Business
Fed hikes US interest rates to fresh 14y high
The US central bank has approved another sharp rise in interest rates as it wrestles to rein in fast rising prices.
The Federal Reserve said it was raising its key interest rate by 0.75 percentage points, lifting it to its highest rate since early 2008.
The bank hopes pushing up borrowing costs will cool the economy and bring down price inflation.
But critics are worried the moves could trigger a serious downturn.
The latest increase takes the bank’s benchmark lending rate to 3.75% – 4%, a range that is the highest since January 2008.
Federal Reserve chairman Jerome Powell warned that rates were likely to move up again, saying that speculation that the bank might pause was “premature”.
“We still have some ways to go,” he said at a press conference following the announcement.
The US’s actions come as many other countries also raise rates in response to their own inflation problems, which have been fuelled by a mixture of factors, including higher energy prices as a result of the war in Ukraine.
In the UK, the Bank of England started raising rates last year but has so far opted for smaller hikes than the Fed. The Bank of England is expected to announce its own 0.75 percentage point hike on Thursday – the biggest such move since 1989.
The sharp rise in borrowing costs has already started to cool some parts of the economy, such as housing.
‘Stay the course’
But many analysts say more economic slowdown is necessary if inflation is to return to the 2% level considered healthy.
“There is always the hope of painless, immaculate disinflation,” said economist Willem Buiter, a former member of the Monetary Policy Committee of the Bank of England who is now an independent economic advisor. “Unfortunately there are very few historical episodes that fit that picture.”
“This is not going to be a pleasant year,” he added.
Inflation – the rate at which prices rise – hit 8.2% in the US last month. That is down from June when it rose to 9.1%, the highest rate since 1981.
A decline in energy prices has helped ease the pressures, but the cost of groceries, medical bills and many other items is still rising.
That is adding hundreds of dollars to the monthly expenses of typical households as wages – while increasing – have not kept pace.
Mr Powell said restoring price stability was key to maintaining a healthy economy and said that he saw few signs, as yet, that the price pressures were easing consistently.
While it remains unclear how high rates will ultimately need to go, Mr Powell said they look likely to end up higher than banking policymakers had previously expected.
“We will stay the course until the job is done,” he said.
Policy error risk
Already, the Fed’s actions have raised borrowing costs at the fastest pace in decades.
Such moves make it less likely that people will spend on big ticket items, such as homes, cars or expanding their businesses. That fall in demand is, in turn, expected to curb price increases.
But there is growing concern among some analysts in the US about job losses – another expected outcome.
Liz Shuler, head of the AFL-CIO labour union, said on Wednesday that the Fed’s moves would be “direct and harmful on working people”, and that it was failing to address the root causes of the inflation problem.
“Working people should not be the target of lowering inflation – it should be corporations that are earning record profits,” she said.
In a statement accompanying their decision, Fed policymakers said they were conscious that there would be a lag before the economy would feel the full impact of their policies, and pledged to factor that in to their decision making.
Stock markets initially jumped, interpreting that message as a sign that rate rises might slow – or even pause in coming months. But they swung lower again during the press conference, after Mr Powell appeared keen to counter those expectations.
The Dow Jones ended the day down 1.5%, while the S&P 500 sank 2.5% and the Nasdaq fell 3.3%.
“Not much has really changed and it seems markets are looking for any apparent dovish reason to lift higher,” said Charles Hepworth, investment director of GAM Investments. “We do not expect a pivot yet but the ‘2023’ pause is obviously not far off.”
The Fed has been able to move relatively quickly compared with the UK, where the Bank of England is contending with more immediate risk of a recession, as well as financial instability risks, said Ryan Sweet, chief US economist at Oxford Economics.
But, Mr Sweet warned, “The risk of policy error is very very elevated across the world, because central banks want to tame inflation and they’re going to do whatever it takes to bring it down.”
Fed Chair Jay Powell got a lot of criticism for responding too slowly to inflation when it first reappeared in 2020.
No one can deny he’s moving quickly now.
Four 0.75 percentage point hikes in a row is lightning fast in the world of monetary policy. As Mr Powell alluded to in his press conference, none of his predecessors – from Alan Greenspan, to Ben Bernanke, to current US Treasury Secretary Janet Yellen – have had to hike rates that fast.
But as the race to beat inflation continues, the question for everyone is: will Mr Powell and his colleagues on the FOMC really keep up this pace?
As he said in the press conference: there’s still more ground to cover. That sounds like another rate hike is likely in December.
But in its statement, for the first time in this tightening cycle, the Fed did explicitly acknowledge that slowing the pace will be warranted at some point, since it takes a long time for the effect of rate hikes to show up in economic data.
So for now the ferocious pace of rate rises continues. Even if, for those paying close attention, there are one or two signs that Jerome Powell’s fast moving Fed might slow down soon.
Reports /TrainViral/
The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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