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The writer is a former central banker and a professor at the University of ChicagoPresident Donald Trump recently met Federal Reserve chair Jay Powell, seeking to persuade him to lower interest rates, reminiscent of the political pressures US presidents applied to the Fed in the 1970s.Some investors may worry that US economic institutions are being eroded, which could lead to macroeconomic volatility. Yet those fears will probably be assuaged by the Fed holding steady on rates. There is still reason to worry, however — not about US institutions weakening, but about the changing political environment in which they operate.To understand the role of institutions in economic folklore, we have to go back to the 1990s, when it was easy to distinguish emerging market economic policies from those of industrialised countries. The former were “procyclical” — countries spent freely when times were good, adding to debt and inflation, only to be jerked back to reality when times were bad and their ability to borrow dried up. In contrast, developed countries adopted stabilising policies; the US ran large fiscal surpluses during the high-growth late 1990s.Economists argued that institutions explained the difference. Independent central banks in industrialised countries targeted inflation, while their parliaments followed fiscal rules that limited excessive spending, and even required budgets to balance over the cycle. Institutions were a straitjacket keeping political expediency in check.Cracks soon emerged in this explanation. Through the 1990s, multilateral organisations like the IMF urged emerging markets to adopt such institutions. Yet even when reformers heeded the advice, policies continued to be procyclical, culminating in a series of emerging market crises.But starting in the early 2000s, macroeconomic policies in some EMs became more stable, as institutions began having more policy traction. Fernando Henrique Cardoso’s government initiated inflation targeting in Brazil, but the central bank became truly credible only when his leftist successor, Luiz Inácio Lula da Silva, maintained the bank’s independence.The institutions didn’t change but the political consensus behind them did. Growth, partly driven by the commodity boom, provided budgetary surpluses to aid the neediest. Programmes such as Bolsa Família enabled direct transfers to the poor, while others improved access to education, healthcare and housing. Precarity fell. The incentive for Lula’s Workers’ party to indulge in political radicalism decreased, which allowed a broad national consensus on macro-stable policies to emerge. Institutions started working. While prolonged periods of weak growth do put pressure on the consensus, in many EMs it still holds. The mistake in urging institutions on EMs in the 1990s was there wasn’t yet a political consensus.In contrast, developed countries have arguably become more procyclical. The US spent hugely even as the recovery from the pandemic was well under way, contributing to inflation that the Fed is still trying to control. Trump’s “big beautiful bill” threatens to expand the already unsustainable US fiscal deficit. France and Japan are also struggling to narrow debt-to-GDP ratios of over 100 per cent — something unthinkable in the 1990s.It is unlikely that the Fed is institutionally weaker. It was quick to reaffirm its independence soon after the Trump-Powell meeting. Indeed, regardless of who replaces Powell next year, it is unlikely Fed policies will be pliant. Moreover, it’s not implausible that the Trump administration would welcome having a scapegoat in case the economy goes south.The political consensus in the US, however, has changed. The Fed today probably does not have the political room to tackle inflation as vigorously as it did in the era of Paul Volcker. Similarly, fiscal rules in the US by and large have not changed. The political willingness to respect their spirit has. That’s because precarity and inequality have increased in developed economies. The disappearance of well-paying middle-class jobs for the moderately skilled due to technological change, and to a lesser extent trade, is the obvious cause. By contrast, the highly educated have benefited as globalisation has brought greater opportunities to those in white-collar industries. For those left behind, radical politicians offer the persuasive message that self-serving elite policies are responsible for their plight. As a result, the political consensus behind macro-stable policies has weakened, with even GOP fiscal hawks abandoning their opposition to spending. Balanced budgets require compromises. But when politics is so polarised, few are willing to make them, and runaway spending becomes the norm. For some industrialised countries, sudden stops, when markets become unwilling to fund their governments, could be on the horizon.Institutions do not assure countries a ticket to macroeconomic nirvana — and they cannot create political consensus. That requires citizens to believe economic outcomes are fair. This necessitates structural reforms that enhance opportunities for those falling behind. Perhaps developed countries need to start emulating what emerging markets did. More

This article is an on-site version of our FirstFT newsletter. Subscribers can sign up to our Asia, Europe/Africa or Americas edition to get the newsletter delivered every weekday morning. Explore all of our newsletters hereGood morning and welcome back to FirstFT. Today’s agenda: Donald Trump weighs his options vis-à-vis Iran Altman accuses Meta of staff poachingMartin Wolf on Trump’s “big, beautiful” billBeach-ready timepiecesWill the US join Israel’s bombing campaign against Iran? That’s the question consuming governments and investors around the world this morning as the Israel-Iran conflict enters a sixth day. Here’s what we know.Trump calls for Iran’s “unconditional surrender”: Donald Trump opened the door to the US joining Israel after calling for Tehran’s “unconditional surrender” yesterday in a series of bellicose comments in which he also said his patience was “wearing thin” with the regime in Tehran and that supreme leader Ayatollah Ali Khamenei was an “easy target”. “We are not going to take him out (kill!), at least not for now,” Trump wrote on his Truth Social platform of Iran’s supreme leader. “But we don’t want missiles shot at civilians, or American soldiers.”The Trump administration is actively debating whether to join Israel in attacking Iran, three people familiar with discussions told the Financial Times. Last night the president held an 80-minute meeting with members of his national security team in the White House Situation Room to discuss whether the US should join Israel and its strikes on Iran’s nuclear programme. Meanwhile, the US has pivoted to a more hostile military posture towards Iran by sending more assets to the region. These include the USS Nimitz aircraft carrier and three guided-missile destroyers that had been in the South China Sea and air-to-air refuelling aircraft that the US would use if American fighter jets became involved in the conflict. Meanwhile, Israel said it launched a fresh round of attacks near Tehran this morning and Iran deployed a hypersonic ballistic missile in its latest strikes. Follow our live blog for the latest updates.Nuclear disaster? Israel’s attacks on uranium enrichment facilities have caused localised radioactivity, but contamination appears limited.‘Iranian lioness’: State TV anchor Sahar Emami has become a symbol of resistance after she kept broadcasting amid Israeli bombing.Tanker collision: A crash between two oil tankers near the Strait of Hormuz has raised anxieties about GPS interference in the region. Netanyahu: The Israeli prime minister has consistently misread the region since the 1980s, writes Kim Ghattas, dooming it to endless cycles of violence.Here’s what else we’re keeping tabs on today:US interest rates: War in the Middle East will play into policymakers’ thinking as they decide whether to cut interest rates from the current level of 4.25-4.50 per cent. Brazil’s central bank is expected to maintain the country’s benchmark Selic rate at 14.75 per cent. Here’s how economists assess the impact of the conflict on the global economy.Economic data: The US Census Bureau reports on May housing starts and new issuance of building permits. Argentina’s statistics agency is set to release retail sales data for April.Russia: President Vladimir Putin will welcome attendees to the three-day 28th St Petersburg International Economic Forum. Five more top stories1. OpenAI chief executive Sam Altman has accused Mark Zuckerberg’s Meta of trying to poach his developers with the promise of $100mn sign-on bonuses and even higher compensation. Meta has been racing to poach top researchers and engineers from rival groups as it seeks to build a new “superintelligence” team to develop AI. Read more on Meta’s poaching campaign.More AI news: Big Tech groups, including Amazon, Google, Microsoft and Meta, are pushing for a 10-year ban on AI regulation by individual US states.Amazon: The ecommerce giant has told white-collar employees that their jobs will be at risk from AI in the next few years.TikTok: The White House has extended a deadline for another 90 days to allow the Chinese-owned social media app to continue operations.2. China’s central bank governor has said he expects a new global currency order to emerge after decades of dominance by the US dollar, with the renminbi competing in a “multi-polar international monetary system”. Pan Gongsheng said the US dollar had “established its dominance” after the second world war but warned of “excessive reliance” on a single currency. He was speaking at China’s flagship financial forum in Shanghai.3. HSBC is considering forcing staff back to the office at least three days a week. Chief executive Georges Elhedery has discussed the group-wide policy with executives across the bank’s businesses, people involved in the deliberations said, with some managers frustrated that many employees are still mostly working from home.4. India’s aviation safety regulator said it had found no “major safety concerns” during inspections of Air India’s Boeing 787 aircraft following Thursday’s fatal crash of a flight from Ahmedabad to London. Independent experts have raised questions about the position of the plane’s wing flaps and have asked why its landing gear remained down in the seconds before it crashed. Boeing’s shares rose after the report’s release.5. A mayoral candidate in New York was detained by law enforcement yesterday while trying to escort a defendant out of immigration court, his spokesperson said. The arrest of Brad Lander, who is also the city’s top finance official, highlights the rising political temperature in response to Trump’s deportation push. The Big Read© BloombergImmediately after the Paris climate accord was signed nearly a decade ago, it seemed as if world leaders were finally in agreement, with several countries pledging to quit coal entirely to limit global warming. Many people from experts to politicians believed demand for the dirty energy source had peaked. They could not have been more wrong. We’re also reading . . . Edward Luce: Political assassination has moved into a grey swan zone in the US, with would-be killers swimming in increasingly hospitable waters.Trump’s G7 exit: The US president’s abrupt departure from the Alberta summit raises fears over Washington’s commitment to global alliances.Forever chemicals: A recent move to review how the controversial substances are defined is motivated by commercial interests, writes Anjana Ahuja. Energy Transition: Big Oil’s sunset period, renewable ambitions and architecture’s sustainability push in this special report. Chart of the day Some content could not load. Check your internet connection or browser settings.Whose interest does Trump serve? His “big beautiful” budget bill is a powerful example of “pluto-populism”, writes Martin Wolf. The rich receive most of the goodies; the poor become poorer; and the fiscal deficit stays huge, he writes. Take a break from the newsNow is the time for a fun, no-nonsense, beach-ready watch. Louis Cheslaw reviews affordable and water-resistant watches for the summer. More

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Unlock the White House Watch newsletter for freeYour guide to what Trump’s second term means for Washington, business and the worldDealmakers are concerned that President Donald Trump has set a dangerous precedent for politically sensitive tie-ups by taking a “golden share” in US Steel as a condition for approving its takeover by Japan’s Nippon Steel. US Steel’s announcement last week that it was giving the government the share cleared the way for the $14.9bn deal and ended 17 months of tense negotiations. The transaction had significant political implications due to US Steel’s historic role in American industry and its headquarters being located in the electoral swing state of Pennsylvania.The “perpetual” golden share will give the US veto rights over decisions, including any delay to Nippon’s agreement to invest billions in the company, the closure of plants and certain changes to raw material sourcing, US commerce secretary Howard Lutnick said at the weekend. The agreement does not give the US an equity stake in the company. “This is not about economics, this is about control,” said Stefan Selig, former US under secretary of commerce and ex-executive vice-chair for global investment banking at Bank of America. “To cede negative control to the US government, and a future government that they don’t know or have a good handle on, is a real accommodation that speaks to the importance they placed on getting this deal done.”While M&A lawyers and bankers view the US Steel takeover as an unusual case, many expressed concern that the measure could represent a new modus operandi for the Trump administration in complex takeovers of US companies.José Luis Vittor, partner of the Womble Bond Dickinson law firm, said international investors needed further details from the US government on how the golden share would be implemented and clarification about the possibility of similar structures in future deals. “Regulations on this golden share ought to be only applied to this particular transaction and thoroughly reviewed to avoid the risk of misinterpretation by the foreign investment community that this could extend to other transactions,” he said.While golden shares in the US are a rarity, several European countries, including the UK, France and Italy, have long relied on them in defence, telecoms and energy groups to maintain state influence even after they have been privatised.However, an official close to the White House said the deal for US Steel was a “one-off” and that the “large majority” of foreign investments would not warrant a similar share class. They added that few transactions reached the point of undergoing a review by the Committee on Foreign Investment in the US (Cfius), an inter-agency panel chaired by the Treasury that vets inbound investments for security risks, let alone the sort of scrutiny that US Steel’s takeover has endured.Joe Biden, who was president when the deal was agreed in December 2023, had blocked it after Cfius suggested it could pose national security threats. However, the golden share and a pledge by Nippon to invest $11bn through 2028 and another $3bn in future years helped sway the Trump administration, according to a person close to the deal. “Steel is the backbone of a modern economy and military,” White House spokesperson Kush Desai said in a statement. “The Trump administration is committed to ensuring that foreign business decisions do not undermine our national and economic security.”Aaron Bartnick, a former Cfius official during the Biden administration, said that further deals resembling the one for US Steel would mark a “meaningful shift” in America’s approach to capital markets, after decades of criticising other nations for taking golden shares in national champions.Still, Anthony Rapa, a Washington-based partner and co-chair of the international trade practice at Blank Rome, said it seemed “reasonably likely that the use of a ‘golden share’ mechanism will be reserved only for more sensitive or complex cases”. But he cautioned that “it could be the case that the Trump Administration will make more use of this tool in order to drive outcomes consistent with its ‘America First’ investment policy”.The White House’s use of a golden share has also prompted concerns among multinational companies that this adds another dimension of uncertainty to an already precarious dealmaking environment. “The market is watching this,” said George Casey, global chair for corporate at Linklaters law firm. “Multinational companies that are contemplating investments in the US want to understand what future investments or acquisitions might look like, and how this feature will or will not impact their potential transactions.”Others expressed concern for the future of Nippon. One shareholder said it could harm the company’s flexibility in decision-making and “set a bad precedent”. However, they acknowledged that the option of a golden share could facilitate more foreign investment in the US in sectors such as critical minerals and other areas of national interest.Additional reporting by Alex Rogers in Washington and David Keohane in Tokyo More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The writer is co-global head of investment strategy for JPMorgan Private BankMarket narratives tend towards extremes. Is the US an unstoppable economic power or a cautionary tale of debt and dysfunction? The truth, as is so often the case in investing, lies somewhere in between.Investors face considerable policy uncertainty from a new US administration. The public debt and deficit have risen dramatically, and pending legislation would likely exacerbate the trend. As the dollar has weakened and long-term bond yields have risen this year, we’ve heard growing calls for investors to slash their exposure to US assets.I would recommend a scalpel, not a hatchet. US exceptionalism, broadly defined as US economic and market leadership, has not disappeared although it may be shifting in significant ways.A key and under-appreciated element of US exceptionalism is the economy’s productivity engine and that remains very much in force. By any measure, productivity — essentially producing more with less — is a key determinant of long-term economic growth and corporate profitability. On this critical front, the US continues to lead and that can keep US equities a core holding in global portfolios for many years to come.Since the pandemic, US business sector productivity has grown at more than 2 per cent per year — a marked acceleration from the decade before — while the same measure in Europe and Japan has barely been positive. While US technology grabs the headlines, productivity gains are evident across professional services, logistics and even healthcare as firms embrace AI, automation, and digital infrastructure.Higher productivity has tangible implications for investors. It can increase corporate profitability, boost overall GDP growth and act as a deflationary force in the face of inflationary shocks. The Federal Reserve now estimates US long-run growth between 1.5 and 2.5 per cent — a meaningful step up. Europe and Japan, by contrast, remain hampered by weaker demographics and slower adoption of productivity-enhancing technologies. No surprise, then, that US companies continue to generate stronger margins and more reliable cash flows when compared with their developed market peers.However, two further developments could challenge the US productivity edge and further narrow the gap between the US and other developed markets.First, the US administration’s evolving tariff strategy and levies have the potential to constrain growth and boost inflation. Restrictive trade measures could disrupt US supply chains and push up costs, undermining the productivity gains businesses have worked hard to secure. Historically, US productivity leadership has relied on open, competitive markets.Second, as Europe’s economic outlook brightens, its productivity growth could improve meaningfully. The report last year by former Italian prime minister and European Central Bank president Mario Draghi laid out an ambitious agenda for enhancing European competitiveness. Germany’s recently announced fiscal stimulus could potentially increase annual Eurozone growth from a paltry 0.5 per cent pace in 2025 to more than 1 per cent in 2026.Should both these trends materialise and/or accelerate, it would weaken the case for a significant overweight to US equities However, if weakness emerges in US assets, it will show up more in the dollar, not US stocks. We see no meaningful threat to the dollar’s reserve currency status. But the currency looks more vulnerable to shifting capital flows and softening rate differentials than a stock market underpinned by structural productivity gains.Thus, even as the dollar likely weakens in the coming quarters, US equities can continue to make new highs. This year’s gains — with the S&P 500 now in the green year-to-date and up roughly 20 per cent from its April lows — tell us that equity investors are pricing in a reality many narrative-driven commentators are missing.Over the next 12 months we still expect a narrowing gap between the US and rest of the world’s asset class performance — non-US equities look increasingly compelling, particularly for dollar-based investors. Overall, I favour developed markets, especially Europe and Japan, over emerging markets. But while America’s economic leadership may be increasingly contested, its productivity engine remains a powerful force, keeping US equities central to global portfolios. Investors would do well not to forget that. More

Just days after Premier Li Qiang called for “greater efforts” to halt a decline in China’s housing market, fresh data on Monday laid out why the country’s top leadership still has such cause for concern.New home prices across 70 Chinese cities fell 0.2 per cent in May from the previous month, while those of second-hand homes declined 0.5 per cent, according to a Financial Times analysis — the fastest pace of decline in seven and eight months respectively.Real estate investment was also down 10.7 per cent in the first five months of 2025, the data showed.Years after Chinese home prices started to fall following a series of developer implosions, the prospect of a stabilisation remains in doubt, piling pressure on policymakers as they contend with a weaker economic backdrop.“A nationwide turnaround looks a distance away,” said Louise Loo, lead economist at Oxford Economics.Sentiment was buoyed earlier this year by data showing a moderation in falls, and month-on-month growth in prices in tier 1 cities, in a period after Beijing unleashed a series of supportive measures in September. But any sense of improvement stalled in May, despite a trade war truce with the US.“Even the primary prices started to see some weakness,” said Karl Choi, head of Greater China real estate research at Bank of America, of the May figures. “That was a bit of a difference from the last few months, when primary prices were relatively stable.”The setback comes despite numerous government efforts to support the market, including mortgage rate cuts, funds to complete unfinished residential projects and plans to convert unused homes into social housing.Housing prices are typically measured through sales of new homes, reflecting China’s rapid pace of urbanisation. But the secondary home market was “a more definitive gauge of sentiment, given looser price controls”, said Loo, who noted that second-hand prices were flat or rose in just three of 70 cities tracked by the National Bureau of Statistics in May.The property market was “still searching for a bottom”, said Jian Chang, chief China economist at Barclays, pointing to recent declines in secondary market prices in big cities following “some stabilisation in March”.Some content could not load. Check your internet connection or browser settings.Top cities, where housing is still expensive, have scrapped purchase restrictions to try to restore confidence, with the latest announcement coming from Guangzhou last week. Monthly price changes for new homes in tier-one cities turned negative in May for the first time this year, and fell sharply for second-hand homes.Other indicators paint a less gloomy picture. Prices are falling less steeply on a year-to-year basis, with new home prices declining 4.1 per cent in May compared with more than 6 per cent in October.Michelle Kwok, head of Asia real estate research at HSBC, suggested that “things have already started to turn” from the depths of the now four-year crisis. “Big cities are leading the recovery,” she said.Most economists had not anticipated a return to rising prices for some time, even before the added setback of a full-blown trade war with the US.“Stabilisation, much less recovery, is not expected in 2025,” said Yuhan Zhang, principal economist at the Conference Board’s China Center. He added that “oversupply remains a serious challenge”, though he noted that inventory levels were expected to rise less quickly than last year.John Lam, property analyst at UBS, said uncertainty around tariffs had delayed a recovery in tier-one cities in April but stabilisation might still be possible in the fourth quarter. Yi Wang, a Goldman Sachs property analyst, said she did not expect spot prices in the primary or secondary markets to stabilise until the second half of next year.Further afield, the nationwide picture poses an acute challenge to policymakers. Goldman Sachs on Monday forecast that urban demand for new properties would remain below 5mn units per year in the coming years, down from a peak of 20mn in 2017.Han Jun, who runs a trade advisory business in the textile manufacturing capital of Keqiao in coastal Zhejiang province, said last month that local housing prices had fallen about one-third from their peak. “They keep going down, and it doesn’t look like it’s turning around,” he said.Li, in comments that were read out on state broadcaster CCTV, called on policymakers to “focus on the long term”.But if there are still doubts over China’s richest cities, the recovery remains even more uncertain outside of them.“We go as far as saying, just write off the lower tier,” said Kwok at HSBC. “We just have to accept that it’s not going to be a ‘rising tide lifts all boats’ coming out of this crisis.”Additional reporting by Ryan McMorrow in Shaoxing, Wenjie Ding in Beijing and Wang Xueqiao in Shanghai More