Finance

It matters when electricity is produced. A barrel of oil may be a barrel of oil whether it is pumped at midday or midnight, but a megawatt hour (mwh) of electricity is worth a great deal less when you are sleeping than during the middle of the day or, indeed, during moments when everyone decides to boil the kettle. The difficulty of bottling electricity makes its economics unusual: it is a question not just of “how much” but also “when”.At the same time, if there is one thing that everyone knows about renewable energy, it is that it is getting cheaper. Each year, or so the story goes, the costs of wind and solar power fall as the world improves its ability to harness natural resources. In 2014 the levelised cost of offshore wind, a measure for comparing different methods of generating electricity, was around $200 per mwh, according to America’s Energy Information Administration (eia), an official agency; by 2023 it had fallen to $127, excluding subsidies. Yet the industry is struggling. Six state governors recently begged Joe Biden to intervene to keep producers alive, according to Bloomberg, a news service. In Britain the latest annual offshore wind auction attracted no bids whatsoever.To understand what is going on, consider the levelised cost of energy in more detail. Do away with sun and wind, too, and return to a world where the choice is gas, coal or nuclear energy. These differ in terms of both their fixed and variable costs. The costs of a nuclear plant are mostly fixed: once built it is inexpensive to produce another unit of electricity. Natural-gas plants are the opposite: most of the costs are the fuel, and are thus variable.A levelised cost means taking these fixed and variable costs over the lifetime of the plant and weighting them by the expected number of watt-hours the plant will produce. This gives a comparable measure. According to the eia, the levelised cost of nuclear power is $91 per mwh. Natural gas comes to $43. Compare that with expectations for the price of electricity and you should have a good idea of whether or not a new plant is worthwhile.Yet these costs vary depending on how often a source is producing energy. A nuclear plant will be cheapest if it is running constantly, as the high upfront costs will have produced greater output. Gas, with low fixed costs and high variable costs, has lower economies of scale. Coal sits somewhere between the two. Considered purely on the financial merits, the optimal power mix is to have nuclear cover the “baseload”, or minimal level of demand, coal for the “mid-load” and, finally, natural gas for the “peak load”, when demand is highest. Add a carbon price and the coal will be displaced by natural gas, which is less dirty, as has happened in Europe over the past few decades.Unfortunately, this dynamic is upset by renewables, which provide power according to the weather and often require the rest of the energy system to accommodate them. Gas, with its low fixed but high variable costs, can do so easily. Nuclear, with high fixed and low variable costs, becomes much more expensive. It is costly to build a nuclear power plant to cover only the windless hours.As such, solar panels and wind turbines are themselves less beneficial than they might seem. If they cannot reliably produce electricity when it is needed, then their generating capacity is not as valuable as that of a regular power plant. To truly compare the two requires a measure of not just how much each megawatt hour costs to produce, but the value of that particular hour.In an idealised market, with prices updating moment-to-moment and geographically from node-to-node on the grid, the relative benefit of any energy source would be easy to calculate: it would depend on the “capture rate”. This is the difference between the market price that a source receives and the average price for electricity over a period. Prices should be higher when people most want electricity, boosting the capture rate of sources that produce at that time. Fortunately for renewables, this is usually during daylight hours, making solar useful, or during the cold windy months. But as more renewables join the grid the capture rate will fall, since an abundance of solar panels means that when it is sunny electricity prices are very low, or even negative.Consider these costs, as measured by the eia in America, and most renewables look less competitive: solar’s cost of $23 per mwh falls below an average capture rate of $20 for the electricity generated. That is still sufficiently good to beat everything other than onshore wind, geothermal energy and adding more battery storage to the grid. Offshore wind, by contrast, looks downright uncompetitive: the capture rate of its electricity is around $30 compared with a cost of $100 per mwh—only nuclear and coal have lower ratios. Add in rising costs, due to higher interest rates and disrupted supply chains, and it is no wonder many offshore-wind providers are struggling.Scottish powerMost electricity markets are not ideal. Prices do not reflect the true value of time and place, meaning they are not a perfect guide to how much society wants each mwh of electricity. Look at Britain. Wholesale electricity prices are settled for half-hour blocks, which should mean pricing will give a decent idea if renewables are producing at the wrong times of day. But there is only one price for the whole country. Most onshore wind is in Scotland, since England until recently had a de facto ban on building such wind farms, though more of the demand for electricity is in the south of England. A lack of capacity on the grid to move the electricity south means that the grid manager pays to turn off Scotland’s wind turbines while gas power plants in England are turned on.Eventually, increasing the grid’s capacity to shift and store electricity will solve such problems. But for the moment, comparing costs with the capture rate would not give an accurate idea of the relative benefits of building more Scottish wind power. The true costs of renewable energy are greater than they appear. ■Read more from Free exchange, our column on economics:Does China face a lost decade? (Sep 10th)Argentina needs to default, not dollarise (Sep 7th)How will politicians escape enormous public debts? (Aug 31st)For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

When russia invaded Ukraine, panic gripped Europe’s nuclear experts—the civilian variety, that is. Ukraine, where 15 reactors relied on Russia for their uranium, rushed to sign an unusually long 12-year deal with Canada. European utilities, also reliant on Russia, drew the maximum they could under other contracts. Most exposed were operators in Finland and eastern Europe that owned Russian-made reactors, which only Russian firms knew how to feed. Finding an American rival that could bundle uranium rods into the hexagonal blocks such plants demand took a year. Now they are searching for the metal needed to restart the atomic Tetris.Such last-minute procurement of uranium is very rare, notes Per Jander of wmc, a trader. Utilities usually take deliveries two to three years after signing a contract. The scramble is just one illustration of the fallout of the war on a once-sedate market already squeezed by rising demand, supply shocks and speculation. In the week to September 18th uranium’s spot price hit $65 a pound, its highest since 2011, reports uxc, a data firm. At the industry’s yearly shindig in London, which drew a record 700 delegates this month, some warned it could reach $100. The two largest producers are sold out until 2027; some utilities are thought to be short for 2024.image: The EconomistJust 85,000 tonnes of uranium are used each year. This compares with 170,000 for niche metals like cobalt and many millions for industrial ones like copper. Unlike coal or gas plants, nuclear reactors cost a lot to build but little to run, so utilities mostly opt to keep them going regardless of, say, the economic cycle, making demand for fuel predictable. It also means that utilities cannot afford to run out, which is why they buy the stuff via long-term contracts.Most supply comes directly from mines. Canada and Kazakhstan, two reliable exporters, account for 60% of such “primary” supply. A quarter of total global supply arrives from “secondary” sources. Exhausted fuel blocks, replaced every three-to-four years, are re-enriched and re-used. Fuel is also made by diluting weapons-grade uranium, which contains more than 90% fissile elements, to concentrations of just 3-4%. In the two decades following the cold war the dilution of just 30 tonnes a year displaced 10,000 tonnes of annual mine output. More supply is regularly released from stockpiles. America, China, France and Japan hold a combined stash worth years of global use, which can be drawn from when prices are high.This tranquil trade is now being rocked by two forces. One is resurgent demand. For years after the Fukushima disaster in 2011 the closure of plants in Japan, Germany and elsewhere pushed the market into surplus. But the search for steady sources of low-carbon power, and Russia’s war in Ukraine, have led governments back to nuclear energy, which emits about the same as wind power and can operate even if pipelines are shut. Some 60 new reactors are under construction, which should add an additional 15% to the world’s nuclear-power-generation capacity over the next decade, reckons Liberum, a bank. Small “modular” reactors—cheap and easy to build—could turbocharge demand for fuel. The World Nuclear Association, an industry body, forecasts that they could make up half of France’s nuclear capacity by 2040.Uranium’s glowing prospects are not lost on financiers. In recent years several listed funds have launched. Sprott Physical Uranium Trust and Yellow Cake, the two biggest, have bought 22,000 tonnes in the past two years, equivalent to over a quarter of annual demand. Both are set up for the long run, with no fixed date or target price at which they will liquidate their holdings.Meanwhile, supply is looking precarious—the second reason why prices are soaring. Early panic aside, Russian ores can still be obtained. But a coup in Niger in July has put 4% of mined supply in jeopardy. Last week Orano, France’s state-owned giant, said it had halted its ore processing there owing to a lack of critical chemicals. Logistical headaches are causing Kazatomprom, the leading Kazakh supplier, to ship less uranium than expected (it typically passes through Russia). Cameco, Canada’s champion, recently cut its production forecast by 9% after hiccups at two mines.All this will probably keep the market in deficit next year, as it has been since 2018. Outright shortages remain unlikely, however. Major utilities retain stocks. And the fuel blocks inserted into operating reactors have another one-to-three years of life left, with a year’s extension possible at limited costs. Most also have the next block ready to go. Thus the risk of running out lies more than four years ahead.That leaves time for supply to respond. Cameco and Kazatomprom, which have lots of unused capacity after trimming output during the dreary 2010s, will not like to see higher-cost producers nab market share. Tom Price of Liberum estimates that they could add another 15-20% to global supply in as little as 12-18 months. If that fails to tame the market, then a sustained rise in price will incentivise the opening of new mines. Jonathan Hinze of uxc reckons a spot price of $70-80 would be enough to get many projects started. Supply snags are also unlikely to last too long. Niger’s junta has a beef with France, but not with China, which runs other mines in the country. If all else fails, Kazatomprom can always decide to export uranium by plane.So the most likely outcome is high prices for a few years, with a surplus returning by the middle of the decade. No one anticipates a repeat of 2007, when buying by the first uranium fund and floods at big mines combined to push the spot price beyond $135 a pound. Utilities have ample room for absorbing price shocks anyway. Because uranium is heavily processed, raw materials are worth less than half as much as finished fuel, which itself accounts for just 10% of a plant’s operating costs (against 70% for natural gas). The rally matters more to speculators than to the cost of what comes out of your socket. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

If you ever hear a professional investor talk about a trade that taught them a lot, prick up your ears. Usually, this is code for “a time I lost an absolutely colossal amount of money”, and you are in for one of the better stories about how finance works at the coalface.On this front, Victor Haghani is a man to whom it is worth listening. He spent the mid-1990s as a partner and superstar bond trader at the hottest hedge fund on Wall Street. In its first four years, Long-Term Capital Management (ltcm) made its initial backers average returns of more than 30% a year and never lost money two months in a row. Moreover, its partners had been trading the capital of Salomon Brothers, an investment bank, for the preceding 20 years, with similar results. But in 1998 the wheels came off in spectacular fashion. ltcm lost 90% of its capital at a stroke. Despite a $3.6bn bail-out from a group of its trading counterparties, the fund was liquidated and its partners’ personal investments wiped out. Mr Haghani writes that he took “a nine-figure hit”.Now, along with his present-day colleague James White, he has written a book that aims to spare other investors his mistakes. Fortunately, “The Missing Billionaires” is not a discussion of the minutiae of ltcm’s bond-arbitrage trades. Instead, it examines what its authors argue is a much more important—and neglected—question than picking the right investments to buy or sell: not “what” but “how much”.People tend to answer this question badly. To show this, the book describes an experiment in which 61 youngsters (college students of finance and economics, plus some young professional financiers) were given $25 and asked to bet on a rigged coin at even odds. Each flip, they were told, had a 60% chance of coming up heads. They had time for about 300 tosses, could choose each bet’s size and would keep their winnings up to a cap of $250. This was an exceptionally good deal: simply betting 10% of the remaining pot on each toss had a 94% chance of yielding the maximum payout and none of going bust. Yet the players’ average payout was just $91, only a fifth of them hit the cap and 28% managed to lose everything.A list of the coin-flippers’ mistakes reads like a parable of how not to invest in the stockmarket. Rather than picking a strategy and sticking to it, subjects bet erratically. Nearly a third wagered their entire pot on a single flip and, amazingly, some did so on the 40% chance of getting tails. Many doubled down on losses, even though doing so is a reliable way of making mild ones catastrophic. Others made small bets fixed in dollar amounts, avoiding ruin but also giving up the lion’s share of their potential returns. Few considered the optimal, lucrative strategy of betting a constant fraction of their wealth on an attractive opportunity.The rest of the book offers a corrective to these wealth-sapping instincts. Most important is to devise rules for spending, saving and allocating investments, expressed as fractions of your total wealth. Then you must stick to them, avoiding the temptation to chase hot assets or spend too much in the face of losses.The authors’ great success is in offering a consistent and explicit framework within which to do all this. At its core is the concept of “expected utility”, or the pleasure derived from a given level of wealth. This accounts for the fact that most people are averse to risking large chunks of their capital. A happy consequence is that sizing investments to maximise expected utility, rather than wealth, can sharply reduce your chances of intolerable losses while keeping enough risk for a shot at decent returns.In practical terms, the book’s crowning achievement is its explanation of the “Merton share”. This is a simple rule of thumb for determining asset allocation, which says that allocations should rise in proportion to expected returns, fall in proportion to the investor’s risk aversion and fall a lot in proportion to volatility (specifically, to its square).This is not to suggest the book makes for light reading. The authors prescribe calculations that will appeal to only the most dogged investors, ideally with access to a Bloomberg terminal. Most will conclude that they need a wealth-management firm to help them; conveniently enough, Messrs Haghani and White run one. Yet for those investing in their own business—or, indeed, a hotshot hedge fund—it is worth reading simply for Mr Haghani’s reflection on how much he ought to have ploughed into ltcm all those years ago. Spoiler alert: it was rather less than he did. ■Read more from Buttonwood, our columnist on financial markets: Why diamonds are losing their allure (Sep 13th)Should you fix your mortgage for ever? (Sep 7th)High bond yields imperil America’s financial stability (Aug 29th)Also: How the Buttonwood column got its name More

Macau is best known as the casino capital of Asia. But the former Portuguese colony, on China’s south coast, is hoping to gain a reputation for more reputable ways to make money. In August trading began on the mcex, an over-the-counter market that is the first of its kind. Investors are not exchanging currencies, debt or equity. Instead, they are buying the future revenues of businesses in mainland China.If successful, the exchange may help solve a problem that plagues smaller firms both in China and elsewhere: the difficulty of finding finance. Charles Li, a former boss of Hong Kong’s stock exchange and the creator of the new market, has said that investors tend to eschew lending to such businesses simply because the risks and rewards are poorly matched, with borrowers burdened if a venture flops and financiers short-changed if it goes well. For bigger companies, the solution is listing on a public market—something beyond the means of their smaller peers.Mr Li believes he may have solved this mismatch. mcex allows investors to buy and sell a new type of financial instrument called a Daily Revenue Obligation (dro). Contract owners gain a fraction of a business’s revenue for a fixed period of time, in effect buying the right to future income. Issuance has been strong. dros worth almost 2.2bn yuan ($300m) were offered on the exchange in the first month of trading.Selling future revenues is a good deal for small firms. Owners get access to capital without diluting their stake and without repayment obligations. For investors, the advantage is less clear (indeed, no information is available about their appetite so far). Micro Connect, which owns the exchange, claims they can enjoy “equity-like returns”. Their exposure is, however, rather large. Small firms often fail. Whereas a loan secured against assets has limited downside for its financier, the risk for a dro holder is limited only by the size of the investment. They have no claims on the assets of the business if it goes bankrupt.But Micro Connect does have a couple of selling points. If financial instruments designed to fund firms that banks won’t lend to and investors won’t buy sounds unpalatable, allocators can diversify their risk by buying up pools of dros, known as a “Daily Revenue Portfolio”. The underlying dros are unrated, but the pools are given a risk indicator under a framework developed by a Chinese rating agency, which relies on predictions of cash flows.Mr Li’s financial innovation also offers foreign investors something valuable: access to China. After decades of trying, overseas investors still have few good options. Cross-border private-equity deals have collapsed; “keepwell agreements”, between parent firms and subsidiaries, have been the subject of years-long court disputes. mcex promises to be different. dros are Macau-issued copies of contracts agreed on the mainland. Micro Connect takes on the enforcement risk in mainland China and offers investors the assurance of a contract enforceable under Macanese law.The company that issues a dro will have its revenues verified and disbursed by local banks each day, and recorded on a blockchain, providing investors with real-time insight into the performance of the business in which they have an interest. Although technology cannot eliminate accounting trickery, such as changing when invoices are issued, it can prevent fraud. It is almost impossible for a business to earn and not disclose cash revenues in China’s entirely digitised economy.China’s entrepreneurs may be especially eager to make use of the scheme now. Banks are scrutinising lending more closely owing to the economy’s struggles, so firms are looking elsewhere for capital. Many are turning to outfits beyond the banking system, known as “shadow lenders”, from which China Beige Book, a data firm, says borrowing is at near-record highs as a share of total lending. This helps explain why China’s smaller firms are keen. Whether these are the sorts of businesses in which foreign investors want to invest is another question entirely. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

Chinese electric car brand Nio released an Android smartphone on Thursday.
The company’s CEO William Li spoke with CNBC in an exclusive interview.
Nio doesn’t have plans to release the smartphone in Europe – until the market grows larger, Li said.

SHANGHAI — Chinese electric car brand Nio on Thursday released an Android smartphone, which the company expects at least half its users to buy, CEO William Li told CNBC in an exclusive interview ahead of the launch.
The phone, priced from around $900 to $1,000, is an Android device that’s about $150 cheaper versus a comparable Huawei phone, Li said in Mandarin.

He told CNBC that among Nio users from which the company makes a profit, more than half are iPhone users, while the other half uses flagship Android phones from Huawei and other brands.
“I believe this portion of users are very likely to use this new form [of device] when they are changing their phones,” Li said according to a CNBC translation, citing the phone’s overall performance and car connectivity.
Nio is the first high-end Chinese electric car brand to release its own smartphone, which Li said the company developed in about a year. Electric car companies in China have sought to make in-car entertainment and mobile phone connectivity a selling point for their vehicles.
Delivery starts on Sept. 28, with orders starting immediately.

Chinese electric vehicle maker Nio launches a smartphone at an event in Shanghai on Sept. 21, 2023.
Evelyn Cheng | CNBC

Swedish electric car maker Polestar, which counts China as a major market, told CNBC earlier this month it plans to launch a phone in December.

Smartphone companies Apple and Xiaomi have long been reportedly working on their own cars.
Less than two years ago, Huawei released the Aito brand, which sells electric cars in China that are integrated with the smartphone company’s operating system. Huawei also sells its in-car software to other electric car companies such as Avatr and BAIC’s Arcfox.
That connectivity allows drivers to sync their personal device settings — such as for music — with the car. Nio also has a standalone mobile app.

A smartphone for cars

While the new Nio device resembles a typical smartphone, it comes with a special button that acts as a key for the car, Li told CNBC on Wednesday.
The Nio smartphone also allows users to connect more seamlessly with the car, such as when transitioning between the phone and the vehicle during online meetings, he said.

What we are pursuing is the car experience and the emotional experience we can provide to our users.

William Li

The new device is an opportunity for Nio to make more money per user.
“We pay more attention to the value that each user brings to our entire brand, and it is more convenient to connect users. It is also more efficient than before,” Li said. “What we are pursuing is the car experience and the emotional experience we can provide to our users.”
The phone is available to all consumers in China, not just those who own Nio cars, Li added.
He pointed out that the Nio phone app has 600,000 active users a day, about 1.5-times the number of car users.
Nio’s monthly deliveries rose to around 20,000 in August and July, after a decline in delivery volume the prior three months.

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Nio shares

In the second quarter ended June 30, Nio reported that revenue from the “other sales” category was mainly driven by a boost in the sales of used cars, accessories and power services, which more than doubled from a year ago to 1.59 billion yuan ($217.86 million) despite a decline in total revenue.
The company attributed the year-on-year and quarter-on-quarter increase in other sales to “continued growth of our users.”

Europe market

However, Nio doesn’t have plans to release the smartphone in Europe — at least not until the market grows larger, Li said.

Nio holds a product event in Shanghai on Sept. 21, 2023.
Evelyn Cheng | CNBC

Nio is in five countries in Europe, including Germany, and the company needs time to focus on developing local car services, Li said, noting those are important for auto products.
When asked about the European Union’s anti-subsidy probe into Chinese EVs, Li said the company was still learning the details.

We believe time is still on Nio’s side.

William Li

It’s more important for the world to cooperate, especially on addressing climate issues, he added.
“I don’t think anyone should block users from using good products through multiple ways” such as investigations, he said.

Investing for the future

In China, the penetration of new energy vehicles has expanded quickly, but an overall slowdown in economic growth has weighed on the market.
Competition in the domestic electric car market is “fierce,” Li said, noting challenges for industry peers as well.
But he expects business investments will help Nio create barriers to entry. “We believe time is still on Nio’s side,” Li said.
He noted the company spends about $500 million on research and development every quarter. Other major areas of investment for the company, he said, are battery charging and development of a mass market brand.

Read more about China from CNBC Pro

Nio previously said it plans to release a vehicle in the second half of next year under the mass market brand “Alps.”
The company has faced financing challenges more than once since its founding in late 2014. Earlier this year, Nio said it was delaying some spending plans due to lackluster deliveries.
But the company subsequently received nearly $740 million from an Abu Dhabi-backed fund. Nio also announced this week a refinancing plan for a portion of its debt. More

The Federal Reserve held interest rates steady, while also indicating it still expects one more hike before the end of the year and fewer cuts than previously indicated next year.
Along with the rate projections, the Fed also sharply revised up its economic growth expectations for this year, with gross domestic product now expected to rise 2.1% this year.
In addition to holding rates at relatively high levels, the Fed is continuing to reduce its bond holdings, a process that has cut the central bank balance sheet by some $815 billion since June 2022

The Federal Reserve held interest rates steady in a decision released Wednesday, while also indicating it still expects one more hike before the end of the year and fewer cuts than previously indicated next year.
That final increase, if realized, would do it for this cycle, according to projections the central bank released at the end of its two-day meeting. If the Fed goes ahead with the move, it would make a full dozen hikes since the policy tightening began in March 2022.

Markets had fully priced in no move at this meeting, which kept the fed funds rate in a targeted range between 5.25%-5.5%, the highest in some 22 years. The rate fixes what banks charge each other for overnight lending but also spills over into many forms of consumer debt.
While the no-hike was expected, there was considerable uncertainty over where the rate-setting Federal Open Market Committee would go from here. Judging from documents released Wednesday, the bias appears toward more restrictive policy and a higher-for-longer approach to interest rates.
That outlook weighed on the market, with the S&P 500 falling nearly 1% and the Nasdaq Composite off 1.5%. Stocks oscillated as Fed Chair Jerome Powell took questions during a news conference.
“We’re in a position to proceed carefully in determining the extent of additional policy firming,” Powell said.
However, he added that the central bank would like to see more progress in its fight against inflation.

“We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress and we welcome that. But, you know, we need to see more progress before we’ll be willing to reach that conclusion,” he said.
Projections released in the Fed’s dot plot showed the likelihood of one more increase this year, then two cuts in 2024, two fewer than were indicated during the last update in June. That would put the funds rate around 5.1%. The plot allows members to indicate anonymously where they think rates are headed.
Twelve participants at the meeting penciled in the additional hike, while seven opposed it. That put one more in opposition than at the June meeting. Recently confirmed Fed Governor Adriana Kugler was not a voter at the last meeting. The projection for the fed funds rate also moved higher for 2025, with the median outlook at 3.9%, compared with 3.4% previously.
Over the longer term, FOMC members pointed to a funds rate of 2.9% in 2026. That’s above what the Fed considers the “neutral” rate of interest that is neither stimulative nor restrictive for growth. This was the first time the committee provided a look at 2026. The long-run expected neutral rate held at 2.5%.
“Chair Powell and the Fed sent an unambiguously hawkish higher-for-longer message at today’s FOMC meeting,” wrote Citigroup economist Andrew Hollenhorst. “The Fed is projecting inflation to steadily cool, while the labor market remains historically tight. But, in our view, a sustained imbalance in the labor market is more likely to keep inflation ‘stuck’ above target.”

Economic growth seen higher

Along with the rate projections, members also sharply revised up their economic growth expectations for this year, with gross domestic product now expected to increase 2.1% this year. That was more than double the June estimate and indicative that members do not anticipate a recession anytime soon. The 2024 GDP outlook moved up to 1.5%, from 1.1%.

The expected inflation rate, as measured by the core personal consumption expenditures price index, also moved lower to 3.7%, down 0.2 percentage point from June, as did the outlook for unemployment, now projected at 3.8%, compared with 4.1% previously.
There were a few changes in the post-meeting statement that reflected the adjustment in the economic outlook.
The committee characterized economic activity as “expanding at a solid pace,” compared with “moderate” in previous statements. It also noted that job gains “have slowed in recent months but remain strong.” That contrasts with earlier language describing the employment picture as “robust.”
In addition to holding rates at relatively high levels, the Fed is continuing to reduce its bond holdings, a process that has cut the central bank balance sheet by some $815 billion since June 2022. The Fed is allowing up to $95 billion in proceeds from maturing bonds to roll off each month, rather than reinvesting them.

A shift to a more balanced view

The Fed’s actions come at a delicate time for the U.S. economy.
In recent public appearances, Fed officials have indicated a shift in thinking, from believing that it was better to do too much to bring down inflation to a new view that is more balanced. That’s partly due to perceived lagged impacts from the rate hikes, which represented the toughest Fed monetary policy since the early 1980s.
There have been growing signs that the central bank may yet achieve its soft landing of bringing down inflation without tipping the economy into a deep recession. However, the future remains far from certain, and Fed officials have expressed caution about declaring victory too soon.
“We, like many, expected to see the hawkish hold that Powell nodded to at Jackson Hole,” said Alexandra Wilson-Elizondo, deputy chief investment officer of multi-asset strategies at Goldman Sachs Asset Management. “However, the release was more hawkish than expected. While a share of past policy tightening is still in the pipeline, the Fed can go into wait and see mode, hence the pause. However, the main risk remains tarnishing their largest asset, anti-inflation credibility, which warrants favoring a hawkishness reaction function.”

The recent rise in energy prices as well as resilient consumption is likely why the median dot moved higher next year, she said.
“We don’t see a singular upcoming bearish catalyst, although strikes, the shutdown, and the resumption of student loan repayments collectively will sting and drive bumpiness in the data between now and their next decision. As a result, we believe that their next meeting will be live, but not a done deal,” Wilson-Elizondo said.
The jobs picture has been solid, with an unemployment rate of 3.8% just slightly higher than it was a year ago. Job openings have been coming down, helping the Fed mark progress against a supply-demand mismatch that at one point had seen two positions for every available worker.
Inflation data also has gotten better, though the annual rate remains well above the Fed’s 2% target. The central bank’s favored gauge in July showed core inflation, which excludes volatile food and energy prices, running at a 4.2% rate.
Consumers, who make up about two-thirds of all economic activity, have been resilient, spending even as savings have diminished and credit card debt has passed the $1 trillion mark for the first time. In a recent University of Michigan survey, respective outlooks for one- and five-year inflation rates hit multiyear lows.
Correction: The Federal funds target rate is a range of 5.25-5.5%. A previous version of this story misstated the end point of the range. More

Justin Sullivan | Getty Images

Check out the companies making headlines in midday trading.
Instacart — Instacart shares fell nearly 11% one day after going public on the Nasdaq. The grocery deliver company’s stock debuted at $42 on Tuesday, 40% above its $30 offering price.

Steelcase — The furniture stock soared more than 19% after posting second-quarter earnings that topped Wall Street’s expectations and offered strong full-year and third-quarter earnings guidance as more companies return to work. Excluding items, Steelcase posted earnings of 31 cents per share on revenue of $854.6 million.
Klaviyo — Klaviyo shares jumped more than 9% after the marketing automation company surged to $36.75 after its New York Stock Exchange initial public offering. The company priced 19.2 million shares late Tuesday at $30 per share, valuing the company at roughly $9 billion.
Bausch Health Companies — Bausch Health Companies surged 8% after Jefferies upgraded the drugmaker to a buy from hold, saying that a looming legal win could lead shares to more than double.
Stellantis — Shares rose about 1.7% after sales in Europe of brands such as Peugeot and Opel surged more than 6% in August. In the U.S., the Chrysler-Jeep parent warned that the United Auto Workers strike could result in more than 350 layoffs.
Pinterest — Shares added 3.1%, continuing their rally from Tuesday after management said it expects year-over-year revenue growth to accelerate after a slowdown the last two years. Citi and D.A. Davidson upgraded Pinterest to buy and increased their price targets on Wednesday to reflect the announcement.

General Mills — Shares of the Cheerios and Yoplait maker were flat after beating analyst expectations for its fiscal first-quarter earnings results. The firm’s revenue came in at $4.9 billion, versus the $4.88 billion forecast by analysts polled by LSEG, formerly known as Refinitiv.
Coty — Shares popped 4.5% after the cosmetics maker raised its full-year outlook for 2024, due to strong momentum in beauty demand, particularly in its prestige fragrances category. Coty said it anticipates like-for-like sales to grow 8% and 10% next year, compared to prior guidance of 6% to 8%.
Zebra Technologies — Shares of Zebra Technologies shed more than 6% after Morgan Stanley downgraded the company to underweight from equal weight, citing expectations for a slower recovery in demand.
Textron — Textron shares jumped nearly 5% after siging an agreement with Berkshire Hathaway-owned NetJets. As part of the deal, NetJets may purchase up to 1,500 additional Cessna Citation business jets over the next 15 years.
Chewy — Shares of the e-commerce pet food company slid more than 5% after Oppenheimer downgraded it to perform from outperform. The investment firm said signs of weakness in the pet category signaled a more challenging environment for Chewy in the coming quarters.
On Holding — The shoe stock rose finished lower ever after Needham initiated coverage with a buy rating. The firm said On Holding is one of the fastest-growing stories in retail and at the early stage of its business cycle.
Lululemon — The athleisure clothing company rose nearly 2% after Needham initiated coverage with a buy rating, saying it expects double-digit top-line growth as accelerating technical innovation drives demand.
Azul — The Latin American airline rose almost 12% following an upgrade to buy from neutral at Goldman Sachs, which said Azul has an “undemanding valuation.”
Build-A-Bear Workshop — The stuffed animal retailer jumped 4% after D.A. Davidson initiated coverage on the stock at a buy. The firm called Build-A-Bear an “iconic” company and an underappreciated small-cap growth idea.
First Citizens BancShares — Shares cadded 1.8% after JPMorgan initiated coverage of First Citizens BancShares at overweight, saying it’s set to benefit from the assets it bought from failed Silicon Valley Bank.
— CNBC’s Alex Harring, Hakyung Kim, Jesse Pound, Michelle Fox, Sarah Min, Yun Li and Lisa Kailai Han contributed reporting. More

Federal Reserve Board Chair Jerome Powell speaks during a news conference following a Federal Open Market Committee meeting at the Federal Reserve in Washington, D.C., on July 26, 2023.
SAUL LOEB | Getty

The Federal Reserve stayed put on Wednesday but forecast it will raise interest rates one more time this year, according to the central bank’s projections released Wednesday.
Projections released by the Fed showed the central bank would hike rates to a median 5.6% by the end of 2023, up from the current range between 5.25% and 5.5%. Twelve Fed officials at the meeting penciled in the additional hike, while seven opposed it. There are two more policy meetings left in the year.

The rate-setting Federal Open Market Committee projected two rate cuts in 2024, which is two fewer than its forecast in June. That would put the funds rate around 5.1%.
The change to fewer projected rate cuts next year has more to do with Fed officials’ optimism about economic growth than concerns about stubborn inflation, Fed Chair Jerome Powell said in a press conference.
“Broadly, stronger activity means we have to do more with rates, and that’s what that meeting is telling you,” Powell said.
The dot plot also moved higher for 2025, with the median outlook at 3.9%, compared to 3.4% previously.
Here are the Fed’s latest targets:

Arrows pointing outwards

Fed members also updated their Summary of Economic Projections, revising their 2023 economic growth expectations up sharply. The Committee now expects gross domestic product to increase 2.1% this year, more than double the 1% estimate from June.
As for inflation, the Fed expects that the core personal consumption expenditures price index would slow to 3.7%, down 0.2 percentage points from June’s forecast.
Powell said the Fed is not yet fully convinced that inflation is on the right path.
“We want to see convincing evidence really that we have reached the appropriate level, and we’re seeing progress and we welcome that,” Powell said. “We need to see more progress before we’ll be willing to reach that conclusion.”
The projection for the unemployment rate now stands at 3.8% for 2023, compared to 4.1% previously.
— CNBC’s Jeff Cox and Jesse Pound contributed reporting. More