Aurelia Butler

Israel’s lawmakers are today set to vote on the first bill in prime minister Benjamin Netanyahu’s judicial overhaul. Netanyahu, who had emergency surgery to have a pacemaker fitted on Sunday, plans to be out of his hospital bed and ready to attend the vote. The reforms, which were proposed in March but shelved after heavy protests, would limit the ability of the country’s courts to halt government legislation. Other proposed reforms include transforming how judges are appointed. Netanyahu’s right-wing coalition sees the changes as essential in taming an overly activist left-wing judiciary. Demonstrations against the reforms have drawn large crowds of up to 100,000 to Tel Aviv over the past few days. Israel’s biggest union, Histadrut, has said it will “not hesitate to act” if a compromise cannot be found. Some of Israel’s biggest businesses, including the country’s tech sector, have also promised to strike. The country’s military leaders have warned the protests may do deep damage to the armed forces after roughly 10,000 military reservists said they would stop volunteering if the reforms were passed. From Opinion: Writer and historian Yuval Noah Harari says the proposed reforms show that Israeli democracy is fighting for its life. Here’s what else I’m keeping tabs on today:Economic data: Germany reports retail sales for last month, while S&P Global has its manufacturing and services purchasing managers’ indices for France, Germany, Italy, the UK and the US.Macron in the Pacific: French president Emmanuel Macron begins his tour of the region this week with a visit to the French territory of New Caledonia.Taiwan: The island has started its annual Han Kuang military drills to test the country’s resilience to an attack. This year’s exercises are the largest ever, and will temporarily close the capital’s airport. Five more top stories1. Exclusive: Billionaire donors are starting to go sour on Ron DeSantis over his interventionist policies. Ken Griffin, head of hedge fund Citadel, is said to be uneasy over the Florida governor’s crackdown on teaching and Nelson Peltz, of investment firm Trian Partners, is unsure about his stance on abortion. Both men were expected to be major backers of DeSantis in his challenge to Donald Trump for the Republican nomination. Read the full story. 2. US banks are trying to refile their financials to avoid footing the bill for Silicon Valley Bank’s collapse, saving them ten of millions of dollars. After both SVB and Signature Bank collapsed, the Federal Deposit Insurance Corporation planned to pay for the bailouts by taxing uninsured deposits over $250,000. Since then an unusually high number of banks have refiled their year-end reports to show significantly less uninsured accounts. More detail here. 3. Spain grapples with political uncertainty after its election ends in deadlock as neither the right nor left were able to easily form a government. The centre-right People’s party gained the most votes, but is unable to secure a majority with its ally, the Vox party. The political wrangling to form a government could stretch on for weeks or months. Read about how the night unfolded here. 4. China’s finance regulator has been courting some of the world’s largest buyout groups including Blackstone, Carlyle and KKR to keep investing in the country. Financial authorities held a first-of-its-kind symposium with groups that manage US dollar funds on Friday, and the ministry of commerce met representatives from foreign companies. Here’s why Beijing is trying to lure foreign investors.China Focus: The best of FT journalism on the world’s second-largest economy, in one place.5. Russia’s actions in its war on Ukraine are casting a shadow over a summit with African leaders in St Petersburg this week. A Kenyan official called Moscow’s move to quit an export deal for Ukrainian grain a “stab in the back . . . that disproportionately impacts countries in the Horn of Africa already impacted by drought”. Here’s more ahead of Thursday’s gathering. War in Ukraine: A historic cathedral, architectural monuments and residential buildings in Odesa were severely damaged yesterday by Russian missiles.The Big Read

© FT Montage/AP

China’s military is waging what defence experts call a grey zone campaign, increasing its presence closer to Taiwan one step at a time while remaining below the threshold of what could be considered an act of war. For all the global attention on the prospect of a potential invasion, some fear Beijing’s so-called salami-slicing tactics are slowly changing the status quo.We’re also reading . . . Rise of AI: Just as Google changed the way we think, the advent of AI will force us to reinterpret human intelligence. Barbie: As the corporate culture wars intensify, Barbie, and its owner Mattel, may have found a way to win.Chinese games: Casual game Eggy party by developer NetEase has become a viral hit in China. That has worried market leader Tencent. Chart of the dayThe $1.4tn US junk loan market has been hit by 120 downgrades in the quarter to June, amounting to $136bn. Companies that loaded up on this type of debt when borrowing costs were ultra-low during the pandemic face daunting repayments amid much higher interest rates.Take a break from the newsOppenheimer director Christopher Nolan sits down with Christopher Grimes for Lunch with the FT to discuss streaming, Hollywood strikes and why his new atomic bomb biopic is a “cautionary tale” in the age of AI.

Illustration showing Christopher Nolan © Ciaran Murphy

Additional contributions by Tee Zhuo and Benjamin Wilhelm More

MUMBAI (Reuters) – The recent rise in inflation has prompted Indian investors to push back rate cut expectations by at least a quarter to the middle of 2024, with a sustained rise in prices likely to prompt a further repricing, traders and analysts said on Monday.Surging food prices accelerated India’s annual retail inflation rate in June to 4.81%, above the polled estimate of 4.58%, snapping four months of easing. “Rate cut bets are getting re-priced as markets are now expecting inflation to overshoot above 6% in July and upward pressure in the coming quarter,” said Madhavi Arora, lead economist at financial services firm Emkay Global. “The bet for the first cut has been shifted by at least one quarter to June 2024,” she added.Three senior traders at private and foreign banks agreed.India’s 1-year overnight index swap (OIS) rate currently stands at 6.75%, above its 2023 low of 6.49% reached in May when market was expecting the RBI to cut rates in February or April of 2024.”There is absolutely no rate cut in the OIS 1-year price anymore,” a senior trader at a foreign bank said, adding that “no one would have bet on a rate cut in India through 2024,” if rate cuts in the United States were not a consideration. Inflation has hit the lowest and is likely to continue to hover around current levels or edge slightly higher from here on, the trader who did not wish to be named as he is not authorised to speak to the media added.Vegetable prices, on a consumer price index weighted basis, have risen 25% month-on-month in July, said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership. “This could push July CPI inflation to somewhere close to 6.3-6.4%,” he said.Inflation is seen staying close to 6% in August as well, before cooling, likely prompting India’s rate setting panel to keep rates on hold for longer. “The market for now expects the Reserve Bank of India (RBI) to look through these prints as it is isolated to vegetable price inflation, the seasonality of which is well known and unlikely there will be any second round effects due to that,” a senior trader at a private bank said. “Also since WPI continues to soften, soft goods inflation will keep core inflation steady,” the trader added.The RBI has raised rates by a total 250 basis points since May last year and has reiterated its commitment to bringing inflation down to 4% over the medium term.”OIS market is now pricing in a rate cut only around August next year,” said Upadhyay. “Apart from the inflation picture, the growth picture has also impacted rate cut expectations. Since growth has held up reasonably well so far, there is limited need to cut rates.” More

1. Futures edge higherU.S. stock futures inched up on Monday, with investors awaiting both a parade of corporate results as well as an upcoming interest rate decision from the Federal Reserve.At 05:17 ET (09:17 GMT), the Dow futures contract added 43 points or 0.13%, S&P 500 futures gained 8 points or 0.18%, and Nasdaq 100 futures increased by 42 points or 0.27%.This week’s earnings are expected to provide further clues into the health of the broader U.S. economy. Several stronger-than-anticipated second-quarter returns so far have fuelled hopes that the U.S. may be able to engineer a soft landing in the face of surging borrowing costs.Market participants suspect that the Fed will most likely decide on Wednesday to resume its unprecedented monetary tightening cycle, which the central bank kicked off last year in an aggressive attempt to cool red-hot inflation. According to Investing.com’s Fed Rate Monitor Tool, there is a 98% chance that the Fed will hike the benchmark federal funds rate by a quarter-percentage point to a range of 5.25% to 5.50%.Where policymakers go from there remains a cause for debate. In particular, economists will be keen to see if the Fed will signal its intention to pull back from further rate rises, or give itself the flexibility to react to future economic conditions.2. Chevron beats estimates; busy earnings week aheadOil major Chevron (NYSE:CVX) posted better-than-anticipated profit in the second quarter and suggested that it was open to more dealmaking and shareholder distributions in the future.In a rare preliminary filing, the company reported adjusted earnings per share of $3.08 for the three months ended on June 30, topping Wall Street expectations. Chief Executive Michael Wirth told Reuters that the performance was “strong” despite softening oil prices. Quarterly net profit came in at $6 billion, nearly half the record level reached in the corresponding period last year.Full results from Chevron, the number two U.S. oil group, are due to come out in a batch of key corporate earnings on Friday.The numbers will help round out a busy week of results that will feature top U.S. oil firm Exxon Mobil (NYSE:XOM), consumer goods giant Procter & Gamble (NYSE:PG), and planemaker Boeing (NYSE:BA). Tech titans Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), and Meta Platforms Inc (NASDAQ:META) are also set to report.3. Musk’s Twitter rebranding”Larry T Bird” could be on the verge of retiring.Twitter may soon scrap its famous light blue bird logo, which the social media platform’s co-founder Biz Stone once named after the basketball legend.According to a tweet from owner Elon Musk, the company will soon “bid adieu” to the Twitter brand and, subsequently, “all the birds.” The billionaire added that the image will instead be replaced with an “X”.The letter points to Musk’s larger ambition to transform Twitter from a short-text messaging service into a so-called “everything app” that has features like peer-to-peer payments and e-commerce shopping.Musk’s vision for a revamped Twitter comes as the company grapples with flagging advertising revenues, a heavy debt load, and fresh competition from Meta’s Threads. As recently as July 14, Musk admitted that the business is still “net cash flow negative.”4. Adidas swamped with “Yeezy” shoe orders – FTAdidas AG (ETR:ADSGN) has reportedly received €508 million (or about $565 million) in orders for the first “Yeezy” shoes sold since the German sportswear group cut ties last year with Ye, the rapper formerly known as Kanye West.Sales of Yeezy shoes were halted last October after Ye made antisemitic remarks. The loss of the highly profitable line hit Adidas’s first-quarter sales by around $440 million.In order to avoid a deep write-down on its remaining stock, Adidas announced in May that it would sell some of its leftover Yeezy products and donate the proceeds to different charities that fight antisemitism and racism.Demand for the initial batch of 4 million pairs of Yeezy shoes sold from late May to early June was above Adidas’ “most optimistic forecast,” according to the Financial Times, citing people familiar with the matter. This has helped ease fears at Adidas that controversy around Ye’s statements would make the Yeezy brand too toxic, the FT added.5. Oil hands back some recent gainsOil prices eased slightly on Monday, with traders looking ahead to this week’s rate-setting meetings from U.S. and European central banks.The declines were somewhat mitigated by hopes that top oil importer China would roll out fresh stimulus measures to help revive flagging growth, as well as the prospect of tighter supplies. Saudi Arabia and Russia are both expected to cut production next month.By 05:15 ET, the U.S. crude futures traded 0.12% lower at $76.98 a barrel, while the Brent contract slipped by 0.16% to $80.75.Both of the benchmarks jumped by 1.5% and 2.2% respectively last week, their fourth consecutive week of gains. More

LONDON (Reuters) -The European Central Bank looks set to pull the rate-hike trigger on Thursday, but what it will do after July is less certain and financial markets are craving some guidance.Euro zone interest rates have risen 400 basis points in the last year to 3.5%, their highest in 22 years, and are now close to peaking as headline inflation cools and the economy weakens.”The difference (from past meetings) is that until now they’ve given at least quite precise guidance vis-a-vis the next meeting,” said Barclays (LON:BARC) head of European economics research Silvia Ardagna. “And we expect that to become more loose.”Here are five key questions for markets.1/ How much will the ECB hike rates?A quarter percentage point increase to 3.75% is priced in by markets and forecast by economists.Headline inflation is cooling but remains high enough to justify a modest increase. The ECB has flagged a July move.”The ECB will hike again and anything else would be a major surprise,” said RBC Capital Markets global macro strategist Peter Schaffrik.2/ What signals is the ECB likely to send about future policy?Market consensus for one more hike after July is no longer rock solid after some ECB hawks suggested that a September rise is not certain, so the ECB could turn more cautious in its signalling, while confirming it will be data dependent.”(ECB President Christine) Lagarde will stress uncertainty and conditionality (when and if she mentions further tightening),” said Massimiliano Maxia, senior fixed income specialist at Allianz (ETR:ALVG) Global Investors.Some analysts expect the ECB to pause in September, when updated staff forecasts will give it an opportunity to signal that inflation is set to reach its 2% target.They added that they wouldn’t be surprised if the ECB paused then and hiked later if needed, as the U.S. Federal Reserve has done. Money markets price in one more hike after July, suggesting rates will peak at around 4%.3/ When does the ECB expect core inflation to fall?While headline inflation fell for a third straight month in June, so-called core prices, such as those for services, have risen stubbornly and are not expected to relent soon.Core inflation, seen as a better gauge of the underlying trend, only edged lower to 6.8% from 6.9% – far from the sustained drop rate-setters want to see.ECB chief Lagarde will likely be pressed on this question but may not give too much away before September’s fresh economic projections.”Underlying inflation will be very, very slow to come down so this is a worry for the ECB,” said UBS chief European economist Reinhard Cluse, noting a tight labour market and wage pressures.4/ What does a weakening economy mean for policy?Well, rate-setters have reiterated that the main focus remains inflation, even if monetary tightening hurts the economy.”I think (the weakening of the economy) will have minimal impact on monetary policy,” said Ruben Segura-Cayuela, Europe economist at BofA. “What matters for the September meeting will be core inflation.”Still, slowing growth could strengthen the hands of doves. Euro zone business activity stalled in June as a manufacturing recession deepened and a previously resilient services sector barely grew.BofA reckons the ECB’s forecasts are too optimistic; Barclays expects a stagnation for several quarters starting from the second half of 2023.5/ What impact is tighter policy having on financing conditions?Bank lending data suggests the steepest surge in borrowing costs in the ECB’s history has started to take a toll on credit conditions and latest numbers on July 25 are in focus.The ECB’s chief economist Philip Lane says loan volumes have weakened sharply and that this may generate a “substantial” decline in economic output.This dovish message, if reinforced by latest bank lending data, may fuel speculation that rates are close to peaking.”The peak impact of tightening financing conditions is going to be at the end of this year and the first half of 2024. So a lot of the effect still has to come,” said BofA’s Segura-Cayuela. More

With the U.S. Federal Reserve, European Central Bank and Bank of Japan meeting, the first snapshot of July business activity, earnings and a Spanish election on the calendar, there’s lots going on.Here’s a look at the week ahead in markets from Ira Iosebashvili in New York, Kevin Buckland in Tokyo, Naomi Rovnick, Alun John and Dhara Ranasinghe in London.1/ WAIT NO MOREAnd just like that, the next Federal Reserve meeting is right around the corner. U.S. inflation is cooling but markets expect one more rate hike on July 26. The more interesting question is whether Chair Jerome Powell will signal the Fed is more confident inflation can cool further while growth stays resilient, meaning the most aggressive rate hiking cycle in decades is nearing an end.Signs that the Fed is unlikely to raise rates much further would, in theory, keep the wind in the sails of a buoyant Wall Street, while the dollar’s tumble will likely continue. Also in focus are earnings from some of the massive tech and growth stocks that have led markets higher this year. Among them are Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL), which report on July 25. 2/ SUMMER READINGBefore they go on their summer break, ECB policymakers have a well-flagged rate hike to deliver. That will come on Thursday, with the key deposit rate tipped to rise a quarter point to 3.75%.ECB chief Christine Lagarde will no doubt be pressed for clarity on what happens in September, and economists are divided over whether there will be another rate increase or pause.Note, hawk Klaas Knot says any move beyond July is “by no means a certainty”.Underlying inflation, a key focus for the ECB, remains high, but economic growth is weakening. The previously resilient services sector barely grew in June. The July PMI snapshot of business activity, out globally in coming days, should provide some further insights, as should the ECB’s latest bank lending survey.Rate-setters’ summer reading list just got longer. 3/ LOST IN TRANSLATION    The Bank of Japan wants to promote communication with markets, but something may have been lost in translation.     Comments from top rate-setters have tied investors in knots before a keenly anticipated two-day policy meeting starting on Thursday.     Governor Kazuo Ueda’s message of “steady as she goes” on stimulus, including yield curve control (YCC), was seen, by some, to have been undone by recent remarks by deputy Shinichi Uchida.    Uchida says he “strongly acknowledges” YCC’s negative impact, which hawks took as a hint of an imminent raising of the 0.5% ceiling for 10-year bond yields.    Ueda then again backed continued easing in its current form and data on Friday showed inflation may have peaked.The benchmark yield has swung from 0.4% to a four-month high of 0.485% over the past two weeks, with the market dividing itself sharply into two camps. That creates plenty of opportunity for another jolting BOJ surprise. 4/ STOP: IT’S EARNINGS SEASON     European quarterly earnings are starting to trickle in. The season will be a crucial one, with the STOXX 600 share index up about 8% year to date. The rally has sputtered in July ahead of what Barclays (LON:BARC) describes as a “make it or break it” quarterly reporting season.     Second-quarter earnings are expected to decrease 9.2% from a year earlier, according to I/B/E/S data from Refinitiv, with aggregate earnings likely to be weighed down by poor performance from energy companies. Stocks rallied earlier this year as investors, who were mostly bearish about Europe, switched their positions as global growth continued to defy expectations.     That is a macroeconomic story rather than an earnings narrative, which makes European equities vulnerable to companies missing profit targets.     A better than expected outcome, on the other hand, could fuel another bull run.      5/ SPAIN VOTESNo clear winner emerged in a nailbiting finish to Spain’s election on Sunday, meaning political uncertainty could weigh on markets in the days ahead.The two leading parties – the conservative People’s Party and the ruling Socialist Workers’ Party – will seek to negotiate coalition deals in pursuit of a governing majority. But analysts warned the process could end in a hung parliament and another election.Also in focus is whether pressure on the main parties to cut taxes or increase spending worsens Spain’s finances.     High debt above 100% of GDP, a slowing economy and tighter EU fiscal rules coming into force in 2024 are concentrating minds.     Stock-pickers are also keeping an eye on the energy sector, where the two main parties have different priorities, and financials, with the outlook for Spain’s temporary banking levy in doubt.     More

BEIJING (Reuters) – China is struggling to revive foreign investment in its financially battered cities and provinces as foreign firms remain wary of political risks and new incentives fall far short of sweeteners once used to attract overseas money.With their coffers depleted after an economically bruising pandemic and property crisis, local authorities have been racing to find new revenue sources, with foreign investment particularly coveted.Premier Li Qiang in March declared China open for business again, and since then provinces and cities from Sichuan to Chaozhou have sent delegations across the globe to pitch and invited investors to rare symposiums.However, foreign industry executives and lobbyists say the incentives many local governments now offer are far less attractive than they were a decade ago, when companies could easily win subsidies or free land use and the regulatory environment seemed more predictable.”Clearly the China-side is very much getting on the front foot with international engagement,” said Kiran Patel, senior director at the China-Britain Business Council. He cited five meetings between their London office and delegations from Chinese local governments in late June.But “there’s still a lot of work to do in terms of warming up or reheating interest in China,” he warned.The charm offensive contrasts with Beijing’s more hawkish overtures about dominance in supply chains and President Xi Jinping’s increased focus on national security.Dollar-denominated foreign direct investment (FDI) fell 5.6% in January-May from the same period last year, despite the end of strict COVID curbs, as the post-pandemic recovery in the world’s second-largest economy faltered.China’s Ministry of Commerce did not respond to a request for comment.BENEFITS, NOT INCENTIVESNoah Fraser, managing director of the Canada China Business Council, said his organisation had also been on the receiving end of a “charm offensive” from municipal, provincial and regional authorities, but that his understanding from most of them was that cash would not be forthcoming and projects would need to be self-financed.”They’ll be friendly, they’ll be open minded, but I don’t suspect that they have a great deal of financial capital to move with,” he said. “So I think any equity or any assets will be…in the relationships and permissions that get rid of the red tape.”Senior executives from three large Western companies that Reuters spoke to on the condition of anonymity said they were similarly unconvinced after discussing prospective investment with local authorities.”(The incentives) are not worth engaging our finance team over, it’s public affairs work, as it’s a conversation we’re having with the local government, but it’s not going to affect the company’s investment or operational decisions,” said one of the executives.He added that while in the past his company had been offered enterprise tax waivers and deals on land to put in fresh investment, an eastern Chinese government had recently only offered him a deal on personal income tax for their top executives amounting to 6 million yuan.”I wouldn’t say its an incentive. It’s a benefit. But would our company stay in China forever for this 6 million yuan? No.”PART OF THE SYSTEMLocal authorities carry out a delicate balancing act when courting foreign investment and dealing with critical questions about Xi’s security policies.Many foreign companies have expressed concerns over the changing business environment in China, which in recent years has been marked by a crackdown on consultancies affecting how investors can perform due diligence, as well as new data and anti-espionage laws.Analysts say there is now very little tolerance for deviation from Chinese Communist Party thinking on business, which has forced many foreign firms to rethink their approach to China.”I do think (Li Qiang) wants and intends to bring inbound investment back, but he’s someone who’s loyal and so should he be asked to lock down Shanghai again or do anything that isn’t business friendly, he would,” said Agatha Kratz, director at Rhodium Group, a China-focused consultancy.One of the three executives, whose employer is a foreign automaker, said he had been surprised by how officials had repeatedly raised Xi’s policies on self-reliance and self-strengthening in a recent meeting in a southern Chinese city.”As far as the macro situation is concerned, local governments can’t do anything to reassure foreign investors. Actually, they are part of the system,” he said. More

Argentina is set to introduce tax and currency measures that will in effect devalue the peso as part of a hard-fought deal with the IMF to release delayed tranches of a $44bn loan programme.Buenos Aires will introduce a new preferential exchange rate for agricultural exports and levies on imports on Monday, according to economy ministry staff.Argentina and the IMF have been locked in negotiations for three months over the country’s failure to abide by the terms of last year’s debt restructuring deal after a record bailout in 2018.The fund says Argentina has fallen short on foreign exchange reserves and cutting the fiscal deficit, and last month delayed a $4bn disbursement. Buenos Aires blames its shortfall on a severe drought that wiped out $20bn of exports this year.Without the cash, Argentina risks defaulting on repayments to the multilateral lender for a previous loan, with about $3.4bn worth of obligations coming due by August 1. That would further destabilise the country’s already fragile economy ahead of presidential elections in October.The IMF and Argentina said in a joint statement on Sunday that they had “agreed the central objectives and parameters” for a staff-level agreement to “consolidate fiscal order and strengthen reserves”, ahead of a revision of the country’s support programme. Two staffers in the economy ministry with knowledge of the talks said the agreement would be finalised on Wednesday or Thursday.Economy minister Sergio Massa said in a television interview on Sunday night that the fund was preparing to release “a very big package of disbursements in August and an additional one in November.” He declined to give exact figures. Analysts have expressed scepticism that the IMF will disburse much more cash than Argentina needs to make its repayments.The peso is down a third against the dollar this year on parallel currency markets, where it trades at about half the official rate.Massa has been reluctant to sharply devalue the peso’s official rate. Analysts said the minister, who is also a presidential candidate for the ruling Peronist coalition, fears the impact of a devaluation on inflation, which has already soared to more than 115 per cent, but his objections have proved a major sticking point in the IMF talks.The new trade-related measures appear to be intended to satisfy the IMF’s demands for a devaluation, said Salvador Vitelli, head of research at the Buenos Aires-based consultancy Romano Group.Under the plan, corn and other crop producers will be offered 340 pesos a dollar to liquidate their stock, compared with the official rate of 268. Tax authorities will also impose a 25 per cent levy on imports of services and a 7.5 per cent duty on goods imports.

But Vitelli warned that the policies might result in price increases. Agricultural and manufacturing lobbies have said the measures will distort markets and raise production costs.While the final deal with the IMF is likely to include more measures, including to reduce the fiscal deficit, the currency and tax tweaks are a far cry from the sweeping macroeconomic changes the IMF seeks in the long run.In its global external sector report published last week, the lender criticised Argentina’s multiple exchange rates and currency controls, which it said “have introduced distortions that discourage trade and foreign investment”.However, the IMF may accept the workarounds “with one eye on the negotiations” with the incoming government, Vitelli added. “I think the fund will make a kind of concession in order to allow Massa to hold the economy together until the elections.” More

The writer is a former chair of the US Federal Deposit Insurance Corporation and a senior fellow at the Center for Financial StabilityThe US Federal Reserve should feel vindicated in its decision to pause rate rises at its policy-setting meeting last month. Alas, it seems poised to raise them again. Forgive the cliché, but this risks snatching defeat out of the jaws of victory. For now, the Fed should stay put and hold rates where they are.Climate change may be leading to stifling temperatures, but US inflation is cooling. The consumer price index rose a mere 3 per cent in June, down sharply from a peak of 9.1 per cent in June 2022. The rate of producer price increases slowed even faster.Stubborn increases in the costs of shelter and services have significantly slowed. And a separate analysis by Morgan Stanley of raw data taken from new leases shows residential rents actually falling in some cases. Meanwhile, the economy remains robust. Unemployment is at 3.6 per cent. June brought with it 200,000 new jobs. These trends provide hope that inflation can be meaningfully reduced if not defeated without choking off the economy, so long as the Fed does not overshoot.Over the past 15 months, the Fed has tightened at a staggering pace. It has lifted rates from near zero to north of 5 per cent. By April, a common measure of money supply, M2, had dropped 4.6 per cent year over year, the biggest decline since the Fed began formally tracking M2 in 1959. The economy needs time to adjust to these seismic shifts in monetary conditions, particularly given that the Fed kept rates near zero for 14 years.The economy seems to be adjusting — so far — but there are several shoes still to drop. Trillions in corporate and commercial real estate have yet to reset to higher rates, but will need to refinance over the next few years. Households still benefit from cash cushions built up during the pandemic, but will be feeling the full bite of higher borrowing costs once those funds are gone. While the labour market remains healthy, private sector job growth has slowed notably.Labour and small business are at particular risk if rapid rate increases cause further banking distress. This in turns adds pressure on regional and community banks. The Fed’s primary focus on raising short-term rates has resulted in “yield curve inversion”, a market aberration where short-term borrowing costs are actually higher than long-term rates. If this persists, it represents an existential threat for smaller banks with profits that depend on their ability to use short-term deposits to make longer-term loans at higher rates.If the Fed does raise rates again — as seems certain at this week’s meeting of the policy-setting Federal Open Market Committee — it could temper the impact by only raising rates on bank reserves, while leaving the rate it pays to money market funds and other non-bank financial intermediaries where it is.Using new tools handed to it by Congress in 2008, the Fed can increase the interest it pays banks on their reserve accounts when it wants to raise rates. This gives banks an incentive to keep their reserves at the Fed unless they can achieve a higher, risk-adjusted return by lending them out. In 2013, without Congressional authorisation, the Fed created an “overnight reverse repo facility” — the functional equivalent of a reserve account for non-bank intermediaries such as money market funds — which pays rates almost as high as those paid on bank reserves. This similarly gives non-banks an incentive to keep money sitting idle at the Fed.While ONRRP was meant to be limited and temporary, it has in fact ballooned into around a $2tn facility, contributing to financial instability by draining deposits from banks. Lowering the yield on ONRRP relative to the Fed’s target rate should cause money market funds to redeploy some capital out of the facility and into investments that meet the credit needs of our economy. This would mute the contractionary impact of another rate rise, while contributing to bank stability as much of that capital would find its way back into bank deposits.The Fed faces difficult choices, but we know further tightening heightens the risk of recession and financial instability. If it does continue to tighten, it should find ways to temper the impact. Just as the Fed misjudged the inflationary risks of its loose money policies, it should not now underestimate the potential impact of the jaw-dropping pace of its tightening. The safest choice is to stay put. More