June 24, 2022, 2:57 p.m. ET

Daily Business Briefing

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Fed says stress tests show big banks can withstand a severe recession.

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Credit...Pete Marovich for The New York Times

The largest banks in the United States are well capitalized and could weather a severe economic downturn, Federal Reserve officials announced on Thursday after an annual review of the big banks’ resilience. The tests took on new significance as some economic indicators, like slowing home sales and rising interest rates, appeared to increase the likelihood of a recession in the near future.

The Fed tested the 34 largest banks operating in the United States, looking at how their balance sheets would withstand sharp drops in asset prices and a total of $612 billion in losses, caused mostly by stress in commercial real estate values and in the markets for corporate debt. Each bank had enough capital to meet regulators’ minimum requirements, even in the worst-case scenario.

The tests are part of an annual checkup that regulators began performing on the financial industry after the 2008 financial crisis. Each year, the Fed uses a snapshot of the economy taken at the end of the previous year — this time it was the fourth quarter of 2021 — to design a hypothetical disaster scenario that is commensurate with the economy’s current strength. The better the economy in actuality, the worse the stress-test scenario.

The hypothetical situation the Fed uses to test the banks is not a prediction for the future, officials emphasized in a phone call with journalists on Thursday. They added that the banks’ success in this year’s tests was particularly notable considering that many banks had gotten rid of cash, releasing some of the reserves they had set aside during the Covid-19 pandemic to prepare for sudden losses.

The scenario for the 2022 stress tests was worse than the one that was applied to banks last year because the economy had improved in the interim. All 22 of the banks tested last year also passed. Not every one of the big banks is tested each year. Some are too small to qualify for yearly exams and instead are subjected to the test only every other year.

Francisco Covas, the head of research at the Bank Policy Institute, a trade group representing many of the country’s largest banks, said in a statement emailed to journalists that the scenario that the Fed had devised for this year’s tests was worse than any recession since World War II, including the one after the 2008 financial crisis.

“Large banks continue to be in an excellent position to lend to households and businesses and support U.S. economic growth,” Mr. Covas said.

But he warned that if regulators continued to raise capital requirements, the banks’ abilities to lend could be restricted.

Days after passing last year’s tests, several of the largest institutions, including Morgan Stanley, Wells Fargo and JPMorgan Chase, increased their payouts to shareholders with the Fed’s approval.

The big banks are likely to announce the size of their payouts for this year on Monday after the markets close.

Fed officials pledge ‘unconditional’ dedication to lowering inflation.

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Credit...Haiyun Jiang/The New York Times

Federal Reserve officials on Thursday signaled a deep commitment to wrestling down the highest inflation in more than four decades, even as supply disruptions that are largely outside their control help push prices sharply higher.

Jerome H. Powell, the Fed chair, called the central bank’s commitment to bringing price increases under control “unconditional” while testifying before House lawmakers. A Fed governor, Michelle Bowman, indicated in an unscheduled speech that she would favor a three-quarter-point rate increase in July and half-point increases at the “next few” meetings after that — keeping up an aggressive path of policy change — as the central bank tries to tamp down costs.

“These actions do not come without risk,” Ms. Bowman said. “But in my view, our No. 1 responsibility is to reduce inflation.”

The Fed is overseeing an economy in which growth is strong and consumers are spending. At the same time, shipping issues, factory shutdowns in Asia and the war in Ukraine have kept the supplies of manufactured goods, gas and food limited, while domestic labor shortages have limited how many flights airlines can offer and meals that restaurants can supply. As robust demand collides with curtailed supply, prices have surged.

The Fed’s main policy tool, raising interest rates, can do little to improve limited supply but can help to cool off demand. Higher mortgage and credit card rates can tamp down home buying and consumer spending, and more expensive business loans can slow down corporate expansions and hiring.

The Fed has already started raising interest rates, which are now set in a range between 1.50 to 1.75 percent.

While countries around the world are combating supply chain issues that have spurred rapid inflation, Fed officials have underlined that the United States also has rapid growth and a solid job market. That might give it room to try to moderate business activity and lower price increases without causing an outright downturn.

“We actually have a very strong economy,” Mr. Powell told lawmakers on Thursday. “More of our inflation is from demand, and we do have tools to work on demand.”

But Mr. Powell has also been clear that while it is possible the central bank could engineer a soft landing, doing so will be a challenge. Interest rates are blunt, and it will be hard to cool down price increases while maintaining a strong economy and job market as shocks continue to rock the economy and curb supply.

“We have a job to do, and it’s very important that we do it,” Mr. Powell said. “The only way we can get back to a place where inflation is low again” is “by trying to get demand and supply back in balance.”

He was clear that whether the Fed can set the economy down gently will heavily depend on what happens with supply disruptions.

Asked if it would be necessary to cause very high unemployment to contain inflation, as some economists have suggested, Mr. Powell said on Thursday that “the answer is going to depend, to a significant extent, on what happens on a supply side.”

But he also emphasized that it was critical for the Fed to keep consumer inflation expectations under control. Economists believe that if workers begin to expect consistently faster price increases, they will ask for higher wage increases, which will prompt employers to charge more to keep up with climbing labor costs and set off an upward spiral.

“If the public retains confidence that inflation will come down — if expectations remain anchored — then it will come down,” Mr. Powell said Thursday. “We think that’s how it works.”

That means that gas prices matter to the Fed, even though it can do little to control them, because high energy costs can influence what consumers expect.

“We are mindful that even though these things are outside of our control — gas prices, and food prices for the most part — that just adds a little bit of urgency to our wanting to get our rates to a place where we’re addressing inflation directly,” Mr. Powell said.

Citadel says it will move offices to Miami because of crime in Chicago.

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Credit...Mike Blake/Reuters

The hedge fund Citadel and the trading firm Citadel Securities, both run by the billionaire Ken Griffin, are moving their offices to Miami after more than three decades in Chicago, according to a memo to employees that was obtained by The New York Times on Thursday.

The move follows elevated tensions between Mr. Griffin and Gov. J.B. Pritzker of Illinois, a Democrat, over taxes and the city’s crime rate. (Florida is one of the few states that don’t have a state income tax.) And it comes as the rise of remote work during the coronavirus pandemic has enabled companies to more freely move their offices in search of lower taxes, a more affordable work force or other potential perks. In recent months, Caterpillar said it was moving its office from Illinois to Texas, and Boeing has said it is moving from Illinois to Virginia. Kellogg, on the other hand, said this week that it was moving its corporate headquarters from Battle Creek, Mich., to Chicago.

“The firms are having difficulty recruiting top talent from across the world to Chicago given the rising and senseless violence in the city,” said Zia Ahmed, a Citadel spokesman. “Talent wants to live in cities where they feel safe.”

According to the Chicago Police Department, there were 797 murders in 2021, up from 772 in 2020. Crime has been spiking in the city, though it is largely concentrated in a few areas.

While not a direct comparison, Miami Dade County reported 30 homicide offenses this year through May, down from 48 over the same period last year.

Mr. Griffin has been threatening to move Citadel’s headquarters for years, citing concerns over local crime. At a recent DealBook conference, he recounted the story of a Citadel partner’s being accosted outside his home with a gun to his head. He said that when he brought up the issue to Governor Pritzker, “he took the moment to call me a liar.”

“I’m going to make sure that if he runs again, that I am all in to support the candidate who will beat him. He doesn’t deserve to be the governor of our state,” Mr. Griffin said.

He said that whether he kept Citadel in Chicago “comes down to whether or not we’re willing to embrace the policies in Chicago that we need for people to be safe and secure.”

A spokeswoman for Governor Pritzker, Emily Bittner, pointed to Kellogg’s announcement and said the administration supported “emerging industries that are already creating good jobs and investing billions in Illinois, like data centers, electric vehicles and quantum computing.”

“We continue to lead the nation in corporate relocations and had a record number of business start-ups in the past year,” Ms Bittner said.

A spokesman for Mayor Lori Lightfoot of Chicago said in a statement, “Citadel leadership has been signaling for some time an enhanced presence in Florida, and while this announcement is not surprising, it is still disappointing.” He added, “We thank the Citadel team for their contributions to our city and their many philanthropic commitments.”

Mr. Ahmed, the Citadel spokesman, said, “In Chicago alone, Ken has donated more than $600 million to educational, cultural, medical and civic organizations.”

Mr. Griffin gave roughly $21.5 million through March to groups supporting the election of Republican candidates around the country during the 2022 election cycle, according to Open Secrets. He is among the biggest supporters of Gov. Ron DeSantis of Florida, a Republican, according to Open Secrets.

Mr. Griffin founded Citadel in Chicago in 1990 and, alongside his partners, Citadel Securities in 2002. Combined, the two firms employ more than 1,000 people in Illinois. Globally, they employ 4,000 professionals across 17 offices.

Citadel told employees that the firm’s new headquarters would be in Brickell, Miami’s financial district, and that the move was expected to take several years. Some employees of Citadel Securities have already begun to work out of temporary offices in the city, and employees of Citadel will soon follow.

Mr. Griffin, who was born in Daytona Beach, Fla., and grew up in Boca Raton, Fla., will move to Miami as well.

In the memo to employees, he recalled the welcome he got in Chicago when he started his firm. “I still remember the incredible civic pride and engagement when I arrived more than 30 years ago — and the outreach by business and political leaders who wanted us to succeed and be a part of the fabric of Chicago’s community,” he wrote.

The announcement was celebrated by Mayor Francis Suarez of Miami, who offered Mr. Griffin a “warm Miami welcome.” Mr. Suarez has courted big business since his election in November 2017, and many companies have taken advantage of Florida’s lack of state and local income taxes. Among those that have moved offices there are the hedge fund Elliott Management and the private equity firm Blackstone.

‘We are in a gas crisis.’ Germany raises emergency level.

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Credit...David Hecker/Getty Images

Germany warned residents and businesses on Thursday that the country was in a natural gas crisis that could worsen in coming months.

“The situation is serious, and winter will come,” Robert Habeck, Germany’s economy minister, told reporters at a news conference in Berlin. He said the government had triggered the second stage of its three-step energy gas plan; the next stage would permit the government to begin gas rationing.

“Even if you don’t feel it yet: We are in a gas crisis,” he said. “Gas is a scarce commodity from now on. Prices are already high, and we have to be prepared for further increases. This will affect industrial production and become a big burden for many consumers.”

Last week, Russian’s state energy giant, Gazprom, reduced the amount of natural gas it was delivering to Germany by 60 percent, in what appeared to be the latest move to punish Europe for sanctions and military support for Ukraine.

Gazprom has pinned blame for the reductions on a turbine for a compressor station that was sent to Canada for repairs and has not been returned because of sanctions. But Mr. Habeck called Gazprom’s cutbacks a deliberate economic attack by Russia’s president, Vladimir V. Putin.

“It is obviously Putin’s strategy to create insecurity, drive up prices and divide us as a society,” he said.

Russia Restricts Gas Supplies to Germany

Daily flow of natural gas from Russia to Germany via Nord Stream 1 pipeline

Source: Nord Stream

By The New York Times

The recent developments have created concerns that the gas crisis is gaining dangerous momentum that could have unforeseen consequences for the wider economy, and that governments are not moving fast enough to stop it.

“We are one step away from the rationing of gas across Europe, which would impact many sectors, businesses and consumers,” said Biraj Borkhataria, an analyst at RBC Capital Markets, an investment bank. Policymakers seem to have found themselves unable to act quickly enough given the speed of events.”

Mr. Borkhataria said Russia’s actions in Germany could lead to “contagion and knock-on effects” across Europe because the gas markets are connected. So, for example, restrictions on flows to Germany are likely to affect prices in Britain.

Russia is also inflicting financial damage on its corporate customers. One concern is that utilities that have contracts to buy gas from Gazprom will find themselves short of the fuel and then need to buy additional supplies at much higher prices to fulfill their obligations, leading to losses.

“Due to the restrictions on the Nord Stream 1 pipeline, only significantly smaller quantities of gas are currently coming from Russia, and replacements can only be procured on the markets at very high prices,” said Klaus-Dieter Maubach, chief executive of Uniper, a German utility, in a statement. Uniper has said it is receiving only 30 percent to 60 percent of its requested volumes.

The shortages have driven gas prices to extraordinarily high levels, about six times what they were a year ago. Mr. Habeck warned that the such high prices were forcing energy providers to take on losses, which could threaten the entire energy market.

“If this minus gets so big that they can’t carry it anymore, the whole market is in danger of collapsing at some point,” Mr. Habeck said, drawing a parallel to how the collapse of Lehman Brothers triggered the global financial crisis.

Mr. Maubach welcomed the government’s emergency plan as a “viable instrument” for coping with the gas situation for now, but warned that more extensive measures would be needed “if the supply situation remains like this or becomes even worse.”

Since late March, when Germany entered the first phase of its plan, the government has focused on increasing its gas storage, which is at more than 58 percent of capacity. But activating the second stage of the emergency plan means the government sees a high risk of long-term supply shortages.

The German government approved a 15 billion-euro, or $15.7 billion, line of credit on Wednesday for utilities to buy natural gas to fill storage facilities. In addition, the government plans to start a program that would help the gas system cope by encouraging companies to suspend their use of gas temporarily. The unused fuel would then be made available for other industrial users for the cheapest price.

But the government decided against allowing gas providers to pass on the soaring costs of energy to customers, after businesses pushed back against the measure.

German companies have been looking for alternative energy sources and ways to save gas, and Mr. Habeck said they had been able to cut their use by around 8 percent in recent weeks. The government has also passed a law that would allow utilities to restart coal-fired power plants that either had been shuttered or were scheduled for phaseout. The Netherlands and Austria have taken similar measures.

Nord Stream 1, the main pipeline supplying Russian gas to Germany, is scheduled for regular maintenance for about two weeks beginning July 11, when flows will stop, raising concerns that Gazprom could take advantage of the situation to halt deliveries for even longer.

Netflix lays off another 300 employees.

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Credit...Mark Abramson for The New York Times

Netflix laid off 300 people on Thursday, the second consecutive month that the streaming giant has cut staff as it confronts declining subscriber growth and a falling share price.

“Today we sadly let go of around 300 employees,” the company said in a statement. “While we continue to invest significantly in the business, we made these adjustments so that our costs are growing in line with our slower revenue growth.”

Last month, Netflix laid off 150 workers, including staff working at Tudum, which was part of the company’s marketing division.

In April, the company announced that it had lost 200,000 subscribers, and said it anticipated losing another two million in the second quarter of this year. It has nearly 222 million subscribers in total. The company’s stock price, which has fallen about 70 percent this year, was slightly lower on Thursday.

To address the company’s financial struggles, Netflix has said it will introduce a lower-priced subscription tier that includes advertising. The decision is a significant strategic pivot for the company, which had rejected adopting ads for years. Executives at the company have said they hope to introduce the advertising model by the end of this year, and Netflix is in talks with several companies that may help build out the business.

Though the ad-supported service could increase revenue, some Wall Street analysts have cautioned it could also cannibalize Netflix’s existing user base, with current subscribers trading down for a lower-priced tier.

“Ad-tiering could serve as a way for consumers across all income brackets to extend their streaming budget by trading down to subscribe to an additional service, benefiting Netflix’s competitors much more than Netflix itself,” analysts at Bank of America wrote in a note to investors on Thursday.

Stocks rise but oil and bonds show recession fears.

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Source: FactSet

By: Ella Koeze

Stocks rose while bond yields and oil prices fell, as investors weighed the risk of an economic and assessed the odds of an outright recession.

Federal Reserve Chair Jerome H. Powell said on Thursday that the central bank’s commitment to rein in rising prices was “unconditional.” It was Mr. Powell’s second day of testimony before Congress, and was again dominated by discussion of recession, inflation and interest rates.

  • The S&P 500 rose nearly 1 percent, after a late afternoon rally.

  • Government bond yields, a benchmark of borrowing costs, fell for a second day. The 10-year Treasury yield slipped to about 3.1 percent. The Fed is on an aggressive campaign to raise rates to fight inflation, but this may lead to a recession, so traders are making long-term bets that rates may need to moderate in the future.

  • The price of West Texas Intermediate crude oil, the U.S. benchmark, fell nearly 2 percent, extending a big decline the day before. President Biden called for a federal gas tax holiday on Wednesday, but experts were skeptical about the benefit for consumers.

  • Altria, which owns a big stake in the e-cigarette company Juul, rose 2.4 percent after falling over 9 percent on Wednesday. On Thursday, the Food and Drug Administration ordered Juul to stop selling e-cigarettes in the United States, a profoundly damaging blow to a once-popular company whose brand was blamed for the teenage vaping crisis.

  • Shares of gun and ammunition companies rose sharply after the Supreme Court on Thursday struck down a New York law that placed strict limits on carrying guns outside the home, saying it was at odds with the Second Amendment. Smith & Wesson gained 9.6 percent.

  • In Europe, the Stoxx 600 fell 0.8 percent. In Japan, the Nikkei 225 closed flat, and Hong Kong’s Hang Seng gained 1.3 percent.

Korean currency falls to 13-year low amid global recession fears.

SEOUL — The South Korean won hit its lowest point against the U.S. dollar in nearly 13 years on Thursday, opening at 1,299 won and weakening to more than 1,300 in intraday trading.

How Much a South Korean Won is Worth

Note: Scale is inverted. A falling line indicates a weaker won.

Source: FactSet

By The New York Times

The last time the country’s currency breached the 1,300-won threshold was in the summer of 2009, toward the end of the global financial crisis. The won also passed this threshold during the Asian financial crisis of 1997-98. South Korea’s export-driven economy makes it particularly sensitive to conditions in the global economy, which have been deteriorating recently.

Choo Kyung-ho, the nation’s deputy prime minister and the minister of economy and finance, warned of the need to prevent a further decline of the currency at a meeting with other officials in Seoul on Thursday morning.

“If needed, we will make efforts to stabilize the market,” he said, while also calling for labor reforms and fair compensation.

Inflation is rising in South Korea as policymakers in the United States are also struggling to contain runaway consumer prices.

This week, the Bank of Korea, South Korea’s central bank, predicted the nation’s annual inflation rate would hit 4.5 percent by the end of the year, the highest rate in 14 years, with increased spending and rising commodity prices being contributing factors.

In May, consumer prices in the country jumped 5.4 percent from a year earlier. It was the sharpest rise in over a decade, and came at a moment when South Koreans were eager to spend money after having lived under strict coronavirus social distancing rules.

The war in Ukraine has also played a role, according to the Bank of Korea, which said in a statement that sanctions on imports of Russian crude oil and petroleum products have led to a rise in international oil prices.

The central bank raised the base interest rate by 1.50 to 1.75 percent in May, and officials predict further increases to combat inflation.

How inflation could factor into student loan forgiveness.

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Credit...Haiyun Jiang/The New York Times

Around 200,000 former students who attended schools that they said had defrauded them will have $6 billion in federal loans canceled under a sweeping settlement announced this week, the latest move by the Biden administration to address the student loan crisis by eliminating some debts, Stacy Cowley writes for The New York Times.

Those who applied for relief — some as long as seven years ago — will have their loans wiped out if they attended one of more than 150 schools named in the class-action settlement, nearly all of which are for-profit colleges and vocational programs. The deal reverses 128,000 denial notices — which a federal judge called “disturbingly Kafkaesque” — that were sent to relief applicants during the Trump administration.

Many of the schools included in the settlement are out of business.

The soaring cost of food, gasoline and other staples is further complicating a fraught debate among President Biden and his closest advisers over a broader pledge to cancel thousands of dollars of student loan debt for tens of millions of people, Stacy Cowley and Zolan Kanno-Youngs write.

While Mr. Biden has signaled to Democratic lawmakers that he will probably move forward with some form of student loan relief, he is still pressing his team for details about the economic ramifications of wiping out $10,000 of debt for some — or all — of the nation’s 43 million federal student loan recipients.

The country’s 8.6 percent inflation rate, a four-decade high, has added another layer of complexity to the decision: What would it mean for the economy if the government forgives some $321 billion in loans?

Today in On Tech: App rules are twisted to absurdity.

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CreditCredit...By Talia Cotton

Today in the On Tech newsletter, Shira Ovide writes that apps have become a huge economy, but the rules that govern them are nearly impossible to understand.