Fed signals fewer cuts in 2024

This is an audio transcript of the FT News Briefing podcast episode: ‘Fed signals fewer cuts in 2024’

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Marc Filippino
Good morning from the Financial Times. Today is Thursday, September 21st, and this is your FT News Briefing. 

The Federal Reserve is getting more hawkish. And the companies are issuing fewer share buybacks. Plus, a look at how US president Joe Biden is banking his legacy on economic policy. 

Gideon Rachman
Which to my mind is probably simultaneously one of the most important issues in American politics and one of the most important issues facing the global economy. 

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

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The Federal Reserve hit the pause button on interest rate rises yesterday. Not a huge surprise there. Fed chair Jay Powell explained the reason for the pause at yesterday’s press conference. 

Jay Powell voice clip
Given how far we have come, we are in a position to proceed carefully as we assess the incoming data and the evolving outlook and risks. 

Marc Filippino
But Powell also suggested the Fed wasn’t done yet, given that inflation is still too high.

Jay Powell voice clip
We’re prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we’re confident that inflation is moving down sustainably towards our objective. 

Marc Filippino
The Fed’s policymakers projected that the central bank will raise rates one more time before the end of the year. They also projected fewer interest rate cuts in 2024 and 2025. The S&P 500 fell about 1 per cent, but it was the two-year US Treasury yield that caught the most attention. It hit a 17-year high yesterday.

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Corporate buybacks in the US are down — way down, actually. Share buybacks slumped to their slowest pace since the early stages of the pandemic, and analysts say that the trend is likely to continue. Here to talk about both the risks and the rewards of this decline is the FT’s Nicholas Megaw. He covers the US capital markets. Nick, what exactly are stock buybacks and just how important have they become in recent years? 

Nicholas Megaw
They can have a direct impact on share prices by adding another steady source of demand into the market and also then the indirect impact by making companies’ profits look better. I was talking to one analyst about this the other day. He compared it to if you’re selling a house and if there’s two people bidding for it, you’re gonna get a higher price than if there’s just one person interested in it, even if the house is the same thing. And so if there is a company in and about the market buying its stock occasionally, that’s just a sort of kind of constant level of bidding that keeps the demand up and therefore helps to push the price higher. 

Marc Filippino
OK. So what is causing the decline in corporate buybacks now? 

Nicholas Megaw
So there are a couple of factors that have all come together to put pressure on the overall number. One of them is industry-specific, which is that at the start of this year, banks were some of the biggest repurchasers of their shares. And then in March there was a little issue with a bunch of banks collapsing, which led to a big drop off in buybacks in the second quarter. For the really big banks, that’s not a sign that they’re, like, scared about their health and felt that they needed to hold on to cash, but more an expectation that they’re gonna have stricter regulations. And then meanwhile, everyone else is dealing with higher interest rates and various macroeconomic issues. So there is increasing pressure to spend on things like sorting out supply chains, reaching net zero targets, and that all drives up capital expenditure costs. And at the same time, it’s more expensive to fund any of that through borrowing than it used to be. And so people have to be a lot more thoughtful about what they’re spending on. 

Marc Filippino
But they aren’t missed by everyone, right? Like a lot of people don’t like share buybacks?

Nicholas Megaw
A lot of critics see them as a kind of financial engineering that’s more about just manipulating the numbers in your quarterly reports to reward executives who get paid based on earnings per share or share price performance targets. They say it’d be better to spend that money on real investments or improving pay for junior employees. And then from an investor perspective, some people much prefer to get dividends because they’re seen as more reliable. 

Marc Filippino
So given that they’re unpopular and there’s been this reduction of share buybacks, are they a thing of the past? And, you know, if they are, is that even a problem? 

Nicholas Megaw
So buybacks are not gonna disappear entirely, but the trend does look like it’s gonna be going downwards for a while. Like, interest rates aren’t going to be going back to zero anytime soon. And some of those spending pressures like needing to sort out supply chains are also kind of long-term trends. And so that reduction will be an incremental factor like weighing on stock prices going forward. And it might also kind of widen the difference between the haves and the have-nots in the market. Apple, on its own, spent $20bn on buybacks in the second quarter. That’s so huge, and they’re generating so much cash. They don’t really need to worry that much about borrowing costs. So they have more freedom to keep up with repurchases, whereas some smaller companies will be feeling much more pressure. 

Marc Filippino
Nicholas Megaw covers the US capital markets for the FT. Thanks, Nick. 

Nicholas Megaw
Thanks. 

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Marc Filippino
Lately, the Biden administration has been leaning into one term and leaning into it a lot. 

News clips
Bidenomics . . . Bidenomics . . . Bidenomics rate . . . That’s Bidenomics. 

Marc Filippino
Biden’s economic policies, like passing subsidies for green energy and infrastructure, have become a huge focal point of his presidency. And the FT’s Gideon Rachman is launching a series in his Rachman Review podcast, Looking at Bidenomics. Gideon joins me now to talk about it. Hey, Gideon. 

Gideon Rachman
Hi. 

Marc Filippino
So tell us a little bit about the series. 

Gideon Rachman
So we’re gonna run three podcasts on Bidenomics, which to my mind is probably simultaneously one of the most important issues in American politics and one of the most important issues facing the global economy. In American politics, it’s pretty clear that Biden is going to run on his economic record. He’s churning out ads about it, but that most Americans currently are pretty sceptical. The opinion polls don’t show that they think the economy is going well. The other interesting aspect of it is that it’s a really ambitious turn in American policy. Back, if you like, almost 50 years to the idea of industrial policy that the state can intervene, should intervene to foster important industries, in this case, clean energy and so on, and that has been greeted with a lot of nervousness around the world. Is this America going protectionist? Is it destroying the world trade system and so on? 

Marc Filippino
So, Gideon, who are you talking to for the series? 

Gideon Rachman
So the first guest is a man called Brian Deese, who was head of the National Economic Council in the Biden White House, so essentially conceptualised and helped to implement the package of measures which have become known as Bidenomics. That’s the Inflation Reduction Act, the Chips Act, a lot of the infrastructure spending. And I often find that interviewing people just after they’ve left government is a great time to talk to them because they can talk with a bit more frankness, but they’ve got all the authority and knowledge that comes from having just done all this stuff. So Brian, I think, gives a very good interview. And the second is with Ngozi Okonjo-Iweala, who is the head of the World Trade Organization. And she’s bang in the middle of the kind of international argument about Bidenomics. It’s the WTO, which is really the guardian of the world trading system. And I thought she was surprisingly outspoken when I spoke to her. 

Marc Filippino
So what’s your broad takeaway about Bidenomics, Gideon? 

Gideon Rachman
Well, I think it’s a really interesting moment in the debate about American economic policy and global economics. It’s really, I think, the moment when a US administration turns the page on Reaganomics and that free-market neoliberal era and says, we’ve got to try something different, trickle-down hasn’t worked. But also, I think that politically it’s incredibly interesting because my concern for them would be, even if it works — it may not work fast enough for the 2024 election — will ordinary Americans feel the impact soon enough to be convinced to vote for Biden? 

Marc Filippino
Gideon Rachman is the FT’s chief foreign affairs commentator. He hosts the Rachman Review podcast. We’ll have a link to the series on Bidenomics in our show notes. Thanks so much, Gideon. 

Gideon Rachman
Thanks. 

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Marc Filippino
Before we go, the Bank of England meets today, and it’s not clear what the central bank is gonna do with interest rates, especially given that a report yesterday showed inflation rose less than expected in August.

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You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.