Aurelia Butler

(Reuters) – Federal Reserve Chair Jerome Powell had a clear message on Wednesday: as “gratifying” as it is that inflation has begun to slow, the central bank is nowhere near to reversing course or declaring victory.”It’s going to take some time” for disinflation to spread through the economy, Powell said in a news conference following the Fed’s latest quarter-point interest rate increase. He said he expects a couple more rate hikes still to go, and, “given our outlook, I just I don’t see us cutting rates this year.” Investors ignored him, keeping bets on just one more rate hike ahead and piling further into bets that rates will be lower by year’s end than they are now.It’s not obvious which view will prove right: neither the Fed nor markets have a great predictive record since the central bank’s current round of rate hikes began last March. Markets have repeatedly had to scrap bets for a quick pivot, pushing those expectations out farther as the central bank charged ahead with the most aggressive policy tightening in 40 years. For their part, Fed policymakers each quarter through last year kept ratcheting up their own estimates for how high they’d push interest rates as inflation proved stronger and stickier than anticipated. Not once did they signal rates would get cut this year. How the current disconnect resolves will largely come down to whether inflation drops faster than the central bank expects, or labor markets soften further than it hopes. “The actual outcome is data dependent, and we won’t have the data to confirm or deny…until we are deeper into the first half of the year,” said Tim Duy, chief U.S. economist at SGH Macro Advisors.And as long as there’s that uncertainty, it is in Powell’s interest to try to keep financial markets from betting too hard on rate cuts that would loosen financial conditions, possibly undermining the Fed’s hard-won progress against inflation.Even simply acknowledging the possibility of a rate cut later in the year could undo some of the Fed’s work, forcing more Fed tightening and making it even harder to avoid a recession. Thus Powell’s repeated assertions about not cutting rates, and indeed needing to take them at least above 5% as policymakers forecast in December. “It is our judgment that we’re not yet in a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate,” Powell said. But so far, said Kroll Institute’s Global Chief Economist Megan Greene, “the markets aren’t buying what the Fed is peddling.”The central bank’s benchmark overnight lending rate is now 4.50%-4.75%. Traders of interest-rate futures are pricing in one more 25 basis point increase in March before the Fed pauses to assess how its run-up in interest rates from near zero one year ago is slowing the economy. Rate cuts, they expect, will start in September – a view Powell said Wednesday is driven by the expectation of fast-receding inflation. Either cutting in September or waiting until next year, would be in the historical range. Since the 1990s, the interlude between rate hikes and rate cuts has varied from as long as 18 months in 1997-1998 to as short as five months in 1995. GRAPHIC: Fed rate cuts: not so fast? (https://www.reuters.com/graphics/USA-FED/RATECUTS/klpygdgzqpg/chart.png) Inflation data is trending in the right way over the past three months. By the Fed’s preferred measure, inflation is now running at a 5.0% annual rate, still more than twice the central bank’s 2% goal, but down from a high of 7% last summer.Wage pressures are also easing, which could allow the Fed to reduce rates later this year as it tries to engineer an elusive ‘soft landing,’ where inflation comes down without severe harm to economic growth and employment.DON’T WANT TO REV THE ECONOMYThe Fed is also wary of going too easy on inflation and cutting rates too soon. Powell and others point to the last big inflation war the Fed fought, in the last 1970s and early 1980s, as a cautionary tale.”Investors are inviting him to be Arthur Burns, and he doesn’t want to accept that invitation,” Dreyfus and Mellon Chief Economist Vincent Reinhart said of Powell. It was on Fed Chair Burns’ watch, in the 1970s, that the Fed repeatedly raised rates and then cut them to fight rising unemployment, only for prices to explode again and force more rate hikes. His successor Paul Volcker ended up jacking rates to almost 20% to finally quash the inflation that Burns had let get out of hand. The Fed, Powell said Wednesday, cannot risk doing too little. “We have no incentive and no desire to overtighten, but if we feel like we’ve gone too far … if inflation is coming down faster than we expect, then we have tools that would work on that,” he said.Then there’s the thorny issue of financial conditions, a proxy for how easy it is to access credit and which the Fed watches closely to see how tight borrowing costs are in reality.Financial conditions began to ease following the central bank’s policy meeting last November and while Powell largely brushed off such concerns on Wednesday, the Fed can ill afford for them to ease further”This loosening of financial conditions is undoubtedly not what the Fed was aiming for, and we expect a cacophony of Fed speeches in the coming weeks will aim to reorient the Fed’s message,” said Gregory Daco, chief economist at EY Parthenon. More

Here are some of their proposals:PLATINUM COINSome commentators have said the U.S. Treasury could mint high-value platinum coins and deposit them in the Federal Reserve in exchange for cash, which would give the government more money to spend.Critics say that could disrupt financial markets, as investors might be reluctant to buy U.S. bonds not backed by congressional action, or call into question the soundness of a political system that would resort to such unorthodox tactics. Others say it could spur inflation or undermine the independence of the Fed. Furthermore, the law that authorized platinum coins envisioned them as commemorative items, not currency.Government officials including Treasury Secretary Janet Yellen have repeatedly dismissed the idea as a gimmick.14TH AMENDMENTSection Four of 14th Amendment to the U.S. Constitution, adopted after the 1861-1865 Civil War, states that the “validity of the public debt of the United States … shall not be questioned.” Historians say that aimed to ensure the federal government would not repudiate its debts, as some ex-Confederate states had done. Some experts have suggested that Biden could invoke this amendment to raise the debt ceiling on his own if Congress does not act. That would almost certainly lead to prolonged legal wrangling, which could unsettle financial markets for the reasons outlined above. BYPASS REPUBLICAN LEADERSHIPDemocrats and rank-and-file Republican allies in the House of Representatives could bypass McCarthy and force a vote on a “clean” debt ceiling increase, free of spending cuts or other conditions. Because Republicans hold a narrow 222-212 majority in the House, only six of them would have to break with their party and side with Democrats in order to get the 218 votes needed to pass legislation.This group could try to hijack an existing vote on another bill and substitute it with their preferred solution. Alternatively, they could round up 218 signatures for a “discharge petition” to bypass legislative hurdles. That takes time. Supporters must wait at least 30 days after they introduce their bill before they file their petition, and then must wait seven more legislative days after that. If McCarthy or gatekeepers on the House Rules Committee still oppose the measure, supporters can still call it up for a vote — but only on the second or fourth Monday of the month when the chamber is in session. That leaves only three possible dates for action in the first half of this year: March 27, May 22 and June 12.Discharge petitions have only succeeded twice in this century, in 2002 and 2015. HIGH INTEREST BONDSSome have suggested that the Treasury Department could sell bonds at higher interest rates than those that are dictated by market conditions. Under this scenario, Treasury could earn $38 billion by selling $35 billion worth of bonds at 5%, rather than 3.5%, and use the proceeds to retire more of its debt, giving it more space to operate under the existing debt limit.Analysts say this would leave Treasury on the hook for higher interest payments and unsettle the market for Treasury bonds, which serve as a bedrock for the global financial system. GET RID OF ITCongress could vote to abolish the debt ceiling entirely, which would eliminate the need to vote on the issue periodically but also erode Congress’s authority on fiscal matters. Yellen has endorsed the idea, but Biden has dismissed it as “irresponsible” and prominent liberal lawmakers like Senator Bernie Sanders have ruled it out. Attempts to abolish the debt ceiling have gotten no traction in Congress in recent years.Sources: Moody’s (NYSE:MCO) Analytics; Congressional Research Service More

It has been a data-rich end of January. Last week we got fourth-quarter US and German growth numbers, with more countries reporting output statistics this week. On Tuesday, the IMF updated its economic forecasts, and the US reported quarterly employment cost data. Yesterday, the eurozone published the latest inflation rates. The overall narrative taken from the IMF update goes roughly like this: growth will be worse this year before getting better again in advanced economies (in emerging and poor countries growth hit its low point in 2022 and is slowly accelerating). But 2023 won’t be as bad as we had feared. In return, growth will improve less in 2024 than previously thought. Among rich countries, the US will pick up speed sooner than Europe, where a sharp slowdown is predicted this year (and an outright contraction in the UK). Inflation is coming down, though somewhat slowly. Some other new statistics would seem to support the same reading. The US recorded a solid 2.9 per cent annualised growth rate in the fourth quarter; Germany suffered a contraction of 0.2 per cent, or 0.8 on an annualised basis.But there are many things that worry me that the shared narrative ignores. The US GDP number is not such good news when you look under the bonnet. Big contributions to the fourth-quarter growth rate came from companies building up inventories fast (that is to say, not selling all their output) and shrinking imports. Those are not the characteristics of a booming domestic economy. And the IMF does not highlight anywhere near enough just how badly the past year has thrown advanced economies off course. The chart below, from the blog of its chief economist Pierre-Olivier Gourinchas, illustrates how the fund’s output forecast for 2024 changed from the eve of the pandemic to January 2022, and how the same forecast changed from January 2022 to today.

A year ago, advanced economies were — miraculously — set to achieve greater production by 2024 than if the pandemic had not occurred. This is what some of us insisted we should celebrate as a triumph of crisis policy. Only a year later, they are set to fall significantly behind the pre-pandemic trend, and that is after the fund’s upgrade since its October forecasts. What is behind this deterioration? There are two obvious candidates. One is Russian president Vladimir Putin’s weaponisation of energy (and other commodity) prices. The other is the decision by central banks to reduce their economies’ rate of output and jobs growth. In other words, is the roughly 3 per cent shortfall one of supply or demand? It is no doubt a bit of both — but an important indication of which prevails is surely a question of how inflation is developing — rising inflation if the growth slowdown is driven by supply and falling if by demand.My colleague Martin Wolf’s column on the IMF forecasts points out the fund’s judgment that “underlying (core) inflation has not yet peaked in most economies and remains well above pre-pandemic levels”. But for the most significant economies, this is just not true. In the US, price growth for non-food and energy personal consumption expenditures peaked last February. In the eurozone, the consumer price level excluding food and energy is falling, and is now at its lowest since September (the same is true for the overall price level). US labour cost growth fell for the third quarter running, coming in at a quarterly increase of 1 per cent (or 4 per cent annualised) at the end of 2022. That is approaching the range consistent with 2 per cent inflation, especially if the strong labour market has led to job reallocation that will, in time, boost productivity. All this suggests to me that if our economies weaken in the coming year, that is the work of our own central banks more than Putin’s machinations.In defiance of — or rather by passing over — such observations, the IMF holds on to the monetary dominance it pushed at its annual meetings last October. It says “the priority remains achieving sustained disinflation . . . Raising real policy rates and keeping them above their neutral levels until underlying inflation is clearly declining.” Wiser advice would be to stop tightening as soon as there is good reason to think inflation will abate by itself. As Free Lunch readers know, I have argued this for a long time (and I note some hawks are beginning to do so who, until very recently, chided central banks for not tightening more). For now, central banks seem to be following the fund’s advice, so I can only hope that it is right and I am wrong.There are tax credits and then there are tax creditsI got a lot of reader reaction to my column this week on why the EU should welcome a green subsidy race. Many of those readers also wanted to correct me on one point: my warning that tax credits “only help companies in a position to pay tax, which favours established players over newcomers”. One of the blessings of writing for the FT is to have highly informed and intelligent readers, who in the case at hand have read the Inflation Reduction Act better than me.So I am happy to stand corrected and relay that the IRA has an option for “direct payment”, which I understand as a refundable tax credit you can pocket even if you don’t owe any tax. This is mostly for non-profits and tax-exempt entities, but seems to be available to for-profit corporations for some of the green industrial activities that the act promotes. In addition, the IRA allows for a (one-off) sale or transfer of unused tax credits. And many readers have also pointed out to me that the US has a market for “tax equity”, in which financial investors in a position to pay tax join forces with companies keen to invest in the targeted green industrial projects. With the right corporate structures, the tax credit can then be applied to the investor’s tax liability rather than be “lost”.I would note that tax equity removes some of the simplicity and automaticity that is so appealing about tax credits, and the financial engineering obviously comes at some cost which means less than 100 per cent of the value of the credits can be realised in practice. And since the EU has nothing like the US’s federal taxes, such a practice can’t be as useful in Europe as in the US. My comment on tax credits referred as much to EU policy challenges as to US practice, but clearly, anything that works in the latter should be considered by the former. Making tax credits refundable, at least, seems essential — and plans in the works at the European Commission (which my eminent Brussels colleagues have sleuthed out) seem to go in that direction. There are taxes and then there are taxesI got a lot of reader emails about my newsletter on Norway’s exodus of billionaires, too. Not so much from the aggrieved billionaires themselves, but from people who thought I had missed out other important tax motivations for the migration of the very wealthy to Switzerland. On top of the tax changes I mentioned in the piece, Norway’s centre-left government has increased the tax rate on dividends (which hurts in particular the extremely few business owners who have no liquid money and must take cash out of their companies to service their newly higher net wealth tax). The maximum effective marginal dividend tax rate (including corporation tax on distributed profits) has gone up to 51.5 per cent for this year from 46.7 per cent in 2021. Note that this is still below the 55.8 maximum effective rate for salaried income (including employer payroll tax).And, “worst” of all, a loophole that could eliminate capital gains tax by spending five years abroad was removed late last year — a move that had been tabled in parliament months earlier. It worked like this: capital income is largely only taxed when realised by an individual in Norway, so you can postpone taxation as long as you keep investments inside a corporate wrapper. Move to a country that does not tax capital gains, largely the case for Switzerland, and you can enjoy your gains, with any deferred tax liability to Norway expiring after five years of Alpine residence. But not anymore. If this was the main motivation for the exodus of the super-rich, it should presumably now dry up. Free Lunch will try to keep half an eye on the world’s least important migration crisis and report back.Other readablesIn the New Statesman, Anoosh Chakelian writes about the loss of public spaces around Britain — “‘places to meet’ are the top thing people in 225 ‘left behind’ neighbourhoods . . . say they lack”.Sarah O’Connor notes that the young who graduated into the pandemic lockdowns have fared much better in the job market than we might have feared — at least, I would add, while governments were supporting a strong recovery.The European Commission is consulting on how to redesign its electricity market. Two Twitter threads by Georg Zachmann and Conall Heussaff, both from Bruegel, summarise (and criticise) the consultation document and link to relevant proposals and analyses.Numbers newsA new study of the UK benefits system, for the Deaton Review of Inequalities, shows that while it may have succeeded in bringing more people into work, it traps its beneficiaries in part-time low-wage work, effectively promoting poor “mini-jobs” with little prospect for career progression. More

Good morning. It looks like the US is in a manufacturing recession. Yesterday’s ISM manufacturing report showed the sector shrinking for the third straight month, and the ISM index has dipped below where it bottomed in recent non-recessionary downturns, such as 2015-16. The contrast with the consumer side of the economy is striking. Email us your thoughts: [email protected] and [email protected] plug: Armstrong is the guest on this week’s Behind the Money podcast. Listen in and subscribe!The Fed vs marketsNeither Federal Reserve chair Jay Powell’s press conference yesterday, nor the official statement that preceded it, held many surprises. Both acknowledged that disinflation has begun in earnest, that growth is slowing, but that “ongoing increases” in interest rates are nonetheless likely. In the presser, Powell sounded measured. He cheered on disinflation while cautioning that the process was at an early stage. The Fed, he added, is still holding out for “substantially more evidence” that inflation is coming down for good. Asked if it was time to halt rate increases, Powell pushed back:Why do we think [a couple more rate hikes are] probably necessary? Because inflation is still running very hot . . . We don’t see [higher rates] affecting the services sector ex-housing yet. Our assessment is that we’re not very far from that [appropriately restrictive] level. We don’t know that, though . . . I think policy is restrictive. We’re trying to make a fine judgment about how much is restrictive enough. Markets looked indecisive after the statement came out, but took the press conference as dovish. The policy-sensitive two-year yield dropped some 13 basis points in the half-hour Powell was speaking. The Nasdaq closed up 2 per cent.What struck us most was Powell’s calm, almost blasé attitude towards the wide gap between markets’ rate expectations and Fed’s policy guidance. Futures markets are pricing in roughly 50 bps of rate cuts by the end of 2023, leaving the policy rate at 4.4 per cent, an outlook which did not budge after the meeting. The Fed, in December, said it expected rates to end the year at 5.1 per cent. Questioned about the mismatch, Powell said:I’m not particularly concerned about the divergence, no, because it is largely due to the market’s expectation that inflation will move down more quickly. Our forecasts, generally, are for continued subdued growth, some softening in the labour market, but not a recession. We have inflation moving down to somewhere in the mid-3s . . . Markets are past that. They show inflation coming down much quicker than that. So we’ll just have to see. We have a different view, a different forecast, really. And given our outlook, I don’t see us cutting rates this year, if our outlook turns true. If we do see inflation coming down much more quickly, that’ll play into our policy-setting, of course.In other words, Powell sees inflation moderating without plummeting, meaning rates will stay high. Markets see inflation dropping like a rock, pushing the Fed to cut.Is Powell right to be unbothered? His remarks yesterday emphasised how much tighter financial conditions are today than, say, a year ago, while playing down the importance of “short-term moves” in the markets. The chart below, of the Chicago Fed’s financial conditions indicator, shows both the marked tightening since mid-2021 and the extent of recent loosening:The most persuasive argument for Powell’s nonchalance is that, by all indications, monetary policy is working as intended, if slowly. Demand, wage growth and inflation are all cooling off. Mortgage rates have fallen 100bp from their peak, but that still leaves them 350bp higher than in 2021. This is having the hoped-for effect on the real economy; existing-home sales fell 38 per cent in 2022, for example. That broad story — off a peak but plausibly restrictive — holds for bond yields and credit spreads, too. The recent loosening isn’t ideal but if policy is working, why worry about what the market expects?The case against Powell’s nonchalance about the gap hinges on credibility. This is a vague concept, but Unhedged defines it simply: it is the ability of a central bank to jawbone the market. It is important that the central bank can change financial conditions just by talking about policy, as opposed by actually enacting policy, especially for keeping inflation expectations anchored. The idea that Powell is putting his credibility at risk by looking past the Fed-market gap comes down to the idea that market conditions are undercutting central bank policy. High stock prices and tight bond spreads are inflationary; they make more capital available to companies, make households feel richer, and so on. Powell, therefore, should further tighten policy, bringing markets to heel (Richard Bernstein recently made this sort of argument in the FT; Mohamed El-Erian presented a different version on Bloomberg.)Credibility, though, cannot be established by posturing or signalling. It is the product of consistently having the correct policy. It would be absurd to suggest that the Fed should build its credibility by pursuing a policy that is wrong for employment or price stability. So Powell has to choose a rate level that he thinks will get financial conditions to the right place at the right pace. An optimistic market is a consideration determining the right policy rate, because it loosens financial conditions. But the market’s failure to mirror the Fed’s inflation outlook is not a reason, over and above financial conditions, to tighten policy in the name of credibility. That said, we are worried about the Fed-market gap, not because of credibility but because of market risk. Suppose the Fed is right and the market is wrong, and the path to lower inflation does not run smooth. Say in a few months we get some bad news on inflation, forcing the market to move its estimate for the peak policy rate up and extend its expectations for how long high rates will last. That could lead to a very large, very fast repricing in markets. Remember that the S&P 500 is 15 per cent off its lows of October, while junk bond spreads have tightened by a full percentage point. If that were to reverse all at once, as the economy was already shrinking, that could easily turn what might otherwise have been a mild recession into a severe one. This does not strike us as a particularly unlikely scenario, simply because inflation tends to be volatile and markets are very jumpy about rates right now.Is it Powell’s job to control market risk? Should he target lower stock and bond prices directly? We’re not sure, and are very interested to hear readers’ thoughts. (Armstrong & Wu)Mark Zuckerberg gets the messageMeta reported earnings after the close yesterday. Revenue was a little better than expected, but the big news was meaty cuts to the outlook for operating expenses in 2023 (from $97bn at the midpoint to $92bn) and capital expenditure (from $35.5 to $31.5bn).In the conference call, Zuckerberg said 2023 would be “the year of efficiency” at Meta and said his goal was to make the company not just stronger but more profitable. The stock, already up 3 per cent on the day, rose another 19 per cent in after-hours trading, The shares have now doubled (doubled!) from its November lows, when it looked like expenses were rising fast while revenue set to fall. Back then I wrote:If Zuck can cool it [on expenses] my guess is that Meta shares have a lot of upside — so long as the company’s digital ad sales slowdown doesn’t get much worse. I have no idea about this. Of course this is all very crude (“Just spend less money and talk like a grown-up and the stock will go up!”) but some problems have crude solutions. Have my dreams come true? Maybe. The cost cuts are good news, but put them in perspective. Operating expenses in 2023 are still set to be 30 per cent higher than they were two years before; capital expenditure, 30 per cent higher. No one is going to start calling him ‘Mark the knife’.On the earnings call yesterday, one analyst asked exactly the right question: in years to come, is the plan for expenses to rise in line with revenues, or is the company still in margin-compression mode? Slightly alarmingly, the CFO gave a vague answer, pointing to expectations of “compounding earnings growth” over time. Meta, at its lows, traded at 11 times forward earnings estimates, a huge discount to the market. Now, at 22, it is at a small premium, despite cloudy prospects for earnings growth. Readers can come to their own conclusions.One good readI missed it when it came out last spring, but this detailed account of how social media feeds political polarisation, from the social psychologist Jonathan Haidt, is a must-read for Facebook investors (and probably the rest of us too). More

When Jay Powell took to the lectern to give his first press conference of 2023, the Federal Reserve chair stuck to pretty much the same script he has been using since the US central bank started ratcheting up rates last year. He spoke of the Fed’s unwavering commitment to rooting out high inflation and pledged to keep squeezing the economy until it is vanquished, insisting the central bank was not yet done with its campaign of interest rate rises. “We are going to be cautious about declaring victory and sending signals that we think the game is won, because we’ve got a long way to go,” he told reporters on Wednesday after the Fed raised its benchmark rate by a quarter point. That marked a downshift from the larger increases the central bank has relied on in recent months and a return to a more conventional pace of tightening. But even as Powell jettisoned the idea that the Fed would ease off any time soon — keeping open the possibility of another two 25-basis-point increases to come — he was decisively more upbeat not only about the economic outlook but also the central bank’s grip on inflation. That helped fuel a rally in US government bonds and stocks, with the S&P 500 closing at its highest level since last summer. “People came into this thinking he might have that same scolding tone as he had in December,” said Julia Coronado, a former Fed economist who now runs MacroPolicy Perspectives. “He sounded more positive and more optimistic.”Powell’s optimism might have been subtle, but it was in evidence throughout the question and answer session. While he maintained price pressures were still unacceptably high, he repeatedly said the “disinflationary process” was under way. What is more, he said he saw a “path” to bringing inflation down to the Fed’s 2 per cent target without a “really significant economic decline or a significant increase in unemployment”. Powell also seemed more relaxed about a recent easing of financial conditions and the fact that traders in fed funds futures do not seem to believe the central bank will have to raise rates to levels implied by officials’ projections given their expectation that inflation will moderate more quickly. He even went so far as to suggest officials could consider reversing course earlier if forthcoming data suggests.That marked a significant de-escalation in a months-long tussle with traders who have refused to back off their wagers that the Fed will not raise the benchmark rate to at least 5 per cent and hold it there throughout the year. The increase on Wednesday took the federal funds rate to between 4.50 per cent and 4.75 per cent. Most officials have signalled the Fed must increase it to 5.1 per cent before considering cuts in 2024 at the earliest. Yet traders’ bets suggest it will start loosening monetary policy before the end of the year. “Perhaps Powell was in no mood to fight the market because he wasn’t convinced the market’s inflation outlook is wrong,” suggested Michael Feroli, a former Fed economist now at JPMorgan.Powell’s comments were sufficiently dovish to cause consternation among those economists who had thought the Fed would raise rates in March and again in May before taking a breather. For instance, Aneta Markowska at Jefferies said she was now slightly less confident in her base case that the Fed would follow though with a final quarter-point increase in May. “Whether they pause in March or May, that really is just a function of how you think the data will play out,” she said. Not all economists are so sanguine, especially given concerns that progress on inflation could stall. Peter Hooper, global head of research at Deutsche Bank, said: “Folks who were inclined to look for things to be optimistic about picked those parts out and maybe didn’t put enough weight on the thrust of the overall message.”Hooper, who worked for the Fed for almost 30 years, said the central bank was trying to communicate that it expected to raise rates “a couple more times . . . to get to a noticeably more restrictive level”. Şebnem Kalemli-Özcan, an economist at the University of Maryland and a member of the New York Fed’s economic advisory panel, also warned that booming markets and even looser financial conditions could harden the central bank’s resolve. “If equity markets keep going through the roof, then that says there is growth in the future and everything is rosy,” she said. “People start spending more, and that is what the Fed doesn’t want.”“They don’t want people to buy stuff and they don’t want people to borrow to buy stuff,” Kalemli-Özcan added. “They want to slow down sentiment.” More

De-risk, don’t decouple, from the Chinese economy — this was the economic philosophy for the EU articulated by European Commission president Ursula von der Leyen at Davos last month. As organising principles go, it’s not a bad one, certainly better than Brussels’ nebulous “strategic autonomy” or the US’s disingenuous “worker-centred trade policy”.The EU has for years been attempting to attain and hold a middle ground. On the one side is the official US predilection for using its federal powers to decouple its economy from China’s. (It should be noted that it’s unclear how far this will work: overall US-China goods trade probably hit an all-time record last year.) On the other is the EU’s history of mainly letting commerce with China flow. But despite EU member states increasingly turning against Beijing, Brussels is struggling to construct tools to reduce a perceived dangerous reliance on Chinese trade.Europe’s ability to use policy is particularly weak in sensitive technologies with military and security applications. The EU has its own collective mechanisms for designing export controls. When there’s an obvious threat, the EU can act swiftly, with unity and in co-ordination with Washington: the two trading powers rapidly imposed a broad range of export controls on Russia after the invasion of Ukraine, from semiconductors to submarine engines.But when a policy is more contentious and particularly affects one member state, EU processes are generally pushed aside in favour of national competence. The details of the reported US-Netherlands-Japan agreement further restricting the sales of chips and chipmaking kit to China remain to be seen. But it was the Dutch, with their comparative lack of economic and diplomatic heft, in the negotiating room with the US, not the EU collectively. The process was confidential and ad hoc, exactly the kind of environment in which Washington is particularly able to throw its weight about.Sensitive technologies are an obvious weakness for collective EU action, but so is the lack of a strategy on de-risking China trade more generally. Europe would like security of supply, and where feasible a domestic industry, in sectors it considers of strategic importance, particularly green goods. That may be a wise idea or not, but in any case the EU is a long way from achieving it.One obvious example is that Europe, not helped by complacent sluggishness in its own car industry, is lagging well behind China (and increasingly the US) in electric vehicles. The EU is currently poring over its underpowered and scattered subsidy toolkit to see if it can hope to match American spending in this area, let alone China’s — a subject to which I will return next week. In the meantime, in line with the EU’s habit of relying on rules (of which it has plenty) rather than cash (of which it has relatively little), the bloc’s most enthusiastic China de-riskers (France in particular) have high hopes of the EU’s new foreign subsidies regulation. After years of debate, the new instrument comes into force in July. It enables the Commission to prevent state-subsidised companies from China or elsewhere producing in Europe or bidding for public procurement contracts there, essentially extending the EU’s tough state aid constraints to foreign governments.The question, though, is how much and how well it gets used. After all, the EU has long had the ability to use trade defence instruments (TDI) to impose anti-subsidy and antidumping duties on imports it deems unfairly cheap. But it has not employed those instruments to their full extent, certainly not enough to constitute a determined industrial policy in green or other high-tech goods. A decade ago, in the face of opposition from member states, the Commission was forced to back down from its plan to impose hefty across-the-board antidumping and anti-subsidy duties on imports of solar cells from China, in effect ceding control of the EU solar market to Chinese companies.Peering through the opacity of the hugely complex Chinese subsidy regime to come up with an estimate of competition-distorting handouts that might survive challenge at the World Trade Organization, which the EU quaintly seems still to care about, is not an easy task. The anti-foreign subsidy tool, along with traditional TDI, is unlikely to achieve a carefully calibrated degree of distance between the EU and Chinese economies. It also risks being used too broadly, reflecting domestic lobbying rather than a well-judged strategy of competitiveness.De-risking rather than an all-or-nothing approach to decoupling from China is a good way of framing the issue. But the EU isn’t currently very well set up to do it. Brussels and the member states need to work hard to acquire and use precision-focused tools if they are to turn the slogan into more than elegant rhetoric. [email protected] More

(Reuters) -Meta Platforms Inc’s stricter cost controls this year and a new $40 billion share buyback sent shares soaring on Wednesday, as CEO Mark Zuckerberg called 2023 the “Year of Efficiency.”The parent of Instagram and Facebook (NASDAQ:META), which has fallen on hard times amid a broad post-pandemic slump in digital ads, is focused on improving its content recommendations powered by artificial intelligence and its ad targeting systems to keep users clicking.Meanwhile, it will cut costs in 2023 by $5 billion to a range of $89 billion to $95 billion, a steep drop from the $94 billion to $100 billion it previously forecast, and it projected first-quarter sales that could beat Wall Street estimates.Meta stock surged nearly 19% in after-hours trade. If gains hold on Thursday, it would set up the shares for their biggest intraday surge in a decade and added more than $75.5 billion to its existing $401 billion market capitalization.Zuckerberg described the focus on efficiency as part of the natural evolution of the company, calling it a “phase change” for an organization that once lived by the motto “move fast and break things.””We just grew so quickly for like the first 18 years,” Zuckerberg said in a conference call. “It’s very hard to really crank on efficiency while you’re growing that quickly. I just think we’re in a different environment now.”The cost cuts reflect Meta’s updated plans for lower data-center construction expenses this year as part of a shift to a structure that can support both AI and non-AI work, it said in a statement.The digital ad giant faced a brutal 2022 as companies cut back on marketing spending due to economic worries, while rivals like TikTok captured younger users and Apple Inc (NASDAQ:AAPL)’s privacy updates continued to challenge the business of placing targeted ads.Meta in November cut more than 11,000 jobs in response, a precursor to the tens of thousands of layoffs in the tech industry that followed.”Our management theme for 2023 is the ‘Year of Efficiency’ and we’re focused on becoming a stronger and more nimble organization,” Zuckerberg said in a statement. Monetization efficiency for Reels on Facebook, a short-form video format, had doubled in the past six months and the business was on track to roughly break even by the end of 2023 or early 2024 and grow profitably after that, he said on the conference call.INVESTMENTS STARTING TO PAY OFF”Meta’s better-than-feared results should refute concerns over the state of the digital advertising industry following Snap’s horrible guidance earlier this week,” said Jesse Cohen, senior analyst at Investing.com.”Despite all the challenges Meta must deal with, there are signs the business is still doing well,” Cohen said.Shares of peer Alphabet (NASDAQ:GOOGL) Inc were up 3.3% while Snap Inc (NYSE:SNAP) stock rose 1% in after-hours trade on Wednesday.On the conference call, executives said Meta’s investments in AI-surfaced content and TikTok competitor Reels were starting to pay off. The company also has been using AI to increase automation for advertisers and target ads using less personal data, resulting in higher return on ad spend.Meta forecast first-quarter revenue between $26 billion and $28.5 billion. That was in with analysts’ average estimates of $27.14 billion, according to Refinitiv.Zuckerberg said generative AI – technology for producing original prose, imagery or computer code on command – would be the company’s other big theme for this year, alongside efficiency.Meta was planning to launch several new products that would “empower creators to be way more productive and creative,” he said, while cautioning about the cost associated with supporting the technology for a large user base.However, net income for the fourth quarter ended Dec. 31 fell to $4.65 billion, or $1.76 per share, compared with $10.29 billion, or $3.67 per share, a year earlier. Analysts had expected a profit of $2.22 per share.The decline was largely due to a $4.2 billion charge related to cost-cutting moves such as layoffs, office closures and the data center strategy overhaul.The company previously said it was planning to account for much of that cost in 2023. More