Finance

Masterly inactivity is back in vogue at the Federal Reserve’s rate-setting committee. After its meeting on June 14th it kept its benchmark rate on hold, rather than raising it, for the first time since January 2022. One or two more rate rises may lie ahead: Jerome Powell, the Fed’s chairman, suggested so in his post-meeting press conference, and that is what investors expect. Gradually, though, the main debate among Fed watchers has shifted from how high the rate will go to how long it will stay there before being cut.Listen to this story. Enjoy more audio and podcasts on More

Masterly inactivity is back in vogue at the Federal Reserve’s rate-setting committee. After its meeting on June 14th it kept its benchmark rate on hold, rather than raising it, for the first time since January 2022. One or two more rate rises may lie ahead: Jerome Powell, the Fed’s chairman, suggested so in his post-meeting press conference, and that is what investors expect. Gradually, though, the main debate among Fed watchers has shifted from how high the rate will go to how long it will stay there before being cut.That is a knotty problem, made knottier by the fact that core prices in America (excluding volatile food and energy) rose by 5.3% in the year to May. It is also not the only one facing Mr Powell and his colleagues. They have spent the past year steadily shrinking the Fed’s huge stock of Treasuries and mortgage-backed securities (MBS), the face value of which has fallen from $8.5trn to $7.7trn. Each month the Fed allows up to $60bn-worth of Treasuries, and $35bn of MBS, to mature without reinvesting the proceeds. Now it must decide when to stop.This vast portfolio was amassed via the Fed’s quantitative-easing (QE) programme, through which it bought bonds with newly created money. Conceived amid the global financial crisis of 2007-09, it was put into overdrive during the covid-19 pandemic. QE flooded markets with liquidity and nudged nervous investors into buying riskier assets—because the Fed was already buying the safest ones, which pushed their yields down. That kept the supply of credit and other risk capital flowing into the real economy. Critics decried all this as reckless money printing. But with inflation low and deflation more of a threat, they were easy to dismiss.The return of high inflation makes QE’s reversal (quantitative tightening, or QT) desirable on several counts. Just as buying Treasuries brings long-term rates down, the disappearance of a buyer should raise them, complementing the tightening effect of the Fed’s short-term rate rises. And if the Fed is not buying Treasuries, someone else must be holding on to them. That means they are not buying a riskier asset such as a stock or corporate bond, reducing the supply of capital to an overheated economy. Both effects should dampen price rises.QT also bolsters the Fed’s credibility. If it only ever conducted QE, and never reversed the process, accusations of money printing and currency debasement would be much harder to brush off. Inflation expectations could rise, self-fulfillingly and perhaps disastrously. So the Fed must prove it is willing to hoover up dollars as well as pump them out.In that case, why stop at all? The simplest reason is that the Fed’s tightening cycle is approaching its end. Eventually it will consider cutting short-term rates again, especially if economic cracks appear. To still be pushing long-term ones up at that point would be akin to a driver pressing the accelerator and the brake at the same time.The more troubling reason is that, just like raising short-term rates, QT can inflict its own damage. Having been tried only once before, from 2017 to 2019 and at a much slower pace, its side-effects are poorly understood. That does not make them less dangerous. By sucking cash out of the system, the previous bout of QT prompted a near-failure of the money markets—the place where firms borrow to meet immediate funding needs and one of the world’s most important pieces of financial plumbing. The Fed cleared the blockage with an emergency lending facility that it has since made permanent. It also had to halt QT.This time it would be something else that breaks. The stockmarket is an obvious, if unthreatening, candidate: only a devastating crash would threaten financial stability. A broader liquidity crunch would be worse. Credit markets, already tight following several bank failures and rising defaults, are more likely to seize. America’s Treasury, meanwhile, is set to soak up yet more liquidity. It must sell more than $1trn of debt over the coming three months to rebuild its cash buffers after the latest debt-ceiling drama. By increasing the risk of sudden market moves, that raises the odds of participants suddenly needing to raise cash for margin calls—and the risk that they cannot.However small the ideal size of the Fed’s balance-sheet, ever more shrinking could be dangerous. So QT must stop before it risks sparking a crisis that requires a return to QE. But when? That is the central bank’s next big dilemma.■Read more from Buttonwood, our columnist on financial markets:Surging stockmarkets are powered by artificial intelligence (Jun 7th)Investors go back into battle with rising interest rates (Jun 1st)The American credit cycle is at a dangerous point (May 24th)Also: How the Buttonwood column got its name More

Hardly a day passes without someone in Chinese finance “falling off his horse”, or coming under a corruption investigation. State media warned on June 5th that the banking industry is infested with “moths”—mid-level managers who slowly ingest lenders’ resources from the inside out. “Internal ghosts”, executives who use insider connections to pilfer billions from banks, often pose a greater danger. There are “nest cases”, where clusters of fraud spanning several banks are discovered at once, and “skewer cases”, in which the arrest of one banker leads to another, then another. After a recent spate of scandals an official newspaper dubbed smaller banks an “anti-corruption disaster zone”. Such parlance hints at pervasive graft throughout China’s vast financial system, which has assets of 400trn yuan ($56trn). Between January and May at least 60 financial institutions were hit with major investigations into personnel, according to official statements and press reports. Research by The Economist shows that, over the past five years, 78 executives at China’s eight largest banks have been investigated or charged with corruption. Since 2018 authorities have also probed 385,000 shareholders of rural banks suspected of using the lenders as personal piggy banks.The crackdown has shown no sign of ebbing as the Communist Party gains a much firmer grip over enforcement. In the biggest regulatory change in two decades, the central government announced earlier this year that it would create a super watchdog that oversees all areas of finance except the securities industry. How it applies its mega-powers is bound to remould a sector the health and stability of which matters hugely not just to China, but also to the global economy. The new system is modelled on America’s, which seeks to avoid overlapping mandates. The National Administration for Financial Regulation (NAFR), as the new watchdog is dubbed, has been granted status that moves it closer to the central government. That gives it stronger enforcement powers, similar to America’s Securities and Exchange Commission. It has gained investor-protection responsibilities, akin to America’s Financial Stability Oversight Council, and taken over financial oversight from the central bank (which, like the Federal Reserve, now focuses on macroprudential policy). NAFR is preparing to take forward what has perhaps been the most extensive financial clean-up campaign in history. Starting in 2017, its predecessor scrambled to slow down a dangerous rise in risky financial activities. It tightened rules on shadow banking, shrinking the stock of shadow loans from the equivalent of 25.3% of total banking assets in 2017 to just 13.5% last year. It subdued sprawling financial firms and powerful people that had sought to manipulate the system. Among them were Anbang, an insurance group, and Baoshang Bank, a mid-tier lender. It crushed a 1trn yuan peer-to-peer lending industry, where people lent to one another via online platforms. The central government also upended the fintech empire of Jack Ma, China’s most famous entrepreneur, after his company, Ant Group, built a mammoth lending business that received little regulatory scrutiny.The new team will have to reckon with the costs of the clean-up, which are mounting. Many wealth-management products have gone bust, causing investors to protest. The bill for cleaning up urban banks and bailing out several large lenders has come to 10trn yuan. Rescuing Anbang alone cost $10bn. Tens of thousands of investors in peer-to-peer lending products have lost their savings. Nearly 630 small banks have been restructured. The cutting down of Mr Ma has hurt China’s reputation as a place safe for entrepreneurial experimentation. So has the recent detention of Bao Fan, one of China’s most famous investment bankers. Senior regulators bristle at such criticisms and feel that, at least in Mr Ma’s case, official actions were too timid for a risky business model. The new system will rectify that by giving NAFR regulatory control over financial holding companies such as Ant.The vision for regulating the financial sector is becoming clear. Senior officials believe they have chosen the best features of the American system while rejecting the values of Wall Street, which, in their view, have seeped into China over two decades. The message to bankers is grim. Entrepreneurs will be allowed to continue to reap enormous fortunes. But the government does not want bankers to become exorbitantly wealthy. No celebrity financier, no matter how high-profile, appears immune from corruption probes.NAFR has several pressing tasks ahead of it. First it must replace local financial regulators with its own teams and dismantle the connections between banks and local governments. The establishment of thousands of new banks since the 1990s and commands from politicians to build endlessly have helped feed a cesspool of bad assets. The small lenders that sprung up across the country often had close connections with local governments and the largest local companies, namely developers. In many cases tycoons who held shares in the banks, or controlled them outright, used them to fund their businesses. One result was a decade of high-speed economic growth. Another was rampant graft and poor allocation of funds.So far the onslaught on corruption, the biggest threat to China’s financial stability according to many, is proving highly effective, says Sam Radwan of Enhance, a consultancy. The number of arrests will probably fall. But to purge the financial system of the bad assets revealed by the campaign will be a big job—and it is an urgent one. Tight links between banks, property developers and city governments have left the industry with masses of risky loans. Developers and local-government companies owe China’s banks 130trn yuan, or about 42% of total banking assets, according to Xing Zhaopeng of ANZ, a bank.Most of those debts are deemed healthy. Li Yunze, who was recently appointed to lead NAFR, said on June 8th that the risks are controllable. In its most recent review of the banking system, the central bank said just 1.6% of total system assets are considered high-risk.That could change if things get worse for developers and local governments. Both are finding it increasingly hard to pay back loans. A group of companies called local-government financing vehicles (LGFVs), which often borrow from banks on behalf of cities and provinces, have spooked markets in recent weeks as many show signs of impending failure. Such risks often emerge suddenly and have the potential to contaminate banks. Dalian Wanda, one of China’s top developers, has reportedly entered into talks with banks on a loan-relief plan. It has more than 90bn in outstanding loans. An LGFV in south-west China is rumoured to be paying back loans using local social-security funds.Failure to handle this pile of debt threatens to mire the system in bad credit. Many such loans may not turn into toxic assets overnight. Instead, some will become long-term drags on bank profits. Another LGFV in southern China recently agreed with banks to restructure 15.6bn yuan in loans by lowering interest rates and pushing the maturity of the loans out by 20 years. In such situations banks have few other options than to extend.Regulators have been experimenting with merging bad banks for years. So far 23 urban banks have been combined. But insiders say the process is cumbersome, can drag on for years and ultimately leads to the creation of larger bad banks. Another option is letting banks fail. This has been tested only a few times and risks causing runs on deposits—the opposite of the stability China’s leaders are trying to achieve.Large banks are absorbing some bad debts from smaller ones. But their ability to do this is limited, and they are unlikely to take on equity in troubled banks. Some local state-owned firms have started injecting liquidity into rural lenders and taking shares in them, according to Chinese media. This type of recapitalisation is bolstering banks’ balance-sheets and giving them more room to dispose of bad debts.The only way to heal the sector is to recognise and treat soured loans. Efforts to do so have been haphazard. In 2019 regulators said they would require banks to declare the true scale of bad loans instead of using fancy accounting to hide them. But the pandemic then forced watchdogs to enforce the rules less stringently; they also told banks to roll over loans. This avoided mass corporate defaults, but also added to the hidden accumulation of bad assets. Now, with the pandemic at an end, the long-delayed recognition of more bad debts is starting, says Ben Fanger of ShoreVest Partners, an investor in distressed debt. This means a vast flow of toxic assets is coming on to the market. State-owned asset managers will buy up some of that debt at discounted rates. Unlike 20 years ago, when the previous mountain of bad assets failed to lure bargain-hunters, there are now more local private investors willing to snap up non-performing loans from banks. Some corporate investors will also pick through the rubble of the property sector to search for distressed debts that allow them to take over projects on the cheap. As the economy slows and the extent of the financial rot is revealed, China’s new regulators can only hope there are enough of them. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

After astonishing breakthroughs in artificial intelligence, many people worry that they will end up on the economic scrapheap. Global Google searches for “is my job safe?” have doubled in recent months, as people fear that they will be replaced with large language models (llms). Some evidence suggests that widespread disruption is coming. In a recent paper Tyna Eloundou of Openai and colleagues say that “around 80% of the us workforce could have at least 10% of their work tasks affected by the introduction of llms”. Another paper suggests that legal services, accountancy and travel agencies will face unprecedented upheaval.Economists, however, tend to enjoy making predictions about automation more than they enjoy testing them. In the early 2010s many of them loudly predicted that robots would kill jobs by the millions, only to fall silent when employment rates across the rich world rose to all-time highs. Few of the doom-mongers have a good explanation for why countries with the highest rates of tech usage around the globe, such as Japan, Singapore and South Korea, consistently have among the lowest rates of unemployment.Here we introduce our first attempt at tracking ai’s impact on jobs. Using American data on employment by occupation, we single out white-collar workers. These include people working in everything from back-office support and financial operations to copy-writers. White-collar roles are thought to be especially vulnerable to generative ai, which is becoming ever better at logical reasoning and creativity. However, there is as yet little evidence of an ai hit to employment. In the spring of 2020 white-collar jobs rose as a share of the total, as many people in service occupations lost their job at the start of the covid-19 pandemic (see chart). The white-collar share is lower today, as leisure and hospitality have recovered. Yet in the past year the share of employment in professions supposedly at risk from generative ai has risen by half a percentage point. It is, of course, early days. Few firms yet use generative-ai tools at scale, so the impact on jobs could merely be delayed. Another possibility, however, is that these new technologies will end up destroying only a small number of roles. While AI may be efficient at some tasks, it may be less good at others, such as management and working out what others need. ai could even have a positive effect on jobs. If workers using it become more efficient, profits at their company could rise which would then allow bosses to ramp up hiring. A recent survey by Experis, an it-recruitment firm, points to this possibility. More than half of Britain’s employers expect ai technologies to have a positive impact on their headcount over the next two years, it finds.To see how it all shakes out, we will publish updates to this analysis every few months. But for now, a jobs apocalypse seems a way off. ■For more expert analysis of the biggest stories in economics, finance and markets, sign up to Money Talks, our weekly subscriber-only newsletter. More

The NFL consulted with Bank of America and the National Black Bank Foundation on its loan.
The full terms of the loan are not being released. However, an NFL executive said the terms are at “market rates,” and the league plans to fully draw on the loan over the next three years.
“It’s definitely a needed shot in the arm at a time when community banking is being questioned,” said Ashley Bell, co-founder of the NBBF.

A football with the NFL logo.
Jacob Kupferman | Getty Images

The National Football League is making a big play to increase lending in underrepresented communities.
The league is borrowing $78 million from a syndicate of Black- and minority-owned banks and community development financial institutions.

The loan deal will generate “tier 1 capital” for the banks and CDFIs. According to the National Black Bank Foundation, it will boost their lending power by millions through banking fees and interest. The full terms of the loan are not being released.
However, Joe Siclare, the NFL’s executive vice president of finance and league policy, said the terms are at “market rates,” and the league plans to fully draw on the loan over the next three years.
“These banks play a vital role in our overall economy and many of them are in markets that our teams play, so there is good synergy there,” Siclare told CNBC.
“These community banks sometimes have difficulty navigating down economic times. When large corporations like the National Football League can partner and provide reliable revenue streams, it helps those banks continue to do the great work they do in their communities,” he added.
The NFL deal follows a similar $35 million loan linked to the National Basketball Association’s Atlanta Hawks for a practice facility in 2020 and a $25 million loan with Major League Soccer in 2022, both of which were arranged by the NBBF and a syndicate of Black-owned banks.

NBBF co-founder Ashley Bell is hopeful these deals will prove Black- and minority-owned banks are viable partners for large corporations long term, especially with the threat of an economic downturn or recession that would likely have a bigger effect on communities of color.
“These banks loan money to people and businesses that need it without being predatory. This gives them breathing room. These banks are centers of hope around the country. Whether they are Martin Luther King, Jr Drive or Main Street,” Bell said. These are the places people go to get opportunity and by supporting these institutions, the NFL is supporting these communities.”
The NFL consulted with Bank of America and the NBBF on its loan.
“It’s definitely a needed shot in the arm at a time when community banking is being questioned,” Bell said.
Bell said the regional banking crisis triggered by the collapse of Silicon Valley Bank in March has the potential to destabilize many Black and minority financial institutions. The NBBF says in many cases, Black and minority banks are “hyper local,” providing 85% or more of the loans to underrepresented groups in their area.
“Doing a deal with an entity like the NFL, that helps your brand. It helps people understand that you can do a complex deal. So, if you can do a deal with the NFL, surely you can trust that bank with your home loan,” Bell said. “Surely you can trust that bank with a line of credit for your business, your church, your faith organization. You can go to them and trust that you’ll get the best service.”
The NFL’s involvement will create opportunity for Black- and minority-owned banks to make income and then put that money out into the community, according to Dominik Mjartan, CEO of Optus Bank in Columbia, South Carolina, one of 16 financial institutions partnering on the loan.
“The NFL giving us this chance to participate, it enhances our ability to deliver on our mission to serve underserved, underestimated high-potential customers and communities,” he said. More

Money transfer unicorn Zepz is looking to expand its business through mergers and acquisitions, the company’s CEO Mark Lenhard told CNBC.
The firm, which owns the WorldRemit and Sendwave brands, laid off 26% of its global workforce in May, citing a need to consolidate its operations.
The digital payments group is looking to reach full-year profitability after achieving monthly profitability in the first half of 2022.

Zepz, which owns the WorldRemit and Sendwave brands, has a total headcount of around 1,600.
Sopa Images | Lightrocket | Getty Images

LONDON — Zepz, the owner of money transfer firms WorldRemit and Sendwave, is on the hunt for mergers and acquisitions after cutting 26% of its workforce last month, the company’s CEO told CNBC.
With a $5 billion valuation, Zepz is one of the largest fintech companies in Europe, backed by leading investors including Accel, TCV and Leapfrog.

The company enables users to send money from a smartphone or computer to people abroad, who can receive it in their bank account, mobile wallet, or as a mobile airtime top-up.
The service is a challenger to large banks and established money transfer services like Western Union, touting cheaper fees and the ability to move funds rapidly. A close rival is Wise, which also claims to offer cheaper international money transfers than banks.
Mark Lenhard, Zepz’s CEO, said the firm wanted to grow its portfolio of businesses in an effort to own a larger part of the global digital payments pie.
Lenhard didn’t identify which companies Zepz was looking to buy, but said the sharp slump in private fintech valuations made it an attractive time to kick off M&A exploration.

Digital wallets

The overall value of cross-border payments is forecast to increase from $150 trillion in 2017 to over $250 trillion by 2027, according to the Bank of England. It’s a highly competitive industry with various players operating and taking a slice of each transaction a consumer makes.

A particular focus for Zepz product-wise in the near term is digital wallets, Lenhard said, with the company planning to launch its first digital wallet “imminently.”
“We want to be a core financial hub for a very particular segment,” he told CNBC Wednesday, with a particular focus on migrant communities sending funds home.
The push into M&A is a surprise move in many ways as it follows a significant amount of cost reduction at the 13-year-old company. In May, Zepz laid off 420 employees, equating to about 26% of its global workforce.

Zepz says it cut the jobs to consolidate its operations after its acqusition of U.S. remittances firm Sendwave led to a duplication of certain roles.
Still, at the time, Zepz said it wasn’t pausing hiring, and was actively trying to fill 200 roles.
It marked the second time in just under a year Zepz laid off staff. In June 2022, Zepz cut around 5% of its workforce, according to Sky News.
“Any time you’re laying off individuals it’s hard, it sucks, but it was certainly the right thing to do. We’ve expanded things out of that,” Lenhard said Wednesday.
He added that he hopes the company’s upcoming digital wallet product will convince customers to rely more on Zepz, rather than using competing digital banks and other financial apps which have grown their services to offer a much wider range of products.
PayPal, for example, offers users mobile wallets, the buying and selling of cryptocurrencies, and buy now, pay later installment loans, among other things.
Like other fintechs, Zepz has been in cost-cutting mode as the industry faces huge pressure from a slump in technology valuations, stoked by a host of macroeconomic headwinds including higher inflation and interest rates.
Despite this, Zepz says it has been less susceptible to those economic pressures than other firms in the space. World remittances is less impacted by broader macroeconomic pressures than, say, banking, according to Lenhard.
Zepz’s overall customer transactions are up 25% year-to-date as of April 2023, the company said, while its customer growth accelerated to 30% on average and by as much as 80% in certain areas.
The company, which hit monthly profitability in the first half of 2022, wants to achieve profitability on a full-year basis this year.
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A major financial services CEO warns the economy hasn’t fully absorbed higher interest rates yet.
Thomas Michaud, who runs Stifel company KBW, notes there’s a delayed reaction in the marketplace from the last hike — calling a 25 basis point move at 5% a very different situation than off a half percent.

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“This is getting to be the real deal at the moment because of the level of rates,” he told CNBC’s “Fast Money” on Wednesday. “The bite of these higher rates is gaining traction almost every day.”
Michaud delivered the call hours after the Federal Reserve decided to leave interest rates unchanged. It comes after ten rate hikes in a row.
The Fed signaled on Wednesday two more hikes are ahead this year. Michaud expects one to happen in July. However, he questions whether policymakers will raise rates a second time.
“Trying to deliver a new message with these dots is not what I’m willing to hang my hat on from what I see happening in the economy,” he said. “The economy is slowing. So, I think we’re near the end of this rate increase cycle.”
He lists interest rate sensitive areas of the economy already in a recession: Office space in urban areas, residential mortgage originations and investment banking revenues. He sees the problems contributing to more pain in regional banks.

“Banks were already tightening in the fourth quarter of last year. It didn’t just start in March. Loan growth had been slowing,” added Michaud. “There are elements of like the global financial crisis that are in bank stocks right now.”
According to Michaud, the regional bank rally is a short-term bounce. The SPDR S&P Regional Banking ETF is up almost 18% over the past month.
“The overall industry rally for all participants probably doesn’t happen until we get some more stability in what we think the earnings are going to be,” said Michaud. “Earnings estimates haven’t settled. They haven’t stopped going down.”
He sees a shift from adjusting to the new interest rate environment to credit quality in the second half of this year.
“Before the first quarter we cut bank estimates by 11%. After the quarter, we cut them by 4%.” Michaud said. “My instincts are we are going to cut them again.”
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WASHINGTON, DC – MAY 03: Federal Reserve Board Chairman Jerome Powell delivers remarks at a news conference following a Federal Open Market Committee meeting on May 3, 2023 in Washington, DC. The Federal Reserve announced a 0.25 percentage point interest rate increase bringing the key federal funds rate to more than 5%, a 16-year high. (Photo by Anna Moneymaker/Getty Images) (Photo by Anna Moneymaker/Getty Images)
Anna Moneymaker | Getty Images News | Getty Images

The Federal Reserve paused its hiking campaign in June, but forecast it will raise interest rates as high as 5.6% before 2023 is over, according to the central bank’s projections released on Wednesday.
The Fed on Wednesday kept the key borrowing rate in a target range of 5%-5.25%. But it was its projections, the so-called dot-plot, that moved markets, sending them lower as the central bank projected two more increases. That’s if the central bank keeps its rate-hiking pace at quarter-point increments.

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Fed Chairman Jerome Powell said the next gathering for the committee in July remains a “live” meeting, signaling that a quarter-point hike isn’t baked in yet.
“We didn’t we didn’t make a decision about July. … Of course it came up in the meeting from time to time, but really the focus was on what to do today,” Powell said in a press conference Wednesday. “I would say … two things: One, a decision hasn’t been made. Two, I do expect that it will be a live meeting.”
Here are the Fed’s latest targets:

Arrows pointing outwards

Eighteen members of the Federal Open Market Committee indicated their expectations for rates in 2023 and further out in the dot plot. Four members saw one more rate increase this year and nine expect two. Two more members added a third hike while one saw four more. Only two members signaled that they don’t see more hikes this year.
The central bank also hiked their forecasts for the next two years, now projecting a fed funds rate of 4.6% in 2024 and 3.4% in 2025. That’s up from respective forecasts of 4.3% and 3.1% previously.

Meanwhile, Fed members raised their expectations for economic growth. The Summary of Economic Projections now shows a 1% expected gain in GDP as compared to the 0.4% estimate in March.
Officials also were more optimistic about unemployment, now seeing a 4.1% rate by year’s end compared to 4.5% in March.On inflation, the central bank raised its forecast to 3.9% for core (excluding food and energy) and lowered it slightly to 3.2% for headline. Those numbers had been 3.6% and 3.3% respectively for the personal consumption expenditures price index, the central bank’s preferred inflation gauge.
— CNBC’s Jeff Cox contributed reporting. More