When the Federal Reserve Board’s Open Market Committee meets next Tuesday and Wednesday, one thing is certain—the Fed will cut its benchmark interest rate for the first time in more than two years. For insight, BBTW spoke with an excellent translator of arcane monetary policy: Tyler Schipper, a professor of economics at the University of St. Thomas in Minneapolis. Here’s our Q&A (edited for brevity and clarity).
What’s prompting the Fed to finally cut rates? This week’s report that inflation is down to nearly 2%?
This is the lowest we’ve seen inflation since February of 2021. The numbers have been going down, and it’s giving the Fed the confidence they need to start making rate cuts. In fact, the conversation you will likely see out of the meeting next week will be less about inflation and more about the risks to the job market. Remember, on monetary policy, the Fed has a dual mandate: maintain stable prices, which they interpret as 2% inflation, and maintain the highest level of employment that doesn’t cause inflation.
There’s been a lot of criticism that the Fed waited too long to cut rates, driving up prices and the cost of credit and crimping the housing market in particular.
The Fed has been very cautious because they want to see this inflationary dragon dead for sure before they cut rates. I think if they had kept rates at 3% to 5%, inflation would have come down anyway, because we were facing supply-side pressures [as a result of the pandemic disruptions]. That’s why we had the pandemic stimulus, to help people get by as prices shot up. Maybe the Fed could have acted a little faster, but we were asking them to respond to a macroeconomic event [the pandemic] they’d never seen before and didn’t have many data points to draw from.
So how much will they cut rates by?
The intrigue has been whether the cut will be a quarter of a percent or half a percent. The Fed has been pretty cautious, especially under [Fed chair Jerome Powell], so it would be strange if all of a sudden they made a jumbo rate cut. But they will also offer their projections for the rest of the year, and the markets will be looking at how fast future cuts will follow. I think the markets are overly optimistic. Earlier this year the markets thought there’d be six to seven rate cuts this year, but the Fed has always indicated it will make about three cuts, and I think that’ll be the reality.
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The Usual Suspects
- Elon’s World: Playing catchup in the AI race, Musk has been looking for ways to move cash from Tesla to his xAI project. The latest effort: Formalizing a partnership that would have Tesla pay a third Musk entity for access to xAI tools used in Tesla cars. But shareholders of Tesla, a public company, are objecting to the financial transfers, the Wall Street Journal reports. • If we don’t get to Mars, it’s all Kamala Harris’s fault, Musk said in a tweet promoting Donald Trump. Never mind the lack of air, the high doses of solar radiation, and the low gravity that would make Mars colonization impossible. • Musk could become the world’s first trillionaire some time in the next two years, if his personal wealth keeps on increasing at its current rate of 110% a year, according to the Informa Connect Academy, a unit of the professional conferences firm Informa. • After Taylor Swift, a childless, cat-owning billionaire who’s more popular than Musk, announced on Instagram she’d vote for Kamala Harris, Musk replied on X, “Fine Taylor … you win … I will give you a child and guard your cats with my life.”
- Gas Pains Ebb: Slowing demand for oil and concerns about global economic growth have crimped prices, with benchmark Brent crude trading at about $71 a barrel, far below what OPEC’s megaproducers, Saudi Arabia and Russia, need to balance their budgets. That has OPEC holding off on plans to roll back production cuts it made several months ago in a so-far futile effort to prop up prices. That’s good news for consumers, who are seeing regular gasoline at a national average of $3.25 a gallon this week, down 19 cents in the past month.
- Irish Eyes Are Fining: Apple’s move to Ireland, where it thought it could shield some earnings from taxes, backfired big time this week, when the European Court of Justice ruled Ireland has to claw back $14.35 billion in taxes and penalties from Apple for having offered unfair tax breaks. Fellow tech titan Google lost its own appeal on an anti-competition ruling, with the court affirming a €2.42 billion fine for rigging its browsers to give top billing to Google’s own comparison-shopping business over those of other firms. Google says it changed its practices back in 2017.
Cold Brew
Brian Niccol stepped off his private jet from Long Beach and into the CEO role at Starbucks’ Seattle office on Monday, and immediately started shaking things up. In an open letter to his baristas around the world, Niccol said “we aren’t always delivering,” with an “overwhelming” menu, slow service and inconsistent quality, especially in the U.S. First up, making stores both more welcome to lingerers and faster to serve grab-and-go customers. Niccol’s letter appeared to debunk expectations that Starbucks would sell off its faltering China business, saying the company needs to “understand the potential path to capture growth” in the world’s most populous market. Niccol says he’ll invest in more training for workers, and give baristas “the tools and time to craft great drinks.” No word on whether they’ll also get lessons in spelling customers’ names. Q2 sales were down 5% in the number of items sold, and 3% in dollar terms, from Q1. Starbucks operates more than 39,000 stores in 87 countries. Shares are up more than 25% since Niccol was named CEO last month.
The Short Stack
- Aiming for Hole in One: LIV Golf and the PGA Tour are getting close to a deal that would let pro golfers play in both tournaments. The PGA Tour, a U.S.-based nonprofit with $1.9 billion in revenue in 2022, has been battling LIV, which is funded by Saudi Arabia’s sovereign wealth fund. LIV teed off with top golf stars by offering contracts of $100 million or more to top pros including Phil Mickelson, Brooks Koepka, Dustin Johnson, Bryson DeChambeau, and Cam Smith. The PGA Tour gave out more than $560 million in prize money in 2023, with a $100 million shared among the top 20 players. So far, the PGA Tour has barred its members from playing in LIV, and the lucrative media rights that come with it would bring even more money for golf’s top players.
- SquareSpace Sale: Private equity fund Permira has reached a deal to buy website company SquareSpace for $7.2 billion.
- Put It in the Debit Column: Accounting and consulting firm PricewaterhouseCoopers is laying off about 1,800 U.S. employees, around 2.5% of its workforce, as demand wanes. The firm let the affected employees know in a letter that was pure consultant-speak: “Ultimately, we are positioning our firm for the future, creating capacity to invest, and anticipating and reacting to the market opportunities of today and tomorrow,” U.S. chief Paul Griggs wrote in a letter obtained by the Wall Street Journal.
Crunchtime in Trumpland
On September 19, Donald Trump will get the chance to become a billionaire—again. That’s when the so-called lockup period ends on his $2 billion stake in Trump Media & Technology Group, the publicly traded parent company of Truth Social, the social media network that is his primary online megaphone. Lockups are meant to keep founders and insiders from selling fast and tanking a company’s shares on their way out the door. But Trump Media—which trades, of course, under the symbol DJT—has already lost more than 70% of its value since its debut in March, including a 12% drop after Trump’s debate on Tuesday with Vice President Kamala Harris. Trump’s 57% stake has shed more than $4 billion in value. If Trump cashes out, the price would likely fall even further, wiping out the investments of the company’s 600,000 shareholders, many of them fervent supporters of his presidential run. The company has been losing tens of millions of dollars a month, and there’s little prospect that it will ever make a profit.
Peter S. Green is a veteran reporter and editor who has spent more than two decades covering business and finance from Eastern Europe to New York City, and has worked for Bloomberg News, The New York Post, The New York Times and The Messenger. He lives in New York City and is always looking for the next big story.
