situation in the spring of 2000, when the dot-com bubble started to burst. A recession followed, but not until a year later.

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Economists are lowering growth forecasts — and that's good news

Fed's Barkin: I try not to pay too much attention to the stock market

The Fed's $2.7 trillion mortgage problem

The economy and markets have that year 2000 feeling

Fed chair Jerome Powell confirmed to second term

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Axios Capital: Beware the MBAs

Axios Capital: Corrosion of globalization

Axios Capital: Too fast recovery

Axios Capital: Economic abyss

Axios Capital: That '70s show