The Federal Reserve finally raises rates

This is an audio transcript of the FT News Briefing podcast episode: The Federal Reserve finally raises rates

Marc Filippino
Good morning from the Financial Times. Today is Thursday, March 17th, and this is your FT News Briefing.

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The Federal Reserve raised rates yesterday for the first time since 2018. European energy traders are asking for emergency help, and we’ll look at the rising cost of Beijing’s friendship with Moscow.

Tom Mitchell
I do think Xi and the Chinese leadership have been surprised by how steep these costs are proving to be, especially as the war goes on.

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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The Fed yesterday lifted its key interest rate, a quarter of a percentage point. It’s a milestone in terms of the US economy’s recovery from the pandemic. It’s also the start of the US central bank’s battle against inflation. Here’s our US economics editor Colby Smith.

Colby Smith
People were definitely taken aback by the number of interest rate increases that Fed officials signalled could be in store for 2022. I think going into this meeting, people thought officials would be signalling, let’s say, four to six interest rate increases. So in a lot of ways, I think people have just been trying to digest exactly where this puts the Fed now in terms of its monetary policy given that we have this very kind of clear indication that every meeting from this point forward is lies.

Marc Filippino
Yeah, but it couldn’t have taken investors that much by surprise, right, Colby? I mean, the S&P 500 ended the day two and a quarter per cent higher.

Colby Smith
Yeah, I think people were a little bit perplexed with the market reaction here, given that this was a pretty hawkish move from the Fed. One thing that I think people focused quite a bit on was the fact that Powell sounded quite confident in the Fed’s ability to kind of pull off a soft landing, meaning their ability to bring down inflation without, you know, a huge detriment to growth or labour markets. Now there is some scepticism, however, in the Fed’s ability to do this. And that’s what a lot of economists have been telling me, is that they’re a little bit concerned that interest rates might need to rise a lot more than the Fed has initially suggested, meaning the hit to growth and labour markets might be more pronounced than are currently pencilled in to these forecasts.

Marc Filippino
Colby Smith is the FT’s US economics editor.

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Stock markets around the globe popped up yesterday on news of Russia and Ukraine making progress on a tentative peace plan. TBD on whether that will stick. Asian markets in particular were boosted by remarks from China’s top economic official. He reassured investors that Beijing would take measures to support the economy and financial markets. This comes after sharp stock sell-offs in China and Hong Kong earlier this week. Here’s the FT’s Tom Mitchell.

Tom Mitchell
Vice Premier Liu He, who’s really the most powerful economic official in China. He heads something called the Financial Stability and Development Committee, which came out with a really wide ranging statement, saying they recognise there are all these serious problems in the economy and challenges facing the economy. And they understood some of the reasons that had driven the financial market sell-off, and they were going to take measures to address that. It was really something aimed at increasing confidence. There is nothing specific as of early Wednesday evening, Beijing time, but it will be interesting to see what follow up measures there may be to that.

Marc Filippino
Tom, you’ve also been writing about the rising cost of Beijing’s loyalty to Moscow. I want to ask you more about this. Are we talking about sanctions, and how would sanctions affect China?

Tom Mitchell
What China fears is, for example, technology companies which sell a lot of hand phones into Russia with US components. US sanctions could make it impossible for them to also sell into US and European markets if they continue to do business in Russia. So they are going to basically cut off their Russia business, despite all the pledges of support from Xi Jinping to Putin and the Russian government. The other issue on sanctions is Chinese banks, any Chinese bank with business, US dollar business in Europe and the US, they’re not going to jeopardise their access to the US financial system by doing business in Moscow if that’s what US sanctions mandate. So it’s really a problem for Chinese companies.

Marc Filippino
How much do trade relationships matter, Tom? China’s trade with the west is, it’s just so much bigger than it is with Russia. So how does Beijing take this into account?

Tom Mitchell
Well, apparently not at all, because you would think if you do $1.5tn worth of trade with the US and Europe, you would value that more than it does with Russia. The thing is, ideologically, in terms of his worldview, Xi Jinping is just much more closely aligned with Vladimir Putin than he is with Joe Biden. He sees a world in which the US is domineering. The US has launched a lot of trade and technology sanctions targeting China going back to when Donald Trump was president. So he sees the US as an enemy and so does Putin. And so the enemy of my enemy is my friend. But at the same time, they worry about the economic consequences of this geopolitical relationship, and they would, they want to have it both ways. I won’t have the friendship with Putin. They want to have good economic relations with Europe and the US, and they probably could have had that absent the invasion of Ukraine. But the invasion of Ukraine really puts them on a spot. And that’s exactly where they are now trying to wriggle their way out of it.

Marc Filippino
Now, do you think Xi Jinping’s friendship with Putin is going to cause him political problems in China?

Tom Mitchell
Not necessarily, I think Xi’s political position is as strong as it’s ever been. He will cruise to a third term in October and November. However, that said, I do think Xi and the Chinese leadership have been surprised by how steep these costs are proving to be, especially as the war goes on and is a lot longer than Putin certainly believed, and the Chinese probably believed as well. They don’t want to get to the point where they have to distance themselves from Russia and because of the economic pain is so bad, they’ll do everything they can to support the economy to keep things humming along, even if it means blowing out their debt-to-GDP ratio, something they’ve managed to restrain over recent years. So the question is, are they getting to a point where they are going to have to make a really hard decision, which is either back away from Putin a bit, which Xi does not want to do or bear a much higher economic price than they were expecting to pay?

Marc Filippino
That’s the FT’s Beijing bureau chief Tom Mitchell.

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Europe’s largest energy traders yesterday asked for help with a looming cash crunch. In a letter seen by the FT, the European Federation of Energy Traders called on governments and central banks to provide emergency liquidity. This would help members manage market volatility. The federation’s members include BP and Shell. Energy prices have seesawed since the pandemic, and it’s become even worse since Russia invaded Ukraine. FT Alphaville reporter Claire Jones has more on what the energy traders are asking for.

Claire Jones
The letter’s very specific in saying this is a short-term measure. It’s about providing short-term credit lines that can really deal with very acute situations in energy markets, which, you know, we’ve seen in broader commodity markets too. I think we’ve seen, you know, the nickel market is, it’s got into a lot of trouble. We’ve seen exchanges having to close. I think the trade body is really after is ensuring that doesn’t happen in European energy exchanges

Marc Filippino
Now Claire, do we have an idea if they’re going to get what they asked for or have a sense of what’s going to happen?

Claire Jones
We don’t know yet if these facilities will occur or, you know, what shape they would, you know, they would form. You know, central banks have been pretty non-committal so far, so we shouldn’t really get ahead of ourselves too much. But what it will mean is that the price discovery process still works. I mean, this is why the exchanges are so important because they allow for futures contracts and of the derivatives to be sold. That allows people in the market to really hedge risk and ensure that you’ve got, you know, some way of kind of like managing the volatility that we’ve seen in energy markets. But the prices themselves, I think, are being driven by other factors that are more geopolitical in nature.

Marc Filippino
Claire Jones is a reporter for FT Alphaville.

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Before we go, I’ll be on Twitter spaces today hosting a discussion with FT journalists about China’s role regarding the war in Ukraine like what we were talking about before. Join me at 8:30am New York, 12:30pm. London and 8:30pm in Beijing. I’ll be joined by the FT’s Demetri Sevastopulo and Kathrin Hille. I’ll tweet out the link to it today. My handle on Twitter is @mfilippino. We’ll also have a link in the show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.