Biggest U.S. rate hike in nearly 30 years

This is an audio transcription of the FT press briefing podcast episode: Biggest U.S. rate hike in nearly 30 years

Marc Filipino
Hello from the Financial Times. Today is Thursday, June 16, and it’s your FT News Briefing. The Federal Reserve approves the largest U.S. interest rate hike in nearly 30 years. The European Central Bank promises to protect weaker economies from its rate hikes. Plus, a hedge fund founder exposes the link between America’s economic inequality and the Jan. 6 Capitol riot. I’m Marc Filippino, and here’s the news you need to start your day.

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US interest rates rise three-quarters of a percentage point. They haven’t grown much since 1994. It’s like Netscape a long time ago. Fed Chairman Jay Powell began his press conference yesterday by explaining why this aggressive move is so important.

Jay Powell
The economy and the country have been through a lot over the past two and a half years and have shown resilience. Bringing inflation down is essential if we are to have a sustained period of good labor market conditions that benefit everyone.

Marc Filipino
The FT’s US economics editor Colby Smith was there to cover the press conference and is now here to help us make sense of this interest rate hike. Hi Colby.

Colby Smith
Hello marc.

Marc Filipino
So, Colby, until recently Fed officials had said they were just going to hold interest rate hikes to half a percentage point. And then this week, at yesterday’s meeting, the Fed, of course, as I just said, raised interest rates by three-quarters of a percentage point. Why did they change their minds and become so much more aggressive?

Colby Smith
They changed their minds because of two rather alarming reports on Friday that showed an unexpected rise in consumer prices in May and a very, you know, worrying rise in inflation expectations that suggested that Americans more generally are increasingly concerned about the outlook for inflation in the future. So I think those two reports put together, Powell called the jump in inflation expectations eye-catching, so I think in many ways they realize that a 75 basis point hike was much more appropriate given underlying inflation trends.

Marc Filipino
So Colby, markets like this, at one point the S&P 500 was up 2% after the Fed announced this news, but real people are going to be affected by this, aren’t they? That the Fed’s dual mandate, monitoring inflation and unemployment, is willing to let unemployment rise a bit to bring inflation rates down. So between higher interest rates and high inflation, it hasn’t stabilized yet. What does that do to the average American?

Colby Smith
So President Powell kind of conceded at that point in the press conference where he said the type of way, that soft landing, that would be the ability to get inflation down without, you know, a pain substantial economy, that it was becoming more and more difficult. To be fair, the unemployment rate is at historic lows right now, at 3.6%. Even the projection of a rising unemployment rate of around 4% in 2024, according to Powell, reflects a soft landing. So they haven’t completely moved away from this idea that they can bring down inflation and that they will necessarily cause a recession. But at the same time, I think that path is getting narrower and narrower. And that’s exactly what we heard from Powell.

Marc Filipino
Colby Smith is the US economics editor. Thanks Colby.

Colby Smith
Thanks.

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Marc Filipino
Now, when the European Central Bank said last week that it would raise interest rates for the first time in more than a decade, it worried a lot of people. People fear that Europe will return to a debt crisis like the ones we experienced in 2012 and 2014. So the ECB held an emergency meeting yesterday and the central bank signaled that it would lend a hand to the weakest economies. This is Martin Arnold from the FT.

Martin Arnold
The ECB has announced that it will accelerate work on a new anti-fragmentation instrument to deal with the recent turmoil in bond markets. But the announcement lacked details because it was long in ambition. This reflects how the ECB has been backed into a corner. On the one hand, he wants to fight the record levels of inflation in the eurozone by stopping bond purchases and starting to raise interest rates. But on the other hand, this tightening of monetary policy is causing turmoil in bond markets, pushing up the cost of borrowing, especially of weaker countries like Italy, to levels they never had before. not reached for eight years or more. And this threatens a new debt crisis in the euro zone, which the ECB realizes it must control.

Marc Filipino
So what does this tell us about the unique challenges facing the ECB?

Martin Arnold
There is an apparent contradiction in what the ECB is trying to do. And this contradiction stems from the incomplete nature of the eurozone union. So, while other central banks like the US Federal Reserve and the Bank of England may raise interest rates with a single objective, the ECB must always keep an eye on the risk of fragmentation in the zone’s bond markets. euro. And that’s because, despite sharing a single currency, eurozone countries have their own fiscal policy in their own bond markets, making them vulnerable to investors betting on the odds that one or the Any other of them defaulted on their debts, and the entire single currency could break up, which the ECB, as guardian of the euro, could not allow. Thus, at the same time as it increases interest rates and stops most of its bond purchases, it must think about relaunching another bond purchase program to limit this risk of fragmentation.

Marc Filipino
It is the head of the FT office in Frankfurt, Martin Arnold.

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Members of Congress are currently investigating the events leading up to an attack on the US Capitol last year. This followed claims by Donald Trump that the election was stolen from him. This week’s hearings have led to a number of revelations about what led to the Jan. 6 riot, but what made people come to DC, take up arms and try to harm politicians? Ray Dalio has spent his career observing the links between money and politics. Dalio is the founder and chairman of Bridgewater Associates, the world’s largest hedge fund. And he said that given the growing wealth gap in America, he was not surprised by the Capitol riot.

Ray Dalio
So you lose the middle, you get more and more extremism. And then because it’s a win-at-all-costs approach, the laws and the Constitution become secondary. So, for example, if we deal with some of the issues here in the United States today or in other countries as well, we see that it’s possible that neither side will accept losing the election.

Marc Filipino
Dalio was speaking to the FT’s chief foreign affairs commentator, Gideon Rachman, for this week’s episode of Rachman review podcast. Dalio has made it clear that he believes wealth should be recycled more efficiently and billionaires like him should pay more taxes.

Ray Dalio
Yes, I am a product of the system. Now it was seen as living the American dream. But as always, when you have, say, a capitalist system in which it distributes wealth unevenly, that may not be a problem in itself, even if it has problematic elements, but it also creates an unfair system because that those who are richer can better educate their children.

Marc Filipino
And Dalio says the United States needs to invest more in education.

Ray Dalio
There is hardly a better investment you can make to have a great education throughout the system. However, the Constitution makes it primarily a matter of state. And when you go to states, in most states, it’s a matter of tax district. So, for example, I live in Greenwich, Connecticut, and in the average public school system here, the average per capita spending is $24,000 per student. So up the road in Bridgeport, Connecticut, 15 minutes away where there’s poverty, it’s $14,000 per student. And these regions need it more.

Marc Filipino
Ray Dalio speaks to the FT’s chief foreign affairs commentator, Gideon Rachman, in this week’s edition of the Rachman review podcast. The new episode is out today.

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Before leaving, a little update on the war in Ukraine. European leaders are due to meet the Ukrainian president this week, potentially as early as today. French President Emmanuel Macron, Italian Prime Minister Mario Draghi and German Chancellor Olaf Scholz will meet Volodymyr Zelenskyy to discuss Ukraine’s membership of the European Union. Sources tell the FT that the European Commission will likely recommend that Ukraine be granted EU candidate status on Friday. This is the first step towards joining the bloc.

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You can read more about all these stories on FT.com. This has been your daily press briefing on FT. Be sure to check back tomorrow for the latest trade news.

This transcript was generated automatically. If by any chance there is an error, please send the details for a correction to: typo@ft.com. We will do our best to make the change as soon as possible.

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