Aurelia Butler

The US Federal Reserve appears likely to keep interest rates steady when it meets next week, despite pressure from President Donald Trump for a cut, leaving investors to focus on what chair Jay Powell says about the strength of world’s biggest economy.The Fed is set to meet on Tuesday and Wednesday, and investors are pricing in almost no chance of a reduction in rates from their current 4.25-4.5 per cent range. Markets expect two cuts by the end of this year, with September likely to be the earliest that rates resume their downward path. Investors are betting that Powell will continue not to be swayed by pressure from Trump, who on Thursday repeated his call for a full percentage point cut in rates, calling the Fed chair a “numbskull” and saying he “may have to force something”.Powell was likely to “strike a tone of cautious patience” at the chair’s customary post-meeting press conference, said Gregory Daco, chief economist at EY-Parthenon.“He will offer little in the way of forward guidance and instead underscore the high degree of uncertainty facing households and businesses,” Daco said.The Fed’s June meeting follows a smaller than expected increase in US inflation, with the consumer price index rising 2.4 per cent in May, compared with an expected 2.5 per cent increase. Core inflation, which excludes changes in food and energy prices, was static at 2.8 per cent, defying predictions of a slight increase.Goldman Sachs, which does not expect a Fed rate cut until December, recently bumped up its estimates for this year’s GDP growth from 1 per cent to 1.25 per cent. Signals from inflation and trade policy uncertainty indices have pointed to a “somewhat smaller effect of tariffs on the economy”, Goldman analyst David Mericle wrote.The bank also put the chance of a recession in 12 months’ time at 30 per cent, down from 35 per cent, “in light of the slightly higher baseline and the lack of any signs of major downside risks emerging so far”, Mericle added. Will SchmittWhen will the BoE next be able to cut interest rates?With few in the market expecting an interest rate cut by the Bank of England next week, investors will be scouring the minutes and statement accompanying the decision on Thursday for clues as to how policymakers view recent weak economic data and a surge in the oil price.Markets expect the BoE to continue its pattern, established last summer, of cutting and then pausing, and are placing only a roughly 10 per cent probability on a quarter-point cut to 4 per cent. Since May’s meeting, the data has largely been weaker. The economy recorded its sharpest contraction since 2023 in April, while wage growth slowed in the three months to that month. Unemployment has edged higher, and business surveys, including purchasing managers’ indices and the BoE’s Decision Maker Panel, point to waning price pressures.Inflation came in at a higher than expected 3.5 per cent rate in April, but later the Office for National Statistics said it overstated the pace of price growth by 0.1 percentage points due to an error. Fresh inflation figures for May will be published on Wednesday, with markets expecting a fall to 3.4 per cent.While expecting interest rates to remain on hold, Edward Allenby, economist at Oxford Economics, said any reference to a growing confidence that slack was emerging in the economy would be “a tacit indication that an August cut is the baseline view for a majority of committee members”.The surge in global oil prices as Israel launched air strikes against Iran complicates the outlook for inflation and is likely to deepen the divisions seen at the last meeting among the members of the Monetary Policy Committee, say analysts.For June’s meeting, many economists expect seven MPC members to vote for rates to remain on hold, while Swati Dhingra and Alan Taylor are expected to back a cut, amid subdued domestic demand and a drag from higher US tariffs. Valentina RomeiWill the SNB take interest rates into negative territory?Traders are taking it as a given that the Swiss National Bank will cut its main interest rate from 0.25 per cent to at least zero on Thursday. The focus instead will be on whether or not it goes for a bumper half-point cut and takes rates into negative territory for the first time since 2022. There is a roughly 30 per cent chance of that happening, according to traders’ swaps market bets.The stakes are high. Swiss inflation turned negative in May for the first time in four years, and US President Donald Trump’s trade war has lit a fire under the franc, a haven in times of stress, weighing further on consumer prices.Analysts think the central bank is more likely to use interest rate cuts than currency interventions that could provoke Trump’s ire and make a trade deal more difficult. However, the prospect of negative rates, after the previous eight-year experiment, is also not popular with rate-setters. Capital Economics expects a half-point rate cut, pointing to weak underlying inflation pressures, the franc’s appreciation and the potential for tariffs and a trade deal to weigh on demand.“Just as the SNB was concerned about second-round effects during the recent period of high inflation, we think policymakers will be worried about the risk of deflation becoming entrenched,” said Adrian Prettejohn, the research house’s Europe economist. Ian Smith More

This article is an on-site version of Free Lunch newsletter. Premium subscribers can sign up here to get the newsletter delivered every Thursday and Sunday. Standard subscribers can upgrade to Premium here, or explore all FT newslettersWelcome back. This week, I turn to “creative destruction”. The concept was popularised by Austrian political economist Joseph Schumpeter in the 1940s, and describes how old ideas, technology and businesses are displaced by new ones. If creation is the primary protagonist of economic growth, destruction is a necessary evil. In tandem, they enable people, capital and other resources to be redeployed more efficiently in the economy. But there is a third force that undermines both: preservation.In Hindu philosophy — where Schumpeter’s notion most likely originated — creation, destruction and preservation are a triad of cosmic forces always seeking balance. So in this edition, I explore how this eastern framework might help to explain why creative destruction is, in fact, faltering across the western world. The artificial intelligence revolution has sparked innovation, disrupted industries and is already triggering job losses. But the visible effects of creation and destruction can distort our perception of how strong these economic forces actually are. Creative destruction is hard to measure. That said, proxies for economic dynamism in developed nations have been weakening over the past few decades.“For much of the 20th century, high rates of firm entry, job reallocation and entrepreneurial risk-taking kept American productivity surging ahead,” says Ufuk Akcigit, professor of economics at the University of Chicago. “But in recent decades, that engine has been losing steam — and the numbers are hard to ignore.”Data from the US Census Bureau shows that business entry and exit rates have trended downward since the 1970s. The job reallocation rate — a measure of how quickly jobs are being created and destroyed — has also dropped over the past few decades. Europe, perhaps less surprisingly, shows similar trends. The UK’s Office for National Statistics finds that the job reallocation rate in Britain has slowed by one-third in the past two decades.Some content could not load. Check your internet connection or browser settings.What is contributing to the decline in creative destruction? As I outlined in an FT column in January, there are economic, political and social incentives to sustain the status quo. These preservative forces block new ideas and businesses from emerging — and coddle unproductive ones.Take incumbent businesses in advanced economies. They have become more economically dominant over time. America’s top 10 listed companies currently account for approximately one-third of the S&P 500’s entire market capitalisation — the highest concentration in several decades. In Europe, the average market share of the top four companies across industries in fifteen countries increased by five percentage points between 2000 and 2019, according to OECD research.Some economists reckon globalisation and technology, which support economies of scale, are partly behind the rise of mega-businesses. Size can, however, create protective barriers to entry, as potential market entrants fear entering sectors with domineering firms, notes Akcigit. His research also finds that a greater share of US inventors today work in large, mature firms. “Inventors in young firms are jumping to the established ones where the wage premium has risen over recent decades”, he says. “But in doing so, we find that they end up innovating less.”“The real concern arises when large firms shift from innovation-driven strategies to defensive ones”, says Akcigit. Indeed, there are examples of direct actions taken by incumbents to preserve market share, including buying start-ups, defensive patenting, talent poaching and garnering political influence.“Lobbying today includes regulatory shaping, digital targeting and building political connections”, says Francesca Lotti, an economist at the Bank of Italy. “These activities often insulate established firms from competitive pressures.”Annual lobbying expenditure in the US has risen by $1.7bn in real terms since 1998. In the EU, the number of registered lobbyists has more than doubled since 2012.Some content could not load. Check your internet connection or browser settings.Policy also acts as a preserving force. Over the past decade, tariff and non-tariff trade barriers have risen globally, partly in reaction to a political backlash against the perceived threat of foreign competition to jobs and industries.“Protectionism keeps failed business models on life support,” says Simon Evenett, a professor at the IMD Business School. “The upshot is that potential disrupters hesitate, incumbents delay innovation, and the capital that should fuel tomorrow’s breakthroughs instead flows towards yesterday’s failures.”Similarly, restrictions on foreign investment and immigration limit the penetration of new ideas.Protectionist environments, like today’s, encourage businesses and trade groups to allocate resources to shape tariff policy in their favour. Research analysing high tariff periods in the early 1970s finds a positive correlation between trade levies’ bias towards lower-skilled industries and measures of rent-seeking.Some content could not load. Check your internet connection or browser settings.Finance plays a role too. When overabundant or poorly targeted, it can preserve less efficient firms. Deborah Lucas, professor of finance at the Massachusetts Institute of Technology, says economic bailouts have become “unnecessarily frequent and wide-ranging.” Recent economic shocks — including the global financial crisis, pandemic and European energy price surge — elicited broad state support, including grants, loans and guarantees. Difficulties honing measures meant unviable or undeserving firms also garnered funds. Beyond these crises, a so-called “bailout culture” has become somewhat normalised, says Lucas. In recent years, the prevalence of subsidies — as part of the rising shift towards state-led industrial strategies — has grown. “The expansion of deposit guarantees to uninsured depositors following Silicon Valley Bank’s collapse in 2023 exemplifies this trend”, she adds.The era of low interest rates and quantitative easing that followed the financial crisis propped up less productive companies too. Indeed, even as the cost of credit has risen, excess cash from that period has enabled less viable businesses to secure low, long-term borrowing costs and access private funds. For measure, the percentage of unprofitable companies in the Russell 2000 — a US small-cap index — has risen from 15 per cent to about 40 per cent in the past 30 years.Some content could not load. Check your internet connection or browser settings.Finally, social factors can undermine creative destruction. For individuals, just like businesses, economic success brings a motive to protect it. “I’d argue that there’s an element of Kahnemanian psychology here,” says Marc Dunkelman, a fellow at Brown University. “As a population has more to lose, it becomes more risk averse”.This is evident in nimbyism, and special interest groups which, for instance, resist new technologies in their sector and push for regulations that favour incumbents. In December, then US president-elect Donald Trump backed unionised dockworkers in their opposition to the use of technology in American ports. He said automation was not worth the “distress, hurt and harm” it causes US workers.Data compiled by Pola Lehmann, co-leader of the Manifesto Project, which analyses election manifestos in over 60 countries, shows that mentions of anti-growth sentiment in G7 political campaign documents has surged ahead of pro-growth references in the past decade.Some content could not load. Check your internet connection or browser settings.The success of creative destruction was, ironically, why Schumpeter thought capitalism would not survive in the long run. He believed the prosperity that it generated would eventually drive a demand for security and stability that would usurp society’s willingness to endure further job losses and disruption.There are signs of this dynamic emerging in rich economies today. That doesn’t mean creative destruction is doomed. AI is driving disruption. Higher average interest rates could flush out zombie firms. And status-quo forces aren’t always antithetical to growth. Sometimes they are necessary. Big profits — which take time to build — attract competition and support innovation. The Asian Tiger economies temporarily used protectionist measures to shield infant industries and foster long-term growth. Bailouts help avert financial contagion and regulations provide environmental and social protections.The eastern lens suggests that balancing creation, destruction and preservation is the answer. That is easier said than done: too much destruction harbours instability; too little stifles innovation. A few policy principles do, however, emerge. For instance, protecting people not jobs, so that individuals can retrain and weather disruption. This would complement measures to lower barriers to competition, including strengthening antitrust regimes, reducing protectionist barriers and tightening controls on lobbying. Future bailouts should also be better targeted and less open-ended.For businesses, workers and governments the status quo may feel safe, but over time it can erode progress. If the slow creep of preservative forces remains unchecked — and policy doesn’t evolve to help embrace change — advanced economies risk trading their short-term comfort for long-term stagnation.Send your rebuttals and thoughts to [email protected] or on X @tejparikh90.Food for thoughtHow does a nation’s official language influence economic growth? This blog finds that linguistics policy is not just symbolic.Free Lunch on Sunday is edited by Harvey NriapiaRecommended newsletters for youTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up hereUnhedged — Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here More

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Beating inflation in retirement was the top concern on a pensions webinar Q&A that I hosted last week. And so it should be. Everyone needs their hard-earned nest egg to keep its value — and inflationary pressures have not gone away. Doug Brodie, founder of retirement planning firm Chancery Lane, calls inflation “the single biggest risk” to pensions.New figures released by the Pensions and Lifetime Savings Association show the “moderate” and “comfortable” retirement living standards, a rough guide to how much a retirement lifestyle might cost, have recorded marginal increases to £31,700 and £43,900. That is a concern for anyone who wants a retirement with decent holidays and lots of eating out.Kevin Brown, savings specialist at Scottish Friendly, points out that the last set of inflation data showed prices still rising above the Bank of England’s 2 per cent target rate.“In short, it is a murky outlook for the second half of 2025,” he says.The consumer price index in the UK in April — the most recent figure published — was 3.5 per cent higher than a year before. That was the highest rate for 15 months.At 2 per cent inflation, according to Fidelity International analysis, the purchasing power of a £1mn retirement pot would diminish to £820,000 over 10 years. A sustained rate of 4 per cent would reduce the same pot’s value to £660,000, the firm calculated.Over a 30-year retirement span, there will be inevitable inflation spikes. Those in their 60s and older will remember the 1970s when the annual inflation rate peaked at 24 per cent.Yet inflation is commonly misunderstood, according to Matt Conradi, deputy chief executive of Netwealth.“Many retirees either underestimate its long-term impact or overcompensate based on recent periods of high inflation,” Conradi says. “This can lead to poor decisions.”But, according to investment experts, there are a number of points pension savers should bear in mind that can help to protect them against the spectre of inflation.The first is not to be confident that the “triple lock” on the state pension will protect them in their later years. The arrangement, in place since 2011, guarantees that the state pension will rise by at least 2.5 per cent annually, or by the annual inflation rate or the rise in average wages, whichever is higher.Many experts expect the triple lock to be replaced by either a simple link to inflation or a “double-lock” to average earnings and inflation. Demographics and rising life expectancy have been steadily making the existing lock unaffordable.Savers should also check their exposure to cash savings, which often fail to keep pace with inflation, advisers suggest. Allocations to cash may have crept up as interest rates — and therefore interest rates on savings accounts — have been higher in recent years.Andrew Oxlade, a director at Fidelity International, says investors may have good reasons for keeping some of their wealth in cash.But he adds: “Make sure it’s a conscious decision.”Beyond those points, advisers recommend pension savers should seek a mixture of some guaranteed, perhaps inflation-linked, income alongside a flexible portfolio of drawdown assets designed to grow over time.For the guaranteed part, many people buy an annuity. William Burrows, a financial adviser and founder of The Annuity Project, says payouts from an inflation-linked annuity start at about 30 to 35 per cent less than those from a level annuity. Level annuities pay out the same amount over the instrument’s lifetime.Burrows says this difference explains why most people prefer level annuities to inflation linked.“Generally, people value money today as more important than money in the future,” he says.Chancery Lane’s Brodie, however, points out that if a future government changes tax rates holders of level annuities are “potentially stuffed by tax and inflation”.People with large pensions can split their purchases between level and inflation-linked annuities. Alternatively, they can spread the purchase of a level annuity over five to 10 years.They can stage the purchases by phasing into retirement. They can use a portion of their pension fund to buy an annuity and use the tax-free cash sum to supplement it for a few years. They can then come back a few years later, buy a top annuity and get some more tax-free cash.However, some advisers prefer to purchase UK government bonds directly.Brodie creates the same level of income as an annuity for his clients by purchasing a mixture of 10 different UK government bonds that mature at different times. That approach avoids depleting his clients’ capital, as an annuity instantly does. Even for investors that need the income to escalate at 3 per cent a year, Brodie says his method can work out much cheaper than buying an annuity.Meanwhile, for the element of the pension that remains invested in drawdown, most advisers continue to advocate holding shares, despite recent periods — such a 2022 — when falling stock markets and higher inflation coincided.Oxlade says history shows stock markets offer some protection from inflation, especially for companies that can pass on price rises to customers. However, advisers say the nature of the share exposure is crucial. They generally prefer dividend-producing shares or investment trusts.Brodie says his research shows investment trusts perform better than dividend-producing shares.Other than shares, infrastructure investments have traditionally shown resilience in the face of inflation.Tideway Wealth, which offers financial advisory services, also favours higher yielding, lower volatility investments such as UK corporate bonds, now yielding about 6 per cent, and UK high-yield bonds at 7 to 8 per cent.The verdict is less clear on gold, often considered an inflation hedge. Some experts dismiss it as an unreliable inflation hedge, or a speculative asset producing no income.The current elevated price makes the metal a high-risk strategy, according to James Baxter, founder of Tideway Wealth.“You are in effect betting on someone buying it back from you in the future at a higher price,” he says.The ultimate choice for investors facing inflation, according to advisers, is between guaranteed and probable outcomes. Annuities provide a guarantee. An equity dividend and gilt strategy provides a probable solution. Brodie says that, once this is explained to clients, few choose the annuity.Moira O’Neill is a freelance money and investment writer. Email: moira.o’[email protected], X: @MoiraONeill, Instagram @MoiraOnMoney More

The owner of the UK’s biggest bioethanol plant has given the government two weeks to come up with a rescue package for the industry after the trade agreement with Donald Trump threatened to swamp the British market with 1.4bn litres of tariff-free ethanol.The ultimatum by ABF Sugar, which owns the £450mn Vivergo plant in Saltend, Hull, was issued following an emergency meeting this week with the UK business secretary Jonathan Reynolds and transport secretary Heidi Alexander.The owners said unless the government tabled a package to save the industry within two weeks, they would open consultations about making the plant’s 160 workers redundant. Vivergo supports a further 5,000 jobs in downstream supply chains.Sir Keir Starmer’s government is under political pressure from Labour MPs in the area to save the plant. Nigel Farage’s Reform UK party has enjoyed a surge in popularity in the area; Reform won the Hull and East Yorkshire mayoral election last month.Paul Kenward, chief executive of ABF Sugar, told the Financial Times that investors would no longer support continued losses at the plant, which was already struggling before the US-UK trade pact was announced on May 8.“Our investors have had enough. We cannot continue to lose £3mn a month to support a government agenda when the government isn’t supporting us,” he said.“I can’t go to my board and suggest they spend another £50mn unless I have a copper-bottomed guarantee that the regulatory regime will change, and there is short-term funding to get us through to the point those changes take effect,” he said.Paul Kenward chair of British Sugar (left) & Ben Hackett More

Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldDonald Trump has approved Nippon Steel’s $14.9bn bid for US Steel after an agreement to settle national security concerns swayed the US president into backing the takeover.In a White House executive order issued on Friday, Trump approved the “historic partnership”, which comes with conditions including a golden share for the US government and a commitment to invest $11bn by 2028.The deal’s approval caps 17 months of twists and turns since Japan’s largest steelmaker agreed a deal to buy its US rival, which was blocked by Trump’s predecessor, Joe Biden.“We thank President Trump and his administration for their bold leadership and strong support for our historic partnership,” the two companies said in a statement.The approval comes as a relief for Nippon Steel, which was liable to pay US Steel a $565mn “break fee” penalty if the deal collapsed. The threat persuaded the Japanese company to launch legal action with US Steel against the US government to try to clear the way for approval.Resolving the stand-off also removes a cloud over US-Japan relations as the countries seek a broader agreement on trade to avoid Trump’s threat of higher import tariffs on Japanese cars and other goods. It gives Tokyo’s negotiators an example of how Japanese companies are prepared to invest in American manufacturing. Japan has used its status as the largest foreign investor in the US as a bargaining chip in the trade talks. Officials described good progress in a latest round in Washington on Friday.Talks have covered a broad range of areas, according to people familiar with the situation, including the possibility of cars built in the US by Japanese companies being exported for sale in Japan.Biden blocked Nippon Steel’s takeover of US Steel on national security grounds following a review by the Treasury-led Committee on Foreign Investment in the US.Trump initially opposed the deal at the start of his second presidency but subsequently ordered the committee to review it.The so-called national security agreement also includes commitments related to “domestic production and trade matters” but the White House executive order did not provide further details. The order added that risks to national security would be “adequately mitigated”.The US government has rarely held golden shares, which typically hand the holder a right to override the votes over certain changes to the company. It fulfils Trump’s demand that Nippon Steel would not have full control over the US steelmaker.In June, Trump doubled tariffs on steel and aluminium imports into the US to 50 per cent, making the market more protected from foreign competition for the combined company.The two companies claimed that the deal would secure 100,000 US jobs, including those created indirectly at suppliers and customers. More

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