If the United States decided to levy sanctions on Russian banks, it could then say that Swift was in violation of those sanctions by continuing to let those banks use its system. The Defending Ukraine Sovereignty Act of 2022, which Senate Democrats unveiled this month, would authorize sanctions on providers of specialized financial messaging services, such as Swift, but the Biden administration could also impose such sanctions without the approval of Congress.

Cutting a country’s access to Swift is not without precedent.

In 2012, Swift expelled as many as 30 Iranian financial institutions, including its central bank, in order to comply with European Union sanctions that were enacted in response to Iran’s disputed nuclear energy program. Services were reconnected after the 2015 nuclear deal, and then cut again in 2018 after the Trump administration withdrew from the pact and resumed sanctions.

How would Russia respond to being removed?

Russia has faced such threats before. In 2014, when Russia invaded and annexed Crimea, there were calls in Europe to exclude Russia from Swift. Dmitri A. Medvedev, then Russia’s prime minister, said at the time that such a move would be a “declaration of war.” According to the Carnegie Moscow Center, Russian forecasts at the time projected that being cut off from Swift would shrink the country’s gross domestic product by 5 percent.

Last week, Nikolay Zhuravlev, the vice speaker of Russia’s Federation Council, told the government-run news agency TASS that removing Russia from Swift would also have economic consequences for European countries, which he said would not be able to receive imports of Russian oil, gas and metals as a result of Russia’s being unable to receive foreign currency.

Mr. Smith, the former Treasury official, said the United States and Europe might look for ways to exempt certain Russian sectors, such as energy, from sanctions. However, moves to cut off Russia’s economy could have unintended consequences, such as Moscow retaliating, that could rattle global markets.

“They are not without their own cards to play,” he said.

A switch to Swift alternatives

The threat of being cut off from Swift might not be as dire as it was in the past.

Several countries including Russia have developed their own financial messaging systems that, while less sophisticated than Swift, could allow Russian financial firms to maintain communications with the world. Russia began developing its system in 2014 amid threats of escalating sanctions from the United States.

Article source: https://www.nytimes.com/2022/01/31/us/politics/russia-swift.html

Mr. Bernstein stipulated that while debt financing has its place, the White House also believes it has firm limits within its agenda. “The outcome of all this is going to be some mix of progressively raised revenues and investments in essential public goods with a high return financed by some borrowing.”

Looking Ahead, and to the Past

What would have to happen for these rock-bottom borrowing costs to rise significantly? There could be a crisis of confidence in Fed policy, a geopolitical crisis or steep increases in the Fed’s key interest rates in an attempt to kill off inflation. In a more easily imagined situation, some believe that if inflation remains near its current levels into the second half of the year, bond buyers may lose patience and reduce purchases until yields are more in tune with rising prices.

The resulting higher interest payments on debt would force budget cuts, said Marc Goldwein, the senior policy director at the Committee for a Responsible Federal Budget. Mr. Goldwein’s organization, which pushes for balanced budgets, estimated that even under this past year’s low rates, the federal government would spend over $300 billion on interest payments — more than its individual outlays on food stamps, housing, disability insurance, science, education or technology.

Last month, Brian Riedl, a senior fellow at the right-leaning Manhattan Institute, published a paper titled “How Higher Interest Rates Could Push Washington Toward a Federal Debt Crisis.” It concludes that “debt is already projected to grow to unsustainable levels even before any new proposals are enacted.”

The offsetting global and demographic trends that have been pushing rates down, Mr. Reidl writes, are an “accidental, and possibly temporary, subsidy to heavy-borrowing federal lawmakers.” Assuming that those trends will endure, he said, would be like becoming a self-satisfied football team that “managed to improve its overall win-loss record over several seasons — despite a rapidly worsening defense — because its offense kept improving enough to barely outscore its opponents.”

But at least one historical trend suggests that rates will remain tame: an overall decline in real interest rates worldwide dating back six centuries.

A paper published in 2020 by the Bank of England and written by Paul Schmelzing, a postdoctoral research associate at the Yale School of Management, found that as political and financial systems have globalized, innovated and matured, defaults among the safest borrowers — strong governments — have continuously declined. According to his paper, one ramification may be that “irrespective of particular monetary and fiscal responses, real rates could soon enter permanently negative territory,” yielding less than the rate of inflation.

Article source: https://www.nytimes.com/2022/01/30/business/economy/inflation-bonds-treasury-yields.html

His report estimated that the 2014 sanctions reduced Russia’s annual economic growth by up to 3 percent, and new sanctions could bite much harder.

For an average Russian, the harshest U.S. measures could mean higher prices for food and clothing, or, more dramatically, they could cause pensions and savings accounts to be severely devalued by a crash in the ruble or Russian markets.

“It would be a disaster, a nightmare for the domestic financial market,” said Sergey Aleksashenko, a former first deputy chairman of the Central Bank of Russia and former chairman of Merrill Lynch Russia. He noted that the ruble had already fallen more than 10 percent from its October value against the dollar, amid increasing talk of Western sanctions.

In a sign of the growing seriousness, officials from the National Security Council have been talking with executives from some of Wall Street’s largest banks, including Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America, about the stability of the global financial system in the wake of potential sanctions.

The European Central Bank has also warned bank lenders to Russia about risks if the United States imposes sanctions and has asked about the sizes of their loans.

For now, though, American officials are not considering any immediate sanctions on the foundation of Russia’s economy: its oil and gas exports.

​​European nations rely on natural gas from Russia, and several U.S. allies, notably Germany, prefer that Washington refrain from disrupting the Russian energy industry. Analysts say sanctions that limit Russia’s ability to export oil and gas would be by far the most powerful weapon against the Russian economy, and perhaps the most effective economic deterrent against an invasion of Ukraine, but they would also cause pain in Europe and the United States.

Article source: https://www.nytimes.com/2022/01/29/us/politics/russia-sanctions-economy.html

The contrast between how the economy is doing on paper and how it feels on the ground has made it difficult for Mr. Biden to capitalize politically on what has been, by most measures, a historically strong economic recovery even after accounting for rising prices.

Mr. Biden might take some comfort from the last president to experience a similar combination of strong growth and rapid inflation: Ronald Reagan. He, too, faced an economy struggling with rising prices and snarled supply lines early in his term. He, too, initially struggled to convince Americans that the economy was on the upswing. Yet in 1984, his message of “morning in America” carried him to a landslide re-election victory.

There are important differences. Mr. Reagan took office near the peak of the “Great Inflation” of the late 1970s and early 1980s, when interest rates were very high; by 1984, price growth and borrowing costs both had moderated. Economic growth also accelerated near the end of Mr. Reagan’s first term, whereas now most forecasters expect growth to slow as the postpandemic boom fades. And Mr. Reagan ran for re-election in an era when views of the economy were much less divided along partisan lines than they are today.

The conundrum Mr. Biden is facing shows clearly in polling and survey numbers.

A Gallup survey conducted this month found that Americans view the economy more negatively than positively: Only 29 percent said the economy was improving, while 67 percent believed it was getting worse.

Consumer expectations data produced by the Federal Reserve Bank of New York has shown that a high share of consumers expect to be financially worse off a year from now: 26.3 percent in December, compared with 9.9 percent at the end of 2019, before the onset of the coronavirus. That change has come as inflation expectations tracked by the same survey have surged.

Part of the gloominess inevitably ties back to the long-lasting pandemic. While people harbored hope that the economy would reopen and ordinary life would resume once vaccines were readily available, continued waves of infection have prevented that from happening.

“There was a lot of optimism a year ago,” said Karen Dynan, a Harvard economist and former Treasury official in the Obama administration. “We’d gotten the vaccines faster than we’d thought, and we thought our lives were going to be able to go back to normal, and people just expected the economy to come along with that. And maybe that was a little naïve.”

Article source: https://www.nytimes.com/2022/01/27/business/economy/biden-economy-politics.html

“There are disagreements, legitimate disagreements,” Gina Raimondo, the commerce secretary, said in an interview. “How do we do this? How do we get it right? There doesn’t seem to be much disagreement over the core $52 billion appropriation for chips. There is disagreement around how we make investments in research and development in basic science.”

One major difference is that while the Senate bill invests heavily in specific fields of cutting-edge technology, such as artificial intelligence and quantum computing, the House bill places few stipulations on the new round of funding, other than to say that it should go toward fundamental research.

In a memo on the legislation, House aides wrote that their measure was “focusing on solutions first, not tech buzzwords.”

Some experts argue that approach lacks urgency. Stephen Ezell, the vice president for global innovation policy at the Information Technology and Innovation Foundation, a policy group that receives funding from telecommunications and tech companies, called the House bill “not sufficient to enable the United States to win the advanced technology competition with China.” He argued that the focus on advanced technology in the Senate-passed bill would do more to increase American competitiveness.

In addition, as lawmakers debate how to counter Beijing’s rising influence, efforts to compromise on the foreign policy components of the legislation will most likely create tensions between the chambers and between Democrats and Republicans. In the Senate, for example, lawmakers included stricter requirements for when universities must report foreign funding to the Education Department.

Democrats in the House have resisted the Senate’s proposed foreign policy provisions, complaining that the chamber focused too narrowly on countering China rather than investing in domestic manufacturing. Much of the foreign policy legislation added by Democrats to the House bill is focused on climate change; the House measure would also authorize $225 million over five years to bolster the State Department’s military training and education programs in the Indo-Pacific region.

Article source: https://www.nytimes.com/2022/01/26/us/politics/democrats-china-competitiveness-bill.html

The Fed was already slowing a bond-buying program it had been using to bolster the economy, and that program remains on track to end in March. The Fed’s post-meeting statements and Mr. Powell’s remarks signaled that central bankers could begin to shrink their balance sheet holdings of government-backed debt soon after they begin to raise interest rates, a move that would further remove support from markets and the economy.

Investors have been nervously eyeing the Fed’s next steps, worried that its policy changes will hurt stock and other asset prices and rapidly slow down the economy. Stocks on Wall Street gave up their gains and yields on government bonds rose as Mr. Powell spoke. The SP 500 ended with a loss of 0.2 percent after earlier rising as much as 2.2 percent. The yield on 10-year Treasury notes, a proxy for investor expectations for interest rates, jumped as high as 1.87 percent.

The Fed has pivoted sharply from boosting growth to preparing to cool it down as businesses report widespread labor shortages and as prices across the economy — for rent, cars and couches — soar. Consumer prices are rising at the fastest pace since 1982, eating away at paychecks and creating a political liability for President Biden and Democrats. It is the Fed’s job to keep inflation under control and to set the stage for a strong job market.

“The Fed has completed its pivot from being patient to panicked on inflation,” Diane Swonk, the chief economist at Grant Thornton, wrote in a research note to clients after the meeting. “Its next move will be to raise rates.”

The Fed’s withdrawal of policy support could temper consumer and corporate demand as borrowing money to buy a car, a boat, a house or a business becomes more expensive. Slower demand could give supply chains, which have fallen behind during the pandemic, room to catch up. By slowing down hiring, the Fed’s moves could also limit wage growth, which might otherwise feed into inflation if employers raised prices to cover higher labor costs.

Article source: https://www.nytimes.com/2022/01/26/business/economy/fed-interest-rates-inflation.html

That caused the Fed to change course late last year — and to do so fairly abruptly.

“Inflation really popped up in the late spring last year, and we had a view — it was very, very widely held in the forecasting community — that this would be temporary,” Mr. Powell said in December. But officials grew more concerned as employment cost data moved higher and inflation indicators showed hot readings, he said, so they pivoted on policy.

“It was essentially higher inflation and faster, turns out much faster, progress in the labor market,” Mr. Powell said.

Asset prices have been jerking around in recent weeks as investors try to make sense of the Fed’s new stance and what it will mean for the economy. Stocks have generally slumped, Bitcoin prices have fallen, and bond prices have been increasing as part of the cacophony.

Had the Fed changed course earlier, “there wouldn’t be this sense that the Fed is behind the curve, and this fear in the market that they are going to go aggressively,” Ms. Markowska at Jefferies said.

Part of the challenge is that while the central bank had clearly detailed a plan for when it would slow bond-buying and lift rates — emphasizing what conditions it would want to see — it has not been as clear about its follow-up moves.

Mr. El-Erian thinks that the Fed should promptly stop buying bonds while clearly signaling the path ahead for rate increases. Otherwise, he said, officials risk having to pull back support all at once later this year.

But there are also arguments for gradualism.

Foreign economic officials are nervously eyeing the Fed’s path, especially when other central banks are also pulling back support amid a widespread burst in prices — the Bank of England, for instance, has already raised interest rates. When big economies raise domestic borrowing costs, it can cause capital to flow away from emerging markets, roiling exchange rates and damaging or destabilizing their economic growth.

“If major economies slam on the brakes or take a U-turn in their monetary policies, there would be serious negative spillovers,” President Xi Jinping of China said during a speech this month, warning of “challenges to global economic and financial stability.”

Article source: https://www.nytimes.com/2022/01/25/business/economy/fed-economy.html

The results of that survey, which the Commerce Department published Tuesday morning, reveal how scarce global supplies of chips have become.

The median inventory among buyers had fallen to fewer than five days from 40 days before the pandemic, meaning that any hiccup in chip production — because of a winter storm, for example, or another coronavirus outbreak — could cause shortages that would shut down U.S. factories and again destabilize supply chains, Ms. Raimondo said.

“We have no room for error,” she added.

To help address the issue, Biden administration officials have coalesced behind a bill that the Senate passed in June as an answer to some of the nation’s supply chain woes.

The bill, known in the Senate as the U.S. Innovation and Competition Act, would pour nearly a quarter-trillion dollars into scientific research and development to bolster competitiveness against China and prop up semiconductor makers by providing $52 billion in emergency subsidies.

Momentum on the legislation stalled amid ideological disputes between the House and Senate over how to direct the funding. In June, House lawmakers passed a narrower bill, eschewing the Senate’s focus on technology development in favor of financing fundamental research.

But administration officials, led by Ms. Raimondo, have begun prodding lawmakers behind the scenes in an effort to help bridge their differences to swiftly pass the bill, emphasizing the urgency of quickly signing solutions into law.

“There’s no getting around this. There is no other solution,” Ms. Raimondo said. “We need more facilities.”

Article source: https://www.nytimes.com/2022/01/25/business/economy/chips-semiconductors-shortage.html

For now, most crypto-enthused officials are focused on comparatively modest projects. Mark Wheeler, chief information officer for Philadelphia, became fascinated with crypto in 2018 after hearing about an effort in Cook County, Ill., to list property records on a decentralized database.

“Improving the quality of property-data management inside city government is like the white whale that I’ve been trying to catch,” he said.

Mr. Wheeler stopped listening to NPR in the morning, tuning into crypto podcasts instead. In November, he invited crypto experts to propose initiatives for Philadelphia; the original Bitcoin white paper is now posted on the city’s website.

The fervor has spread to small-town America. Last year, Jalen Nelson, a 26-year-old crypto enthusiast, cold-emailed 2,000 U.S. mayors, hoping to engage them in discussions about blockchain technology. He got one response — from Chris Swanson, the mayor of Two Harbors, Minn., a town of about 4,000 on the shore of Lake Superior.

Mr. Swanson was taken with the idea of forming a decentralized autonomous organization, or DAO — a collective of crypto investors — that would pool money to fund projects in Two Harbors in exchange for some kind of voting power over the new initiatives.

“Trying to get something built can be really complicated, and you end up going to the same pools of money over and over and over again,” said Mr. Swanson, 44. “The projects that the community wants to see could get done quicker.”

Mr. Nelson, who recently moved to San Antonio from California, has never set foot in Two Harbors, where winter temperatures can drop well below zero. (On a recent Zoom call, he chose a tropical background, with palm trees swaying in the breeze. “I told Chris I would visit him in the warmer months,” he said.) For now, the project remains entirely theoretical.

Article source: https://www.nytimes.com/2022/01/25/business/crypto-mayors.html

Those gains continued late last year even as prices for food and gas climbed at a pace not seen in years, along with wages, and despite the overhang of the coronavirus pandemic. Speculators had also turned to investments as varied as cryptocurrencies, real estate and even trading cards and other collectibles, something that had alarmed many who saw signs that investors were getting carried away.

So a slide in prices that removes some of that excess was long overdue, many market watchers said.

“We haven’t had a correction in a long time,” said Lindsey Bell, the chief money and markets strategist at Ally Invest. “While this sell-off in the past couple of weeks feels uncomfortable, the good news is that, the sooner you have a sell-off or correction like we’re seeing today, the earlier and the more likely you are to make up that lost ground before year-end.”

That doesn’t mean it won’t be a bumpy year for stock investors. Growth in corporate profits is likely to slow, in particular among large technology stocks, and many companies championed by investors during the pandemic, like Peloton and Netflix, have tumbled as a return to normal means they lose momentum with new customers.

But some investors are concerned that even the largest tech companies may be faltering, something that will be exacerbated if interest rates climb — forcing them to dedicate more of their profits to debt payments, and also making it harder to achieve investors’ high expectations for growth.

Technology stocks, which have been on the leading edge of the market decline this year, were also walloped on Monday: The tech-heavy Nasdaq composite slid about 5 percent, before it rallied back to end the day with a gain of about 0.6 percent. The Nasdaq had already crossed the correction threshold last week and is now down 13.7 percent from its high.

Microsoft, the next of the big tech companies to report its profits, is expected to say on Tuesday that its bottom line rose 12 percent in the final three months of last year compared with a year ago, a substantial slowdown from its previous quarter, which was its most profitable ever.

More broadly, earnings from tech companies are expected to have risen nearly 15 percent in the fourth quarter. That’s down from full-year growth of nearly 28 percent, according to the market research firm FactSet.

“The return to normalization that we will see this year will include more moderate growth and higher interest rates,” said Ryan Jacob, the portfolio manager of the Jacob Internet Fund. “That’s a difficult environment for large-cap tech.”

Jeanna Smialek, Jeff Sommer and Stephen Gandel contributed reporting.

Article source: https://www.nytimes.com/2022/01/24/business/economy/us-stock-market-correction-territory.html