Finance

It was never in doubt. In the run-up to the Federal Reserve’s meeting this week, investors assigned a probability of nearly 99% to a decision by the central bank to raise interest rates once again. On July 26th policymakers duly fulfilled those expectations, with their 11th increase in 12 meetings, together making for America’s sharpest course of monetary tightening in four decades. The central bank’s next steps, however, are clouded by uncertainty.Some economists are convinced that this will be the Fed’s last rate rise in this cycle. Inflation has come down from its highs in 2022, with consumer prices rising just 3% year-on-year in June. Core inflation—which strips out volatile food and energy costs—has been a little more stubborn, but even it has started to soften, in a sign that underlying price pressures are easing. This opens a pathway for the Fed to relent, hopefully guiding America to a much-discussed soft landing. Ellen Zentner of Morgan Stanley, a bank, expects an “extended hold” for the Fed, presaging a rate cut at the start of next year. Others are not so sure. Inflation has consistently wrong-footed optimists over the past couple of years. Were, for instance, energy prices to rally, consumers and businesses could quickly revise up their expectations for inflation, nudging the Fed towards another rate increase. If an incipient rebound in housing prices gathers pace, that would also fuel concerns. Vigour in the labour market adds to the worries, because fast-rising wages feed into inflation. Remarkably, the Fed’s aggressive actions have barely affected American workers thus far: the unemployment rate today is 3.6%, identical to its level in March 2022 when the Fed raised rates for the first time in this cycle (see chart). The pace of tightening would normally be expected to drive up unemployment. Instead, the recovery from the covid-19 pandemic, including an increase in the number of willing workers, seems to have cushioned the economy.Opposing views among economists are mirrored within the Fed itself. For the past two years America’s central bankers have spoken in similar terms about the peril of inflation, and have been nearly unanimous when it comes to big rate moves. In recent months, however, divisions have surfaced. Christopher Waller, a Fed governor, has come to represent the more hawkish voices. This month he warned that the central bank could continue raising rates until there is sustained improvement in inflation, dismissing the over-optimism bred by the weaker-than-expected price figures for June. “One data point does not make a trend,” he warned. At the other end of the spectrum is Raphael Bostic, president of the Fed’s Atlanta branch, who said even prior to the latest rate increase that the central bank could stop hiking. “Gradual disinflation will continue,” he assured listeners in late June.Even if the latest rate increase does end up marking the peak for the Fed, Jerome Powell, its chairman, has maintained a hawkish tilt in his pronouncements. “What our eyes are telling us is that policy has not been restrictive enough for long enough,” he told a press conference following the rate hike. Financial conditions have loosened in recent months. The s&p 500, an index of America’s biggest stocks, is up nearly one-fifth from its lows in March, when a handful of regional banks collapsed. With his sterner tone, Mr Powell may want to restrain investors from getting ahead of themselves, which could add to inflationary momentum.Central bankers wanting to preserve their reputations as inflation-fighters may prefer to err towards toughness. Steven Englander of Standard Chartered, a bank, likens the Fed to a weather forecaster who thinks there is a 30% chance of rain. It still makes sense to highlight the potential for wet weather, because predicting sun but getting rain is perceived as worse than predicting rain and ending up with sun.In practice, the Fed is sure to be flexible, reacting to economic data. It can look north of the American border for an example of the impossibility of maintaining a fixed policy stance. The Bank of Canada had stopped its rate-rise cycle in January, thinking that inflation had crested. But in June it was forced to resume tightening because economic growth had remained too hot, and inflation too sticky, for comfort.Ultimately, though, there are no risk-free choices for the Fed. What is seen as the more doveish option—holding rates steady for the rest of this year—will in fact take on an increasingly hawkish hue if inflation does continue to recede. Unchanged nominal rates would be ever more restrictive in real terms (assuming that inflationary expectations diminish alongside waning price pressures). In such a scenario central bankers wishing to maintain their current policy stance should therefore think about cutting rates (see chart). When inflation was sky-high, the Fed’s task was tough yet its decisions quite straightforward: officials did not really have much choice but to raise rates. From here on, its task looks easier but its decisions more fraught. ■ More

The Federal Reserve approved a much-anticipated interest rate hike that takes benchmark borrowing costs to their highest level in more than 22 years.
The quarter percentage point increase will bring the fed funds rate to a target range of 5.25%-5.5%.
While policymakers indicated at the June meeting that two rate hikes are coming this year, markets are pricing in a better-than-even chance that there won’t be any more moves this year.
Chair Jerome Powell said the central bank will make data-driven decisions on a “meeting-by-meeting” basis.

WASHINGTON – The Federal Reserve on Wednesday approved a much-anticipated interest rate hike that takes benchmark borrowing costs to their highest level in more than 22 years.
In a move that financial markets had completely priced in, the central bank’s Federal Open Market Committee raised its funds rate by a quarter percentage point to a target range of 5.25%-5.5%. The midpoint of that target range would be the highest level for the benchmark rate since early 2001.

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Markets were watching for signs that the hike could be the last before Fed officials take a break to watch how the previous increases are impacting economic conditions. While policymakers indicated at the June meeting that two rate rises are coming this year, markets have been pricing in a better-than-even chance that there won’t be any more moves this year.
During a news conference, Chairman Jerome Powell said inflation has moderated somewhat since the middle of last year, but hitting the Fed’s 2% target “has a long way to go.” Still, he seemed to leave room to potentially hold rates steady at the Fed’s next meeting in September.
“I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted,” said Powell. “And I would also say it’s possible that we would choose to hold steady and we’re going to be making careful assessments, as I said, meeting by meeting.”
Powell said the FOMC will be assessing “the totality of the incoming data” as well as the implications for economic activity and inflation.
Markets initially bounced following the meeting but ended mixed. The Dow Jones Industrial Average continued its streak of higher closings, rising by 82 points, but the S&P 500 and Nasdaq Composite were little changed. Treasury yields moved lower.

“It is time for the Fed to give the economy time to absorb the impact of past rate hikes,” said Joe Brusuelas, U.S. chief economist at RSM. “With the Fed’s latest rate increase of 25 basis points now in the books, we think that improvement in the underlying pace of inflation, cooler job creation and modest growth are creating the conditions where the Fed can effectively end its rate hike campaign.”
The post-meeting statement, though, offered only a vague reference to what will guide the FOMC’s future moves.
“The Committee will continue to assess additional information and its implications for monetary policy,” the statement said in a line that was tweaked from the previous months’ communication. That echoes a data-dependent approach – as opposed to a set schedule – that virtually all central bank officials have embraced in recent public statements.
 The hike received unanimous approval from voting committee members.
 The only other change of note in the statement was an upgrade of economic growth to “moderate” from “modest” at the June meeting despite expectations for at least a mild recession ahead. The statement again described inflation as “elevated” and job gains as “robust.”
The increase is the 11th time the FOMC has raised rates in a tightening process that began in March 2022. The committee decided to skip the June meeting as it assessed the impact that the hikes have had.
Since then, Powell has said he still thinks inflation is too high, and in late June said he expected more “restriction” on monetary policy, a term that implies more rate increases.
The fed funds rate sets what banks charge each other for overnight lending. But it feeds through to many forms of consumer debt such as mortgages, credit cards, and auto and personal loans.
The Fed has not been this aggressive with rate hikes since the early 1980s, when it also was battling extraordinarily high inflation and a sputtering economy.
News lately on the inflation front has been encouraging. The consumer price index rose 3% on a 12-month basis in June, after running at a 9.1% rate a year ago. Consumers also are getting more optimistic about where prices are headed, with the latest University of Michigan sentiment survey pointing to an outlook for a 3.4% pace in the coming year.
However, CPI is running at a 4.8% rate when excluding food and energy. Moreover, the Cleveland Fed’s CPI tracker is indicating a 3.4% annual headline rate and 4.9% core rate in July. The Fed’s preferred measure, the personal consumption expenditures price index, rose 3.8% on headline and 4.6% on core for May.
All of those figures, while well below the worst levels of the current cycle, are running above the Fed’s 2% target.
Economic growth has been surprisingly resilient despite the rate hikes.
Second-quarter GDP growth is tracking at a 2.4% annualized rate, according to the Atlanta Fed. Many economists are still expecting a recession over the next 12 months, but those predictions so far have proved at least premature. GDP rose 2% in the first quarter following a large upward revision to initial estimates.
Employment also has held up remarkably well. Nonfarm payrolls have expanded by nearly 1.7 million in 2023, and the unemployment rate in June was a relatively benign 3.6% – the same level as a year ago.
“It has been my view consistently, that … we will be able to achieve inflation moving back down to our target without the kind of really significant downturn that results in high levels of job losses,” Powell said.
Along with the rate hike, the committee indicated it will continue to cut the bond holdings on its balance sheet, which peaked at $9 trillion before the Fed began its quantitative tightening efforts. The balance sheet is now at $8.32 trillion as the Fed has allowed up to $95 billion a month in maturing bond proceeds to roll off. More

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 12, 2023. 
Brendan McDermid | Reuters

The Dow Jones Industrial Average just won’t stop going higher it seems like. What is behind this historical momentum for the blue chip measure created more than a century ago?
The Dow on Wednesday rose for a 13th straight day, matching its longest winning streak since 1987. If it closes higher Thursday, it would be a streak not seen since 1897 — about a year after the benchmark was created — when the Dow advanced for 14 sessions in a row. During this latest run, the Dow has outperformed, gaining 5%.

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That momentum hasn’t been seen in the broader S&P 500 and Nasdaq Composite indexes, however. Both are up just 3% since the Dow’s streak began. The S&P 500 has fallen twice in that time, while the Nasdaq has posted three losing sessions.
There are several reasons for the Dow’s streak, but none may be bigger than recession fears easing.

Stock chart icon

Dow riding 12-day winning streak

No more recession?

“So far, there’s no evidence of a recession. So as long as there’s no evidence of recession … I think the market will probably continue to melt up; people are chasing,” Steve Eisman, senior portfolio manager at Neuberger Berman, told CNBC’s “Squawk Box” earlier this week. Eisman rose to prominence for profiting from the subprime mortgage crisis. He was profiled in Michael Lewis’ book “The Big Short.”
Recession fears are easing in large part due to data showing inflation is coming down. In turn, traders are betting the Fed will stop hiking interest rates, moves that have been restraining the economy’s potential. Federal Reserve Chief Jerome Powell hinted Wednesday after the central bank hiked rates that they could hold steady at its next meeting in September.
Near the start of the Dow’s winning streak, the consumer price index, a widely used measure of inflation that tracks prices on goods ranging from food to electronics, rose just 3% on a year-over-year basis. That was less than economists expected. The next day, the producer price index, which gauges what wholesalers pay for raw goods, climbed just 0.1% in June month over month, also less than forecast.

On top of that, employment data points to a resilient economy. Companies continue to hire at a steady pace, as the most recent U.S. jobless claims data showed a decline.
The key reason strong economic data, along with weakening inflation numbers, can benefit the Dow more than other indexes is because of its make-up. Many of the stocks composing the Dow are levered to an improving economy (think American Express, Chevron, Goldman Sachs, and 3M).

Dow winners during streak

Symbol
Name
% during streak

MMM
3M Company
12.9

GS
Goldman Sachs Group, Inc.
12.5

UNH
UnitedHealth Group Incorporated
10.7

JPM
JPMorgan Chase & Co.
8.6

JNJ
Johnson & Johnson
8.3

CRM
Salesforce, Inc.
7.8

AMGN
Amgen Inc.
7.6

HD
Home Depot, Inc.
7.4

INTC
Intel Corporation
7.1

CAT
Caterpillar Inc.
6.9

Source: FactSet

Strong earnings

The smaller Dow has also gotten a boost as many of its 30 members reported strong quarterly reports.
On Wednesday, Boeing shares rallied 8% to push the index into the green. The aerospace giant reported a smaller-than-expected loss and revenue that exceeded analyst expectations. The company also said it delivered 136 planes in the second quarter, up from 121 in the year-earlier period.
Meanwhile, Coca-Cola gained 1% on Wednesday after the beverage giant raised its full-year outlook and reported better-than-expected earnings. CEO James Quincey pointed to supply chain pressures easing and added that “concern surrounding the bank sector diminished and energy prices continue to pull back from record highs.”
Industrial giant 3M also reported strong second-quarter figures, with earnings and revenue exceeding analyst expectations. The stock popped 5% on Tuesday after the results were released.
The Dow’s mechanics could also be playing a part in its rally. The average is price weighted, meaning that a stock with a higher share price will exert greater influence on the overall Dow level than one with a lower share price. The S&P 500 and Nasdaq, meanwhile, are market cap weighted — meaning stocks with higher market caps will have more sway in how the indexes trade.
Goldman Sachs, the stock with the second-highest price in the Dow, is up more than 10% this month. UnitedHealth, which has the highest price, is up more than 5.7% in that time.
Bottom line: Several factors have conspired to push the Dow into a potentially historic winning streak. More

“Limited but intensive”. That is how a regulatory filing described, with something approaching wry understatement, the few days of due diligence before ubs announced its deal to rescue Credit Suisse on March 19th. The acquisition was the first ever tie-up between two “global systemically important banks”, a designation introduced after the global financial crisis of 2007-09. Since it was announced, the pace has barely slowed. In April Sergio Ermotti, a Swiss cost-cutter who ran ubs between 2011 and 2020, returned as the firm’s chief executive. The same month Credit Suisse’s results laid bare the brutal run it had suffered. Combined financial statements followed in May. The fine print of an agreement with Swiss authorities to absorb potential losses emerged in June. Scores of Credit Suisse bankers have rushed for the exit.ubs finally got the keys to the building on June 12th. The tie-up is the most watched deal in finance. It creates a giant with $5trn of invested assets and a balance-sheet twice the size of the Swiss economy. The acquisition’s outcome will say much about the future of global banking. Regulators are eyeing proceedings closely on account of the new institution’s size. Bank bosses, meanwhile, are watching the difficult strategic decisions faced by management for lessons applicable to their own firms. UBS shareholders, who did not vote for the deal, have traded a staid investment for something much riskier. Despite absorbing its risk-taking rival, bosses hope that the new ubs will be able to emerge as an enlarged version of the old ubs. European banks were slow to recapitalise after the global financial crisis; their profitability largely reflected ailing domestic economies. Amid this inauspicious crowd, ubs stood out. After being rescued in 2008, the bank focused on wealth management. It won enough wallets to be rewarded with one of the highest price-to-book multiples of any European bank, trading at an average of 1.1 times its book value last year. ubs’s focus on managing money will continue, but the shape and scale of its other banking businesses is still the subject of internal debate. Nobody expects a smooth ride in the years ahead.Since the deal was announced, shares in ubs have risen only a little. Yet the acquisition ought to be a boon, at least eventually. ubs bought Credit Suisse at a bargain: it will report an estimated $35bn of “negative goodwill”, the difference between what it paid and the higher book value of Credit Suisse’s equity. Turning this scale into profit hinges on the mammoth task of integrating the two institutions’ operations. All the usual post-merger headaches—combining it systems, aligning accounting standards, laying off staff and resolving culture clashes—are especially troublesome at a bank, let alone a failed one. Compared with ubs, Credit Suisse was appallingly inefficient: the bank had a higher ratio of costs to income in every one of its businesses. Its collapse was preceded by five consecutive quarters of losses and a stunning evaporation of confidence among clients and counterparties.When ubs unveils its plans and delayed quarterly results at the end of August, investors will scrutinise any outflow of assets managed by the bank. There is little to suggest a large exodus has taken place. Julius Baer, a Swiss outfit that is likely to benefit from any flight, reported only modest inflows at its quarterly results on July 24th. But investors should also focus on two strategic decisions—ones which will ultimately determine the success of the deal. Both require knife-edge calls and present enormous execution challenges.Credit Suisse’s domestic business is the first question mark. Bosses at ubs are debating whether to keep none, some or all of Credit Suisse Schweiz, which was established in 2016 as part of a plan, later shelved, to spin off the business. The Swiss bank was Credit Suisse’s only profitable division during the first quarter of 2023. Last year Schweiz’s equity had a book value of SFr13bn ($14bn). Selling the outfit at a valuation near this figure might be impossible given the speed with which clients fled before March. A shaky balance-sheet would hinder efforts to pick off better bits of the business, since the rump might struggle to support itself as a standalone operation. Taking the SwissAnger over the tie-up is still simmering in Switzerland. The fate of Credit Suisse’s domestic business could emerge as something of a political lightning rod. Shedding Schweiz might stave off demands for higher capital requirements in the future by calming worries about the parent bank’s size. According to data from Switzerland’s central bank, last year ubs and Credit Suisse had combined domestic market shares of 26% in loans and deposits. In less dramatic circumstances, it would have been possible to imagine the deal falling foul of competition watchdogs.Yet whereas gains from second-guessing political currents are uncertain, gains from keeping the business and making cuts are almost guaranteed. Assuming ubs’s shears are sufficiently sharp, and 70% of Credit Suisse Schweiz’s costs can be chopped, separating the whole business would mean forgoing nearly a third of the deal’s total annual cost savings, according to Barclays, a bank. Lay-offs affecting Credit Suisse’s 16,700 employees in Switzerland, such as from shutting retail branches, would draw particular ire from politicians and the public. According to Jefferies, an investment bank, around 60% of UBS and Credit Suisse branches are located within a kilometre of each other.The second question mark concerns Credit Suisse’s investment bank, which accounted for a third of the institution’s costs last year, and will bear the brunt of the cuts. Mr Ermotti is no stranger to felling bankers: the number of people employed in ubs’s investment bank declined from about 17,000 in 2011 to 5,000 in 2019, leaving behind a leaner operation to play second fiddle to the bank’s elite wealth-management division. Credit Suisse failed to accomplish similar manoeuvres of its own. Therefore ubs last year generated nearly five times as much revenue per dollar of value at risk.Winding down these operations will be a slog. Much of Credit Suisse’s investment-banking operations will be shoved into a “non-core” unit, along with some small parts of Credit Suisse’s money-managing businesses. Modern “bad banks” do not contain masses of toxic derivatives, like an older generation did after the global financial crisis. But they are still hard to shutter without incurring significant losses.Protection against losses from selling some of Credit Suisse’s assets is provided by the Swiss government. As part of the acquisition agreement, the authorities committed themselves to absorbing up to SFr9bn of losses, so long as the first SFr5bn are shouldered by ubs. They are unlikely to have to cough up, however, given the relatively small pool of assets covered by the agreement. As a result, ubs could move to end the agreement before it has wound down the portfolio. The guarantee proved reassuring to investors during March’s turmoil. Today it carries a lot of political risk for not all that much financial gain.Moreover, the loss guarantee fails to insure against the greatest danger when it comes to winding down an investment bank: that revenues plummet faster than costs, creating uncomfortable losses. Even excluding the sizeable cost of employees and one-off items, outgoings in Credit Suisse’s investment bank last year amounted to more than 60% of revenue. Many of these costs, such as the technology systems required to run a trading floor, will remain high even as assets are sold off. Consider Credit Suisse’s own wind-down unit, which the bank created as part of its failed restructuring programme. The unit’s assets have fallen by almost half since 2021, to SFr98bn; its costs, at SFr3bn in 2022, have hardly changed.How quickly ubs is able to shutter this unit will be closely watched. So will what the bank’s bosses do with their remaining investment bank. European investment banks have retreated since the financial crisis, especially in America. Both Barclays and Deutsche Bank have struggled to convince investors their businesses are worth retaining. ubs’s investment bank is profitable, but would need a mighty boost to woo billionaires with its dealmaking advice. The prospect of building an elite, capital-light bank might be appealing in theory, and was the crux of Credit Suisse’s plan to spin out its own investment bank under the moniker of “First Boston”, a famous old institution that it acquired in 1990. But in practice this would require significant turnover among ubs’s own bankers, too. Put the axe awayIt is not clear that such bloodletting is required. In time, the success of the merger will be judged by ubs’s price-to-book multiple. Morgan Stanley, which has ridden its wealth-management success to a multiple of more than two, is a worthy target. After the deal, ubs will remain a measly competitor in investment banking, but growth in the money it manages means it will close the gap in wealth management and overtake its rival in asset management. A bigger bank means bigger ambitions. ■ More

Leon Neal | Getty Images News | Getty Images

The Securities and Exchange Commission wants corporate America to tell investors more about cybersecurity breaches and what’s being done to fight them. Much more. 
The SEC has voted 3-2 to adopt new rules on cybersecurity disclosure. It will require public companies to disclose “material” cybersecurity breaches within 4 days after a determination that an incident was material. 

The SEC says it is necessary to collect the data to protect investors. Corporate America is pushing back, claiming that the short announcement period is unreasonable, and that it would require public disclosure that could harm corporations and be exploited by cybercriminals. 
The final rules will become effective 30 days following publication of the release in the Federal Register. 
Current cybersecurity rules are fuzzy 
Current rules on when a company needs to report a cybersecurity event are fuzzy. Companies have to file an 8-K report to announce major events to shareholders, but the SEC believes that the reporting requirements for reporting a cybersecurity event are “inconsistent.” 
In addition to requiring public companies to disclose cybersecurity breaches within four days, the SEC wants additional details to be disclosed, such as the timing of the incident and the material impact on the company. It will also require disclosure of management expertise on cybersecurity. 
The pushback from corporate America sounds strikingly similar to the pushback from many of the other rulemaking proposals SEC Chair Gary Gensler has made or proposed: too much. 

“The SEC is calling for public disclosure of considerably too much, too sensitive, highly subjective information, at premature points in time, without requisite deference to the prudential regulators of public companies or relevant cybersecurity specialist agencies,” the Securities Industry and Financial Markets Association (SIFMA), an industry trade group, said in a letter to the SEC. 
Industry objections
The most prominent industry concerns are: 

Four days is too short a period. SIFMA and others claim that four days denies companies time to first focus on remediating and mitigating the impacts of any incident. 
Premature public disclosure could harm companies. The NYSE, on behalf of its listed companies, has written to the SEC saying that corporations should be allowed to delay public disclosures in two circumstances: 1) pending remediation of the incident, and 2) if law enforcement determines that a disclosure will interfere with a civil or criminal investigation. 

The proposed rule allows the Attorney General to delay reporting if the AG determines that immediate disclosure would pose a substantial risk to national security. 
“Premature public disclosure of an incident without certainty that the threat has been extinguished could provide bad actors with useful information to expand an attack,” Hope Jarkowski, NYSE Group general counsel, said in the letter. 
Nasdaq, in a separate letter to the SEC, agrees, noting that “the obligation to disclose may reveal additional information to an unauthorized intruder who may still have access to the company’s information systems at the time the disclosure is made and potentially further harm the company.” 
Concerns about duplicate reporting 
Another concern is overlapping regulations. Many public companies already have procedures in place to share critical information about cyber incidents with other federal agencies, including the FBI. 
The lead agency that deals with cybersecurity is the Cybersecurity and Infrastructure Security Agency (CISA) in the Department of Homeland Security. Under legislation passed last year, CISA is adopting cybersecurity rules that require “critical infrastructure entities,” which would include financial institutions, to report cyberbreaches within three days to CISA. 
This would conflict with the SEC’s four-day rule, and would also create duplicate reporting requirements. 
All this goes to the central issue of who should be regulating cybersecurity. “The Commission is not a prudential cybersecurity regulator for all registrants,” SIFMA said. 
What is the SEC trying to accomplish? 
Cybersecurity is only a small part of the more than 50 proposed rules Gensler has out for consideration, nearly 40 of which are in the Final Rule stage. 
If there is an underlying theme behind much of Gensler’s extensive rulemaking agenda, it is “disclosure.”  More disclosure about cybersecurity, board diversity, climate change and dozens of other issues. 
“Gensler is claiming he wants more transparency and thinks that will protect investors,” Mahlet Makonnen, a principal at Williams & Jensen, told me. 
“The fear the industry has is that the data collected will put unnessary burdens on industry, does not actually protect investors, and that the data can be used to grow the aggressive enforcement tactics under Gensler,” she said. 
“The more information they have, the more the SEC can determine if there are any violations of rules and regulations. It allows them to expand enforcement actions. The SEC will say they have broad authority to protect investors, and the disclosures can be used to expand the enforcement actions.” 
Another long-time observer of the SEC, who asked to remain anonymous, agreed that the ultimate goal of stepped up disclosure is to expand the SEC’s enforcement power. 
“It will enable the SEC to claim they are protecting investors, and it will enable them to ask Congress for more money,” the observer told me. 
“You don’t get more money from Congress by asking for money for market structure. You get more money by claiming you are protecting grandma.” More

The Federal Reserve kept its benchmark lending rate near what economists call “the effective lower bound” for the better part of 15 years.
Low interest rates can in some cases distort the basic assumptions of personal finance and business, shifting how investors calculate risk.
The Federal Reserve is in the midst of its fastest interest rate hiking cycle in the modern era, setting up the U.S. economy for conditions not seen in generations

The United States is entering a new economic era as the Federal Reserve hikes its benchmark interest rate.
In July 2023, the federal funds effective rate stood above 5% for the first time in four decades. As interest rates climb, economists say financial conditions are headed back to being more normal.

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“Having interest rates at zero for such a long period of time is very unusual,” said Roger Ferguson, a former vice chair at the Federal Reserve. “Frankly, no one ever thought we’d get to that place.”
Back-to-back financial crises gave past Fed policymakers the conviction to take interest rates as low as they can go, and keep them there for extended periods of time. Along the way, they disrupted the basic math of personal finance and business in America.
For example, the Fed’s unconventional policies helped to sink the profits investors received from safe bets. Government bonds, Treasury securities and savings accounts all return very little yield when interest rates are low. At the same time, low interest rates increase the value of stocks, homes and Wall Street firms that make money by taking on debt.
As the Fed hikes interest rates, safer bets could end up paying off. But old bets could turn sour, particularly those financed with variable loans that increase alongside the interest rate. A wave of corporate bankruptcies is rippling through the U.S. as a result.
“You’re, to some extent, limiting nonproductive investments that would not necessarily generate revenue in this high interest rate environment,” said Gregory Daco, chief economist at EY-Parthenon. “It’s very different in a low interest rate environment where money is free and essentially any type of investment is really worth it because the cost of capital is close to zero.”

In recent years, economists have debated the merits of zero lower-bound policy. As the Fed lifts that federal funds rate, policymakers warn that rates may stay high for some time. That could even be the case if inflation continues to subside.
“Barring a catastrophe, I don’t think we’ll see lower interest rates any time soon,” said Mark Hamrick, Washington bureau chief at Bankrate.com.Watch the video above to learn more about the new economic era unfolding in the U.S. More

NatWest Group CEO Alison Rose admitted on Tuesday to having discussed the details of Nigel Farage’s bank account with a BBC reporter.
Farage was informed earlier this month that Coutts — a high-end private bank and wealth manager requiring clients to hold a minimum of £1 million in investments or borrowing, or £3 million in savings — planned to cut ties with him.
He subsequently filed a subject access request (SAR) to obtain a dossier the bank held on him which he then published, claiming it showed the bank account was being terminated due to his views.

Jonathan Bachman | Getty Images

LONDON — NatWest Group CEO Alison Rose resigned after a media storm over the termination of Brexit figurehead Nigel Farage’s bank account by sister lender Coutts.
Rose admitted Tuesday to having discussed the details of Farage’s account with a BBC reporter and having thus been the source of a controversial story for which the national broadcaster has since issued an apology.

Initially, the board reiterated its support for her to stay on as CEO, but at 2 a.m. Wednesday the bank announced her immediate departure by mutual consent.
In a statement, Rose said she remained “immensely proud of the progress the bank has made in supporting people, families and business across the U.K., and building the foundations for sustainable growth.”
The controversy
NatWest is 39% owned by the British taxpayer following the 2008 crisis, heightening the public interest in the bizarre saga.
“Despite a stellar performance as the first woman to take the helm of a U.K. bank, her mistake in discussing sensitive customer details with a journalist broke a sacred trust with the British public and her decision to step down was the only viable path,” said Danni Hewson, head of financial analysis at AJ Bell.
“She will be a loss, having worked her way up the ranks and championed diversity and inclusion in the sector with a huge focus on getting more women in financial services. But NatWest is no ordinary bank, it is still almost forty percent owned by the U.K. taxpayer, and the political and regulatory ramifications of this episode are likely to ripple out for months to come.”

Farage was informed last month that Coutts — a high-end private bank and wealth manager requiring clients to hold a minimum of £1 million ($1.29 million) in investments or borrowing, or £3 million in savings — planned to cut ties with him.

Alison Rose, NatWest chief executive, (right) departs 10 Downing Street in London, after meeting with Chancellor Jeremy Hunt.
James Manning | PA Images | Getty Images

He subsequently filed a subject access request (SAR) to obtain a dossier the bank held on him which he then published, claiming it showed the bank account was being terminated due to his political views.
Prime Minister Rishi Sunak and several members of his Conservative government issued statements condemning the bank and characterizing the termination of Farage’s account as an affront to free speech. Farage was offered an alternative account at regular main street bank NatWest, but declined.
His critics maintain that although frequent references are made to Farage’s political profile and controversial views, the reasons outlined for allowing the banking relationship to lapse were primarily commercial, and he was not “de-banked” as he claims.
The dossier
Minutes from the Wealth Reputational Risk Committee at Coutts on November 2022 state that Farage’s mortgage was due to expire in July 2023, at which point “on a commercial basis” it would not look to renew and therefore recommended winding down the banking relationship.
Without the mortgage, the bank indicated that Farage’s account value would fall below its commercial criteria. The committee recommended exiting the relationship in July, but was at the time seeking to retain Farage as a client barring any “flash points” that might pose further “reputational risk.”
Coutts said that upon expiry of Farage’s mortgage repayments, it “did not have the appetite to renew his mortgage or provide banking facilities” and had therefore implemented an “exit plan” that allowed for the bank to terminate Farage’s account earlier in the event of further controversy in the meantime.
“The Committee did not think continuing to bank NF [Nigel Farage] was compatible with Coutts given his publicly-stated views that were at odds with our position as an inclusive organisation,” the minutes added.
“This was not a political decision but one centred around inclusivity and Purpose.”
An update from March 10 this year noted that Farage’s account had “been below commercial criteria for some time and upon review of Nigel’s past public profile and connections, the perceived risks for the future weighed against the benefit of retention, the decision was taken to exit upon repayment of an existing mortgage.”
Farage’s politically exposed person (PEP) status — conferred by British banks to high-ranking public figures who may be susceptible to bribery — was downgraded to “lower risk” as he is “no longer associated with any political party” since stepping down as Brexit Party leader in 2021.
Part of the client analysis from Coutts contained within the 40 pages of personal data, highlighted an array of news articles alongside Farage’s own media appearances and tweets, determined that the “values” he promotes did not align with the bank’s.
“Particularly given the manner in which he states (and monetises) those views – deliberately using extreme, hatful[sp?] and emotive language (often with a dose of misinformation) – at best he is seen as xenophobic and pandering to racists, and at worst, he is seen as xenophobic and racist,” it said.
“He is considered by many to be a disingenuous grifter and is regularly (almost constantly) the subject of adverse media.”

LONDON – June 16, 2016: Then-UK Independence Party Leader (UKIP) Nigel Farage poses during the launch of a national poster campaign urging voters to vote to leave the EU ahead of the EU referendum.
DANIEL LEAL/AFP via Getty Images

Farage is a long-time ally of former U.S. President Donald Trump, vocal supporter of Russian President Vladimir Putin, and prominent figure in the British hard right, having previously led the U.K. Independence Party (UKIP) and the Brexit Party.
The documents note long lists of controversial statements and activities, including his filming of migrants arriving in dinghies via the English channel and reference to migrant boat arrivals as an “invasion,” and his blaming of violence in the city of Leicester last year on lawmakers who “promoted multiculturalism.”
Coutts acknowledged that Farage’s commentary “remains within the law regarding hate speech and arguably on the right side of ‘glorifying or promoting harmful behaviour’ (although we should be mindful of the role the ‘illegal immigrant / invasion’ rhetoric plays in contributing to discrimination and in some instances, violence, against migrants).”
The fallout
Farage told Sky News Wednesday that he was “shocked with the vitriol” contained within it, and is calling for the resignation of the entire NatWest Group executive board along with a regulatory overhaul of Britain’s banking sector.
British economist and financial author Frances Coppola, in a blog post Tuesday, agreed that the language in the bank’s risk assessment was “mostly negative and at times possibly defamatory,” and said now-ousted CEO Rose was right to apologize directly to Farage prior to her departure.
However, Coppola argued that the bank was “absolutely right to conduct such an assessment and fully entitled to reach the conclusions that it did,” with the Coutts risk assessment noting that there is an “extra cost attached to managing the accounts of high profile individuals such as NF.”
“Assessing the risk and cost of a customer is a commercial judgement. And reputational risk is hugely important to a bank like Coutts. It is wholly unreasonable to argue that they should not have taken account of – or even evaluated – the risk to them of doing business with a person as controversial as Nigel Farage,” Coppola argued.
“Why should a bank accept the extra cost that you create for them if you don’t borrow from them and don’t keep enough liquid savings with them to support their lending to other people? And why should it keep your account open when you don’t meet its published criteria, given the reputational risk and general aggravation you cause?”

LONDON – June 26, 2020: Private bank and wealth manager Coutts and Company, founded in 1692, and the eighth oldest bank in the world, displays support for Pride month at its offices in London.
Dave Rushen/SOPA Images/LightRocket via Getty Images

Britain’s Financial Conduct Authority said Wednesday that it had raised concerns with NatWest Group and Coutts about the “allegations relating to account closures and breach of customer confidentiality since these came to light,” and NatWest has launched an independent review of the series of events.
“It is vital that the review is well resourced and those conducting it have access to all the necessary information and people in order to investigate what happened swiftly and fully,” the FCA said in a statement.
“On the basis of the review and any steps taken by other authorities, such as the Financial Ombudsman Service or Information Commissioner, on relevant complaints, we will decide if any further action is necessary.”
Following a Wednesday meeting between Britain’s Economic Secretary to the Treasury Andrew Griffith and U.K. banking chiefs, the U.K. Treasury reiterated in a statement “the government’s clear position on the importance of legal freedom of expression,” adding it is “wholly unacceptable” to terminate the account of a person for expressing their political views.
“Banks will also be required to spell out why they are terminating a bank account – boosting transparency for customers and aiding their efforts to overturn decisions,” the statement said. “There will be limited exceptions to these requirements, for example to ensure that bank communications aren’t interfering with investigations into criminal activity.”
Whatever the outcome of Farage’s demands for further resignations and regulatory scrutiny, British banking has been thrust into the spotlight and could become yet another political hot potato ahead of a general election due next year. More

Google headquarters in Mountain View, California, US, on Monday, Jan. 30, 2023. Alphabet Inc. is expected to release earnings figures on February 2.
Marlena Sloss | Bloomberg | Getty Images

Check out the companies making headlines before the bell.
Alphabet — The Google parent popped more than 6% after topping Wall Street’s second-quarter earnings expectations, fueled by growth in its cloud-computing segment. The company also announced that its chief financial officer, Ruth Porat, would step into a new role as president and chief investment officer.

Microsoft — The software giant lost about 4% after reporting slowing revenue growth within its cloud business during its fiscal fourth quarter and called for lower-than-expected guidance. Microsoft, however, did beat Wall Street’s estimates, reporting earnings of $2.69 per share on $56.19 billion in revenue. Analysts polled by Refinitiv anticipated earnings per share of $2.55 on revenue of $55.47 billion.
PacWest — Shares of the regional bank stock jumped more than 28% on news that it will be acquired by Banc of California to create a new firm called Pacific Western. Banc of California shares added about 6%.
Snap — The Snapchat parent shed more than 18% after issuing weak guidance for the current quarter. Snap topped second-quarter expectations, reporting a narrower-than-expected loss of 2 cent a share on $1.07 billion in revenue. That beat expectations for a 4-cent loss and revenues of $1.05 billion, per Refinitiv.
Coca-Cola – The beverage giant saw shares climb more than 2% in premarket trading after the company reported quarterly earnings and revenue that topped estimates. Its organic revenue increased 11% in the quarter, fueled by higher prices. Coca-Cola also raised its full-year outlook following the strong report.
Boeing — The aircraft manufacturer rose more than 3% after it posted a revenue beat for the second quarter. Boeing’s losses per share also came in lower than expected. The company’s results were driven by an uptick in airplane deliveries.

Wells Fargo — The bank stock added 2.5% after announcing a $30 million share buyback program late Tuesday. Wells Fargo also said that its board approved a previously announced dividend hike to 35 cents from 30 cents per share.
Texas Instruments — Texas Instruments fell 4% even after reporting results that surpassed Wall Street’s expectations. The semiconductor stock shared lighter-than-expected guidance for the current period, citing sluggish demand.
AT&T — AT&T rose 2% after posting its latest quarterly results. The company topped earnings but fell short on revenue expectations, reporting adjusted earnings per share of 63 cents on $29.92 billion in revenue. Free cash flows topped expectation, which the company said it would use to pay down debt.
Teladoc Health — Shares jumped 6% after Teladoc Health beat on the top and bottom lines in its most recent quarter. The telehealth company reported a narrower-than-expected loss of 40 cents per share compared to a loss of 41 cents per share, according to the consensus estimate from StreetAccount. The firm also posted revenue of $652.4 million, better than the expected $649.2 million.
Dish Network — Shares of the telecom company jumped more than 9% in premarket trading after Bloomberg News reported that Dish would start selling its wireless service on Amazon this week.
Thermo Fisher Scientific — Shares sank 6.6% in the premarket. Thermo Fisher Scientific reported earnings and revenue that fell short of expectations, citing a difficult macro environment.
Union Pacific — The railroad operator’s stock popper more than 8% even after revenue fell short of expectations. The company named a new CEO and changes to its board.
— CNBC’s Sarah Min, Yun Li, Hakyung Kim and Jesse Pound contributed reporting More