Wed, April 24, 2024 at 9:35 AM EDT
Business
U.S. Federal Reserve hikes interest rate by largest amount since 1994 – The Globe and Mail
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U.S. Federal Reserve Chair Jerome Powell speaks during a news conference on interest rates, the economy and monetary policy actions, at the Federal Reserve Building in Washington on June 15.OLIVIER DOULIERY/AFP/Getty Images
The U.S. Federal Reserve has announced its largest interest rate increase since 1994, and said that it would continue pushing borrowing costs higher in an effort to restrain the highest inflation in four decades.
Officials announced a 0.75 percentage point interest rate increase on Wednesday, lifting the benchmark federal funds rate to between 1.5 per cent and 1.75 per cent.
The move marks an abrupt shift at the world’s largest central bank, and suggests a willingness by the central bankers to squeeze the U.S. economy to prevent prices from spiralling further out of control.
Higher interest rates make borrowing more expensive for households and businesses, with the aim of reducing the amount of demand in the economy. This slows the pace of growth in consumer prices. But it can also lead to a recession if the central bank miscalculates and tightens monetary policy too much, curtailing consumer spending and business investment, and pushing up unemployment.
Bank of Canada would be wise to match U.S. Federal Reserve’s plans for aggressive rate hikes
The Fed’s interest rate hikes in recent months and increasingly hawkish language have already led to tighter credit conditions in the United States and around the world. Global borrowing costs tend to follow what happens in the U.S. That’s led to a decline in house prices in some markets and a sharp sell-off in financial assets such as stocks.
Fed officials had previously signalled that they would announce an increase of a half a point this week. But they were surprised in the days leading to the rate decision by data that showed the rate of inflation continues to march higher. It hit a 40-year-high of 8.6 per cent in May.
Reports published in recent days also showed that Americans are beginning to expect persistently high inflation – a situation that makes the Fed’s job of getting the rate of inflation back to 2 per cent much more difficult.
“We’ve been expecting progress [on inflation], and we didn’t get that, we got sort of the opposite,” Fed chair Jerome Powell said at a news conference after the rate announcement.
Inflation was already at a multidecade high at the start of the year, eating into U.S. wages and savings. Russia’s invasion of Ukraine has made matters worse by pushing global oil and food prices sharply higher in recent months.
This has forced central banks, including the Bank of Canada, to begin raising interest rates rapidly in the hope of preventing high inflation from becoming entrenched, as happened in the 1970s and early 1980s.
Mr. Powell said he did not expect moves of 75 basis points to become common. But he said the Fed would likely consider a hike of 50 or 75 basis points at its meeting in July, with the goal of getting interest rates to a “modestly restrictive level” by the end of the year. (A basis point is one 100th of a percentage point.)
Economic projections published on Wednesday show that Fed officials now expect the federal funds rate will rise to 3.4 per cent by the end of the year, and to 3.8 per cent next year. That’s a stark change from March, when officials expected the benchmark rate to hit 1.9 per cent by the end of the year and 2.8 per cent by 2023.
“We aren’t going to declare victory until we really see convincing evidence, compelling evidence that inflation is coming down,” Mr. Powell said.
After the Fed’s mega rate hike, stock markets vacillated between fear and relief, capturing the tortured relationship between equities and interest rates. Despite the Fed’s hawkish turn, the S&P 500 index gained 1.46 per cent on the day, while the S&P/TSX Composite Index advanced by 0.32 per cent.
This follows a dramatic sell-off on Monday, after the idea that the Fed would move 75 basis points became widespread in financial markets.
In general, equity investors prefer low rates – they make stocks more attractive than low-yielding bonds, and their economic effect tends to boost corporate earnings by making it cheaper to borrow.
This had been the case through the first two years of the pandemic, when emergency central bank action on rates helped orchestrate a monumental rebound in stock markets. From the lows of March, 2020, the S&P/TSX Composite Index roughly doubled over the next two years, while the S&P 500 index gained about 115 per cent.
Now, having lost control of inflation, central banks no longer have the luxury of coming to the stock market’s rescue as it has in the past, by slashing rates when appetite for risky assets such as stocks crumbles.
“The Fed’s primary goal is to tame inflation right now, and not to boost the equity markets,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, wrote in a note. “And depressed market conditions seem necessary in achieving that goal.”
But investors generally seem to have grasped that aggressive policy changes are required to conquer the worst inflation threat in a generation. Influential people in the U.S. financial community, such as activist investor Bill Ackman, have called for enormous rate hikes to restore the Fed’s credibility with financial markets.
The accelerated pace of interest rate hikes is risky. If the Fed tightens monetary policy too much, it could push the U.S. economy into a recession. The Fed’s updated economic forecast, published on Wednesday, doesn’t show the country’s economy falling into recession, but it does show growth slowing and unemployment rising.
The Fed now expects 1.7-per-cent annual GDP growth this year and next year, down from its March projection of 2.8-per-cent growth this year and 2.2 per cent next year. Meanwhile, it expects the rate of unemployment to rise from 3.6 per cent today to 3.9 per cent next year and 4.1 per cent in 2024.
“We don’t seek to put people out of work,” Mr. Powell said. “Of course, we never think too many people are working and fewer people need to have jobs. But we also think you really cannot have the kind of [robust] labour market we want without price stability.”
He said in May that he expects the U.S. economy can achieve a “softish” landing: reducing inflation without causing a sharp rise in unemployment. He reiterated this point on Wednesday, although he acknowledged that high oil prices and the conflict in Ukraine are making a soft landing harder to achieve.
“Many factors we don’t control are going to play a very significant role in deciding whether that’s possible or not,” Mr. Powell said. “There is a path for us to get there. It’s not getting easier, it’s getting more challenging.”
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Oil companies planning to ship crude on the expanded Trans Mountain pipeline in Canada are concerned that the project may not begin full service on May 1 but they would be nevertheless obligated to pay tolls from that date.
In a letter to the Canada Energy Regulator (CER), Suncor Energy and other shippers including BP and Marathon Petroleum have expressed doubts that Trans Mountain will start full service on May 1, as previously communicated, Reuters reports.
Trans Mountain Corporation, the government-owned entity that completed the pipeline construction, told Reuters in an email that line fill on the expanded pipeline would be completed in early May.
After a series of delays, cost overruns, and legal challenges, the expanded Trans Mountain oil pipeline will open for business on May 1, the company said early this month.
“The Commencement Date for commercial operation of the expanded system will be May 1, 2024. Trans Mountain anticipates providing service for all contracted volumes in the month of May,” Trans Mountain Corporation said in early April.
The expanded pipeline will triple the capacity of the original pipeline to 890,000 barrels per day (bpd) from 300,000 bpd to carry crude from Alberta’s oil sands to British Columbia on the Pacific Coast.
The Federal Government of Canada bought the Trans Mountain Pipeline Expansion (TMX) from Kinder Morgan back in 2018, together with related pipeline and terminal assets. That cost the federal government $3.3 billion (C$4.5 billion) at the time. Since then, the costs for the expansion of the pipeline have quadrupled to nearly $23 billion (C$30.9 billion).
The expansion project has faced continuous delays over the years. In one of the latest roadblocks in December, the Canadian regulator denied a variance request from the project developer to move a small section of the pipeline due to challenging drilling conditions.
The company asked the regulator to reconsider its decision, and received on January 12 a conditional approval, avoiding what could have been another two-year delay to start-up.
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Tesla profits slump by more than a half
Tesla has announced its profits fell sharply in the first three months of the year to $1.13bn (£910m), compared with $2.51bn in 2023.
It caps a difficult period for the electric vehicle (EV) maker, which – faced with falling sales – has announced thousands of job cuts.
Boss Elon Musk remains bullish about its prospects, telling investors the launch of new models would be brought forward.
Its share price has risen but analysts say it continues to face significant challenges, including from lower-cost rivals.
The company has suffered from falling demand and competition from cheaper Chinese imports which has led its stock price to collapse by 43% over 2024.
Figures for the first quarter of 2024 revealed revenues of $21.3bn, down on analysts’ predictions of just over $22bn.
But the decision by Tesla to bring forward the launch of new models from the second half of 2025 boosted its shares by nearly 12.5% in after-hours trading.
It did not reveal pricing details for the new vehicles.
However Mr Musk made clear he also grander ambitions, touting Tesla’s AI credentials and plans for self-driving vehicles – even going as far as to say considering it to be just a car company was the “wrong framework.”
“If somebody doesn’t believe Tesla is going to solve autonomy I think they should not be an investor,” he said.
Such sentiments have been questioned by analysts though, with Deutsche Bank saying driverless cars face “technological, regulatory and operational challenges.”
Some investors have called for the company to instead focus on releasing a lower price, mass-market EV.
However, Tesla has already been on a charm offensive, trying to win over new customers by dropping its prices in a series of markets in the face of falling sales.
It also said its situation was not unique.
“Global EV sales continue to be under pressure as many carmakers prioritize hybrids over EVs,” it said.
Despite plans to bring forward new models originally planned for next year the firm is cutting its workforce.
Tesla said it would lose 3,332 jobs in California and 2,688 positions in Texas, starting mid-June.
The cuts in Texas represent 12% of Tesla’s total workforce of almost 23,000 in the area where its gigafactory and headquarters are located.
However, Mr Musk sought to downplay the move.
“Tesla has now created over 30,000 manufacturing jobs in California!” he said in a post on his social media platform X, formerly Twitter, on Tuesday.
Another 285 jobs will be lost in New York.
Tesla’s total workforce stood at more than 140,000 late last year, up from around 100,000 at the end of 2021, according to the company’s filings with US regulators.
Musk’s salary
The car firm is also facing other issues, with a struggle over Mr Musk’s compensation still raging on.
On Wednesday, Tesla asked shareholders to vote for a proposal to accept Mr Musk’s compensation package – once valued at $56bn – which had been rejected by a Delaware judge.
The judge found Tesla’s directors had breached their fiduciary duty to the firm by awarding Mr Musk the pay-out.
Due to the fall in Tesla’s stock value, the compensation package is now estimated to be around $10bn less – but still greater than the GDP of many countries.
In addition, Tesla wants its shareholders to agree to the firm being moved from Delaware to Texas – which Mr Musk called for after the judge rejected his payday.
Business
Stock market today: Nasdaq futures pop, Tesla surges after earnings with more heavyweights on deck
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Tech stocks rose on Wednesday, outstripping the broader market as investors welcomed Tesla’s (TSLA) cheaper car pledge and waited for the next rush of corporate earnings.
The Nasdaq Composite (^IXIC) rose roughly 0.6%, coming off a sharp closing gain. The S&P 500 (^GSPC) was up 0.2%, continuing a rebound from its longest losing streak of 2024, while the Dow Jones Industrial Average (^DJI) fell 0.1%.
Tesla shares jumped nearly 12% after the EV maker’s vow to speed up the launch of more affordable models eclipsed its quarterly earnings and revenue miss. That cheered up investors worried about growth amid a strategy shift to robotaxis and the planned cancellation of a cheaper model.
The results from the first “Magnificent Seven” to report have intensified the already high hopes for Big Tech earnings, that the megacaps can revive the rally in stocks they powered. The spotlight is now on Meta’s (META) report due after the market close, as the Facebook owner’s shares rose after the Senate voted for a potential ban on rival TikTok. Microsoft (MSFT) and Alphabet (GOOG) next up on Thursday.
Meanwhile, Boeing (BA) reported better than expected first quarter results before the opening bell with a loss per share of $1.13, narrower than the $1.72 estimated by Wall Street. Shares rose about 2% in morning trade.
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