Powell Federal Reserve Lowers “Fed Put” Strike Price

Doug Nolan

I have little confidence history will get this right. Today’s overwhelming consensus view holds that Powell this week committed a major policy blunder. After his early-October “we’re a long way from neutral” “rookie mistake”, he has followed with a rate increase right in the throes of a stock market sell-off, Credit market instability and mounting global and domestic economic risk. He stated the Fed’s balance sheet runoff was stuck on autopilot, even as stunned market participants fret illiquidity. Moreover, Powell disappointed skittish markets heading right into December quadruple-witch options expiration – in the face of an impending government shutdown. How times have changed.

There was irony in Alan Greenspan joining Bloomberg’s Tom Keene Wednesday for live coverage of the FOMC policy decision. It was, after all, the original “Greenspan put” that morphed over Bernanke’s and Yellen’s terms into the interminable “Fed put.” Markets this week were desperate for confirmation that the Powell Fed would uphold the tradition of pacifying the markets and, when needed, invoking the Federal Reserve backstop. Markets were prepared to begrudgingly tolerate a rate increase. But the marketplace demanded evidence – an explicit signal - that the FOMC recognized the gravity of market developments and was prepared to intervene. Chairman Powell didn’t share the markets’ agenda.

Our Federal Reserve Chairman should be commended. Under extraordinary pressure, Mr. Powell and the FOMC didn’t buckle.

Expiration for the aged “Fed put” was long past due. For too long it has been integral to precarious Bubble Dynamics. It has promoted speculation and speculative leverage. It is indispensable to a derivatives complex that too often distorts, exacerbates and redirects risk. The “Fed put” has been integral to momentous market misperceptions, distortions and structural maladjustment. It has been fundamental to the precarious “moneyness of risk assets,” the momentous misconception key to Trillions flowing freely into ETFs and other passive “investment” products and strategies. It was central to a prolonged financial Bubble that over time imparted major structural impairment upon the U.S. Bubble Economy.

Moreover, prolonged U.S. financial and economic Bubbles were fundamental to Bubbles inflating on an unprecedented global scale. The “Fed put” morphed into a disastrous global “policymaker put” phenomenon. If not for the “Fed put,” never would there have been the audaciousness to set forth on “whatever it takes.” And the greater asset Bubbles inflated the more convinced everyone became that central banks and governments (certainly including Beijing!) had everything under control - and would in no terms tolerate a bust.

There is never a good time to pierce a Bubble. There definitely is no cure, so it’s a central banker and policymaker imperative to avoid supporting a backdrop conducive to Bubble Dynamics. There was never going to be a convenient time to end the “Fed put.” Implicit backstops and guarantees are problematic that way. Washington throughout the mortgage finance Bubble period was content with the markets’ view that the Treasury would backstop GSE obligations. No one was willing to rock the boat during the boom. Critical lesson not learned.

As for the Fed’s market “put”, it proved a challenge for Chairman Powell to distance the Federal Open Market Committee (FOMC) from an implicit backstop the Federal Reserve repeatedly employed starting all the way back with the 1987 stock market crash (evolving from liquidity assurances to Trillions of “whatever it takes” liquidity injections and zero rates in a non-crisis backdrop). The new Chairman intimated that he preferred the Fed move in a different direction, subtlety easily lost with the focus on communicating policy continuity. It was only when the markets were under acute pressure that participants would comprehend the seriousness of a subtle but momentous change in the Fed’s approach. That day came Wednesday.

December 21 – CNBC (Kate Rooney): “Federal Reserve Bank of New York President John Williams told CNBC on Friday the Fed is open to reconsidering its views on rate hikes next year. ‘We are listening, there are risks to that outlook that maybe the economy will slow further,’ Williams told Steve Liesman… Williams said despite this week’s forecasts, the central bank is not ‘sitting there saying we know for sure what’s going to happen’ in 2019. ‘What we’re going to be doing going into next year is reassessing our views on the economy, listening to not only markets but everybody that we talk to, looking at all the data and being ready to reassess and re-evaluate our views,’ he said.”

The Dow rallied 350 points in Friday morning trading on comments from (NY Fed President) John Williams. Yet another rally to evaporate. By that time, the damage had been done. Confidence had been shaken. Fear had completely supplanted Greed. And, to be sure, it’s not a market structure especially resistant to waning confidence. Indeed, acute fragilities are being laid bare. Bubbles don’t work in reverse. Crisis Dynamics have engulfed the “Core,” and I’ll leave it at that for this week.

I’ve always had serious issues with central banks promoting the perception that they would eagerly backstop market liquidity. Liquidity is a fundamental market risk – that can’t be permanently transformed, transferred or mitigated. It’s a precarious proposition to promote the belief that contemporary central banks - with unlimited capacity to create liquidity - will do “whatever it takes” to ensure highly liquid markets. Nevertheless, it’s an extreme challenge to convey to market participants, central bankers, politicians and the general public why central banks aggressively underpinning the markets over the long-term promotes pernicious instability for the markets, real economies and humanity more generally.

The implicit “Fed put” seemed so innocuous when things looked good – so long as the Bubble was inflating. For going on a decade, Bubble Analysis has appeared a pathetic waste of time. Suddenly, cracks appear, confidence wanes, liquidity disappears, credit falters - and ramifications are anything but subtle: so much teeters on the markets’ perception of the efficacy of central bank market backstops. The world today hangs in the balance – markets, economies, politics and geopolitics. One of the greatest risks associated with the global government finance Bubble has been a crisis of confidence in policymaking.

It was inevitable the “Fed put” would turn problematic. The more explicit central backstops become, the more market distortions promote self-reinforcing speculative excess and Bubbles. The greater the scope of Bubbles, the more deeply manic markets become convinced that central bankers won’t allow the good times to end. Importantly, speculation and leverage will invariably expand beyond the expected capacity of liquidity backstops. This is why “whatever it takes” and “QE infinity” were so reckless. There became essentially no degree of excess that troubled the marketplace. It degenerated into a complete malfunctioning of the market mechanism.

I certainly don’t believe the “Fed put” is dead. The Powell Fed just meaningfully lowered the “strike price.” They’ll be forced to respond, but only after the market has suffered significant impairment. To the markets’ horror, the bursting Bubble will pass the point of no return before our central bank is compelled to aggressively defend the marketplace.

As painful as this process will become, and as deeply distressing it will be to see so many hopes, dreams and expectations crushed, the Powell Fed is taking the best approach. The Bubble would have inevitably burst. Indeed, the global Bubble has been deflating since earlier in the year. That the U.S. “Terminal Phase” of Bubble excess continued even as the global Bubble faltered created a perilous divergence that would end badly. It’s ending now - badly. The miserable downside would have only been worse had the Fed stepped in, bolstered the markets once again and extended the “Terminal Phase.”

It would have been the easy decision for Powell to just pull a Greenspan, Bernanke or Yellen. Just give the markets what they want and silence the temper tantrum. The three preceding Fed chairs invariably acted in the interest of sustaining or resuscitating Bubble Dynamics. In my view, at least two of the three seemed preoccupied with their own reputations and legacies.

In an age seemingly bereft of statesmen, Jay Powell is one. He will fall under only more intense pressure and criticism. This good man will be pilloried and blamed for a predicament decades in the making. Clearly, he’s the targeted presidential fall guy. History will surely be merciless, and it’s all unfair. I worry about a lot of things these days, including how our nation will attract talented and decent individuals into public service – especially now that they will be needed more than ever. We’re heading into challenging and unsettling times. Somehow our nation must to come together and support our institutions and responsible public servants.

Liberals make a risky bet on a Trump recession

The most fiscally irresponsible presidency since that of George W Bush has luck on its side

Edward Luce

Nobody deserves an economic downturn more than US president Donald Trump. But forecasts of America’s looming recession are at the very least premature.

That widely held expectation is driven partly by hope. It has become an article of faith among Mr Trump’s opponents that his 2020 campaign will coincide with a collapse of US growth. That would doom his re-election chances. It would also deliver a richly earned finale to the most fiscally irresponsible presidency since that of George W Bush.

There would be poetic justice in such an outcome. But Mr Trump’s opponents are bad at differentiating between what “is” and what “ought to be”. Depending on what you want to see, the numbers could point either way.

On the one hand, the sugar high from Mr Trump’s $1.5tn tax cut will trail off rapidly next year. It has helped to lift US growth above 3 per cent. Most of that stimulus will vanish by the end of 2019. Growth should correspondingly fall. It is hard to see why a now Democratic-controlled House of Representatives would agree to another stimulus in time for Mr Trump’s re-election campaign.

The bond markets seem to share liberal America’s forecast. The yield curve between two- and five-year Treasuries, measuring the different rewards investors expect, has recently inverted. This means it is cheaper to borrow longer term than short — a classic harbinger of contraction. Many investors are expecting the economy to cool. If you add in Mr Trump’s trade war with China, the stock market turning against big tech company valuations, and oil prices nudging up after Opec and its allies agreed a production cut, then a downturn looks probable within the next two years. Mr Trump’s party was wild while it lasted. Reality is about to switch off the music.

But that is only half the picture. It could just as easily be the wrong half. Here is the other. If you are anti-Trump, shield your eyes: America’s unemployment rate is at a near 50-year low; the US labour force participation rate continues to improve; wage rates are picking up, yet there are few signs that inflation is about to take off.

That means the Federal Reserve can afford to heed Mr Trump’s advice to delay — or water down — next year’s expected interest rate rises. Jay Powell, the Fed chair, may be loath to be seen to be caving in to a bullying president. But the monetary tide is drifting Mr Trump’s way.

Recoveries do not die of old age. Something kills them. If today’s economy were a morality play, Mr Trump would be the murderer. He has done almost everything wrong. His tax cuts were unfunded. Contrary to claims, they will not pay for themselves. The US monthly budget deficit hit a record $205bn in November. There will be less firepower to fight the next recession when it does hit. There will be scant room for monetary policy to counteract it either — interest rates remain well below their historic norms.

Nor was his tax cut a “reform”, as it is often mislabelled. Mr Trump left the existing corporate tax code largely in place, which benefits big incumbents rather than start-ups. It is no surprise, therefore, that businesses have directed most of the windfall to share buybacks rather than new investments.

As a result, inequality has risen under Mr Trump. Economists used to talk of the “Great Gatsby curve” — the fact that US inequality had returned to 1920s levels. Those days now look almost egalitarian. America’s top one per cent own 40 per cent of the country’s wealth, which is greater than the bottom 90 per cent combined. That is a dangerous number, which Mr Trump’s policies are likely to make worse. He will not necessarily pay a price for it.

Just as politics is a game of perception, people’s belief about their economic future is increasingly shaped by their politics. Most Republican voters are optimistic about America’s economic outlook. Most Democrats are gloomy. This is a mirror image of what voters said when Barack Obama was president. The widening of the “partisan expectations gap” offers yet another measure of the cognitive split between red and blue state America.

How does inequality affect the picture? In two ways. First, a large and growing wealth gap reduces long-term growth. The more the economy’s gains are captured by the already-rich, the less society tends to spend on consumption. This augurs badly for America’s trend growth rate. It helps explain why middle class retailers, such as Macy’s, Sears and JC Penney, are faring so badly.

Second, inequality fuels anti-elite anger. Mr Trump is a once-in-a-generation genius at harvesting people’s resentment. Having made the problem worse, he will surely exploit it.

America’s liberals, meanwhile, find it awkward to attack inequality directly. The Democratic party also has its plutocratic wing. Partly they are worried about being accused of class warfare. They are also inhibited by the fact that so many well-known billionaires are liberal. Think of Michael Bloomberg, George Soros and Tom Steyer. Banking on a recession is no strategy for winning.

To recap: Mr Trump is vandalising America’s balance sheet, sowing toxic divisions, and surfing on a wave of cyclical luck. That will eventually come to an end. Do not bet on it happening before 2020. Like Napoleon’s best generals, Mr Trump is lucky. Unlike them, his defeat is not inevitable.

The Continuing Agony of Brexit

Those who are calling for a second referendum on the United Kingdom's withdrawal from the European Union overlook an inconvenient truth: Leavers detest the EU more intensely than Remainers love it. So we must hope that Prime Minister Theresa May gets her amicable divorce when Parliament finally votes on it in January.

Robert Skidelsky  

LONDON – So British Prime Minister Theresa May lives to fight another day. The Conservative Party in the House of Commons reaffirmed its confidence in her leadership by a far-from-resounding 200-117 vote. It is hard to think of another British prime minister whose leadership has been in such continuous crisis. Not so much an iron lady as a stubborn and dogged one, May has begun another round of effort to extract a few further concessions from European leaders to make her divorce agreement more palatable to her party, if not a majority of the public.

The British people decided in June 2016 to leave the European Union, by a slim 51.9%-48.1% margin in a national referendum. After invoking Article 50 of the Treaty of Lisbon, the United Kingdom is due to leave on March 29, 2019. But the Irish question, the Conservative Party’s internal politics, and parliamentary arithmetic have made the Brexit process anything but straightforward.

The UK and the Republic of Ireland share a land border separating the latter, which will remain in the EU, from Northern Ireland, which is part of the UK. Brexit, therefore, would leave Northern Ireland outside the EU’s customs union, and the Irish Republic inside it. Hence May’s agonized efforts to secure a deal that prevents a “hard” border with customs checks.

This is not just a matter of economic convenience. It is literally a matter of life and death. When Ireland won its independence from Britain in 1922, six mainly Protestant counties remained in the UK under a system of devolved government. Two legacies of the truncated United Kingdom survived: free trade and free movement of labor between Britain and the new Irish state.

The incomplete victory over Britain rankled in the predominantly Catholic Republic of Ireland; until 1999, the Irish constitution included a commitment to the “reintegration” of the whole island. At the same time, Northern Ireland’s dwindling Protestant majority clung ever more fervently to the British connection. Following three decades of violent conflict between the province’s Irish nationalist and Protestant groups, resulting in over 3,600 deaths, the Good Friday Agreement in 1998 established a Unionist-Nationalist power-sharing executive in Northern Ireland, along with a British-Irish Council as a nod to harmonious relations with the Irish Republic.

Any hardening of the frontier would jeopardize the fragile peace secured by the Good Friday Agreement. If the power-sharing agreement breaks down, men of violence on both sides would be waiting in the wings. To avoid this outcome, May’s plan provides for Britain to leave the EU but remain “temporarily” in the customs union, pending the negotiation of a free-trade agreement with the EU, with the “backstop” of a guaranteed open border between Northern Ireland and the Irish Republic, come what may.

As if this weren’t bad enough, Parliament is split between those who want to leave and those who want to remain. This cleavage cuts across the ruling Conservative and opposition Labour parties.

The Remainers fall into three groups: those on the left who see the EU’s “social market” approach as a source of protection for British workers; business and financial interests who count the economic costs of Brexit; and idealists who want Britain to play a constructive role in the political unification of Europe. The Leavers also comprise three groups: Thatcherites who view Brussels as a “super-state” bent on stifling free enterprise; a partly overlapping group that envisages Britain as an independent part of a global free-trade system; and the “left-behinds” who want to preserve Britain’s cultural identity and keep out foreigners.

The parliamentary arithmetic matters, despite the referendum result, because May was forced to concede that Parliament would have the last word on any deal she reached. This has given Remainers hope of reversing the 2016 outcome in a second “people’s vote.”

The composition of parliamentary forces reflects May’s disastrous decision to call a snap general election in 2017, which resulted in her losing a Conservative majority. And the 317 Conservative MPs who remain are split about 200-100 between those who back May’s proposed Brexit plan and those who want Britain to “crash out” without a deal.

Support for May’s deal from the opposition – 257 Labour MPs, 35 Scottish Nationalists, and a few others – is uncertain, at best. Likewise, the ten MPs of Northern Ireland’s Democratic Union Party, on whose support the government now depends, are torn between wanting free trade with the South and fear of being sucked into the Irish Republic if and when the rest of Britain leaves the customs union. The DUP has denounced all talk of a special arrangement or “backstop” to enable Northern Ireland to remain in the customs union in lieu of a UK-EU free-trade deal.

Given the divisions in her own party, May will be forced to depend on Labour MPs to get her agreement through Parliament. No one knows how Labour MPs will vote, and the incentives facing the party are mixed. On the one hand, voting with the Leavers to scupper May’s deal would probably lead to a general election, which Labour could win. On the other hand, Jeremy Corbyn, the party’s leader, can have no great appetite to accept the poisoned chalice that May would pass on to him.

There’s an understandable temptation to say, “If Parliament can’t decide, let’s throw it back to the people.” But there’s no clarity about what exactly “the people” would be asked. It is playing with fire to seek a second vote on the ground that you did not like the result of the first one. And there’s one further issue to bear in mind: Leavers detest the EU more intensely than Remainers love it. If the Remainers win a second vote, a passionate resentment will sour British politics for years. So we must hope that May gets her amicable divorce when Parliament finally votes on it in January.

Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

China’s Reform Without Opening

An economic shock—and pain for global markets—may be needed to restart stalled reform in China

By Nathaniel Taplin

Xi Jinping’s speech mentioned the market only around one-fourth as often as Hu Jintao’s speech on reform and opening 10 years earlier, according to Capital Economics.
Xi Jinping’s speech mentioned the market only around one-fourth as often as Hu Jintao’s speech on reform and opening 10 years earlier, according to Capital Economics.

“What we should and can reform, we will resolutely reform. What shouldn’t be reformed and cannot be reformed, we will resolutely refrain from changing.” Not the tone optimists had been hoping for from Chinese President Xi Jinping, speaking this week 40 years after the launch of Deng Xiaoping’s “reform and opening up” policy, which ignited China’s economic miracle.

Real economic reform in China isn’t dead, but its economy may need to get significantly worse before the leadership is convinced it has no other choice.

Given the severe stress China’s private sector is under, with bond defaults at an all-time high and huge amounts of equity pledged as collateral for loans, Mr. Xi’s speech was remarkably light on signals that Beijing is committed to turning things around for private companies.

The speech did urge “unwavering” support for the private economy, but only after calling for “strengthening and developing the state-controlled economy.” Mr. Xi’s speech mentioned the market only around one-fourth as often as President Hu Jintao’s speech on reform and opening 10 years earlier, according to Capital Economics.

That all fits with a Xi administration that has embraced a vision of “reform” without much opening or markets. “Supply-side reform,” has mostly meant shutting down private factories to help state-owned competitors reap higher margins. On debt, regulators have shied away from allowing banks to freely compete for deposits with higher rates, which would force them to lend more to productive private companies, rather than safer state enterprises, to preserve margins. Instead, state-owned conglomerates have benefited from debt-to-equity swaps, while the campaign against shadow banking has starved the private sector of funding.

The good news is, that approach probably isn’t sustainable. Private investment has rebounded modestly in 2018, but mostly due to the bubbly property market, which is likely to stumble in 2019. Profits are weakening and so is the labor market. And corporate leverage has rebounded to 164% of total output after leveling off in 2017, a sign that Beijing’s heavy-handed approach to debt control isn’t working. Administrative efforts to boost private companies and, thus, growth have mostly failed.

That could hand ammunition to economic reformers, particularly since the slowdown is coinciding with President Trump’s pressure campaign. Scattershot new openings for foreign investors such as UBS and Tesla could be replaced with broader concessions on foreign ownership in finance, health care, entertainment and other key sectors, and even on sticking points such as intellectual property.

Much depends on how deep the downturn is next year, and how hard Mr. Trump’s negotiators push. That creates a paradox for investors: Good news on China’s opening is only likely to follow bad news on China’s economy, which would hit global markets hard. Economic reform is overdue but could be surprisingly painful.

Stock Markets Are Wild, but Bond Markets Can Be Dangerous

The sell-off in stocks isn’t the only ominous economic sign emanating from financial markets. The bond markets, much more closely linked to the actual economy, are also flashing a warning.

By Matt Phillips and Peter Eavis

Ask someone how “the Dow” is doing and, even if they don’t know the answer, they’ll know what you’re talking about. Ask them about the bond market and you’ll most likely get a blank stare.

When it comes to the economy, however, bonds are far more important than stocks.

Bond markets dictate the cost of borrowing money, and that can determine actual economic activity. The decision by a C.E.O. to build a plant or take the plunge on a new product is often decided by how much it will cost to borrow the money to pay for it. When that payment climbs too high, corporate activity slows, and so does the economy.

Lately, borrowing costs have been rising quickly. Investors worried about corporate debt loads and the impact of a potential slowdown on profits are demanding companies pay them higher interest rates.

And, in a recent troubling sign for the economy, fewer companies have been turning to the bond market to finance their businesses.

As with the swooning stock market, weakness in the bond market doesn’t mean the economy is destined for an immediate downturn. But signals being sent by bond investors will almost certainly arise in discussions among policymakers at this week’s Federal Reserve meeting on monetary policy, which will culminate on Wednesday with a decision on interest rates.

Here’s what you need to know.

There’s the government, and then there’s everyone else.

Like any borrower, a company raising capital in the bond markets pays interest. What they pay depends on how likely it is that a lender will get repaid. Consumers have credit scores. Companies have debt ratings.

The greater the risk that a borrower won’t be able to pay up — known as credit risk — the higher the interest rates. American Treasury bonds almost always have the lowest interest rates. That’s because lending to the United States government — which has a virtually unblemished record of repaying creditors — is considered pretty much the safest investment on earth.

Everyone else, even the most powerful, cash-rich corporations, must pay more. For example, Home Depot went to the bond market late last month, raising $1 billion by selling 10-year bonds. At the time, the yield on the 10-year Treasury note — the federal government’s cost to borrow for 10 years — was about 3.06 percent. Home Depot, considered a safe or “investment grade” borrower — paid an interest rate of almost 4 percent to borrow for 10 years.

The difference between the low interest rate that the government pays and the higher rate of another borrower is called the credit spread. Riskier borrowers typically have larger spreads.

Bankers who arrange bond issues for companies set the interest rate by looking at where the company’s other bonds are trading and assessing the demand for the new bond.

A higher credit spread can also reflect investors’ concerns about things like the broader economy and the future ability of any company to pay money back. In recessions, for example, they rise for even the healthiest companies.

“As the credit spread goes up, lenders are saying, ‘We’re really worried about making loans, riskier than lending to the government,’” said Philip Bond, a professor of finance at the University of Washington.

Rising credit spreads are sending a warning.

Since early October, credit spreads have increased fast.

Borrowers with investment-grade debt ratings (essentially higher credit scores) are paying more than 1.4 percentage points above Treasurys to borrow, up from less than 1 percentage point at the start of the year.

Spreads on junk bonds, issued by companies that are considered significantly less creditworthy, have risen even more, from around 3.2 percentage points at the start of the year to more than 4.5 percentage points now, according to FactSet.

The sudden increase — “widening” in the bond market’s lingo — is telling us that investors are suddenly more nervous about handing over their cash to corporations. The same change in sentiment is playing out in the stock market and the reasons are largely the same.

A trade war that has no end, signs of a slowing world economy and a widely expected deceleration in growth the United States have all pushed investors to take less risk. At the same time, the Fed is slowly removing the helping hand it has extended to markets and the economy for the last decade, by raising rates and shrinking the stockpile of bonds it owns. Recent drops in oil prices are also making investors less willing to place their money with the smaller energy companies that tend to borrow in junk-bond markets.

While the stock market sell-off may eventually affect sentiment among consumers and corporate executives, bond market moves can have an immediate impact on the economy by discouraging borrowing and investment.

“As those spreads are widening, definitely there is going to be a reluctance to invest, especially in risky ventures,” said Marti Subrahmanyam, a professor of finance at New York University’s Stern School of Business.

There are already signs that the recent jump in borrowing costs is slowing the flow of money to companies. In the junk bond market — where the riskiest borrowers are — there have been no new corporate debt deals this month, according to data from the financial market research firm Dealogic. If none happen, it would be the first such shutout since November 2008, near the peak of the financial crisis.

Can corporate American handle a downturn?

It is true that borrowing costs are still very low by historical standards, because the Fed only just began to step back from its post-crisis programs to keep them that way.

But one concern among investors is that this effort to hold down costs encouraged borrowing to a point that could be problematic in a downturn.

Netflix has gone from having very little debt in 2010 to having more than $10 billion now. Verizon now has $113 billion of debt, more than double the amount it had six years ago. By one measure, the ratio of corporate debt to G.D.P., the total level of borrowing is at all-time highs.

In general, higher debt levels could make it tougher for companies to repay the lenders if there’s a slump in the economy, or a hiccup in sales, or a decline in the value of assets.

Back in 2015 we had just such a situation, when a similar surge in corporate bond spreads pushed borrowing costs up sharply. A sharp dive in crude oil prices was at the heart of the rout, making people less willing to lend money to indebted energy companies. A wave of defaults by energy-related companies, like Linn Energy and SandRidge Energy, ensued.

That turmoil didn’t lead to a full-blown recession. But it did coincide with what some economists, including those at JPMorgan Chase, now call a “mini recession” between 2015 and 2016, in which industrial spending by companies in the manufacturing sector slowed sharply and dragged on growth.

And with the American economy already expected to slow in 2019, the climbing costs of corporate borrowing could determine whether any slowdown turns into something much worse.