Fed holds rates as inflation fears grow

0:28Hey, guys. It's Mark checking in from my time off. Good morning from the Financial Times. Today is Thursday, July 30th, and this is your FT News Briefing. Meta and Microsoft reported earnings yesterday. And how much wiggle room does the new Fed chair have to keep interest rates on hold? Walsh has been very, very consistent in terms of saying he will fight inflation. However, that begs the question, why not raise interest rates? Plus, U.K. oil and gas companies are giving the North Sea the cold shoulder. I'm Sonia Hudson, in for Mark Filipino, and here's the news you need to start your day.

1:17You might remember in yesterday's show, the FT's Rob Armstrong laid out a dilemma for big tech companies as they report their earnings. Can one of these companies get the mix right of strong AI growth without the overwhelming and terrifying AI spending? Get that balance wrong and investors will sell off the company's stock. Well, Meta and Microsoft both reported earnings yesterday. So we asked Rob if they managed to thread the needle. The most important thing was that neither company increased its target for AI capital expenditure, for AI investment. So that takes care of the spending side of the seesaw between spending and growth that these companies are sitting on.

2:10But there was two different stories on the growth side. Microsoft came through with growth in its intelligent cloud business that pleased markets, whereas Meta's guidance for growth in the months to come disappointed. And so Meta's shares are down and Microsoft's are up. That's the FT's U.S. financial commentator, Rob Armstrong. He also hosts the Unhedged podcast. We've got a link to that in the show notes.

2:41the federal reserve kept interest rates steady yesterday for the fifth meeting in a row despite pressure to raise them inflation is still running above the central bank's target and the iran war is adding more fuel to the fire fed chair kevin war said at his press conference yesterday that the central bank is committed to bringing down inflation we are on the job We will deliver. We are focused like a laser on making sure we can do it. But the suggestion that we're going to be able to do it with our magic wand is one I want to disabuse you and everyone else of. Here to tell us more is the FT's U.S.

3:21economics editor, Claire Jones. Hi, Claire. Hi, Sonia. OK, so at first glance, these ideas might seem in conflict with each other. The Fed is committed to bringing down inflation, but it didn't do anything with its main tool to address that yesterday, which is interest rates. Why? It's a great question, Sonia, and it's one that was us time and again during yesterday's press conference. Walsh has been very, very consistent in terms of saying he will fight inflation, that he's not happy with the status quo, where inflation's been above the Fed's 2 % goal for the past five years. However, that begs the question, why not raise interest rates?

4:02And the best answer Walsh could give was that markets have done some of the heavy lifting for them. Market judgments have moved up on what nominal rates are across the Treasury curve. He noted that in the intermeeting period, we've seen markets pricing a greater chance of a rate rise to come. Rates are higher today than they were 42 days ago. The yields on the two-year and the 10-year, which are both very sensitive to expectations for interest rates and have a big impact on the borrowing costs U.S. households and businesses pay, have edged up by 0.2 percentage points. That's almost the same impact as a quarter point rate rise from the Fed.

4:51We'll be continuing to watch that market information, see how it responds to incoming events, and that can help inform our decision making when we meet in seven or eight weeks. However, whether or not people will be convinced by Walsh's rhetoric that he's serious about fighting inflation if he continues to rely on the markets is another thing. And while Walsh is new on the job now and has suggested the committee leads more time, time may be running out. OK, so we talked about what the markets did in the run up to the meeting. How have they responded since yesterday's rate decision and press conference?

5:30Well, the initial reaction has been not particularly favorable. We've seen a big gyration in the 30-year US Treasury bond, which is a bit of a signal about the market maybe doubting Walsh's commitment to inflation and really gives that sense about while it may be acceptable to have held interest rates yesterday. The market may be a bit more of a tougher judge if come September, we still see US borrowing costs officially in the same place as they were today. I think the message from the bond market yesterday was really, we want to see action here. You can say you're hawkish, but we're going to want to see proof of it from the Fed.

6:20And that will mean rate rises in the months to come. Did Warsh give any indication that the Fed could raise interest rates in September? We didn't get a clear answer on that. We know Warsh wants to stay away from messaging about what the Fed does next. He doesn't like the so-called forward guidance approach that his predecessors relied upon. However, we got the sense that he was perfectly happy with the markets pricing in interest rate hikes to come, which gives the sense that he'd be perfectly comfortable should the data go the way people expect, raising interest rates in September. Claire Jones is the FT's U.S.

7:00economics editor. Thanks, Claire. Thanks, Sonia.

7:09The Bank of Japan is also meeting this week. It's expected to hold interest rates steady tomorrow after increasing them by a quarter point last month. But investors have warned that the BOJ risks losing credibility if it doesn't raise rates more quickly. They're concerned about rising inflation and government spending plans. Japanese government bonds and the yen have both sold off this year as a result. The yen actually hit a four-decade low earlier this month. So tomorrow, investors will be looking for any sign that more rate increases are coming. So far, traders have only priced in one more quarter point rise by January.

7:57UK oil and gas companies are setting their sights abroad. They've spent three times more on international acquisitions than on North Sea deals over the past four years. That's a complete reversal from the previous four years. Here to tell us why the companies are turning away from their homeland, or home sea, I guess, is the FT's Malcolm Moore. He's our energy editor. Hi, Malcolm. Hi there. So why is this happening? Well, let me just give you a little bit of historical context, right? So the UK discovered oil in the North Sea in the 1970s, and there was a huge industry. And then in the 1990s, late 1990s, the oil fields have been declining and a lot of the majors started to sell down their portfolios.

8:47And now we're seeing another wave of activity, which is that companies who are in the North Sea are thinking, well, look, this basin is not going to last forever. How can we use the cash that we're generating there to start building companies that can survive into the future? Also contributing to the issue is a tax that came in 2022, a sort of windfall tax on oil and gas profits. That was introduced after Russia invaded Ukraine and gas prices went through the roof. And that has effectively lifted the tax rate on UK oil and gas companies to 78%. So that's also pushing them to look for opportunities elsewhere.

9:32And where are these companies making acquisitions instead? So what we've seen over the past four years since the windfall tax came into place is that UK companies have spent almost$19 billion on international deals. $11 billion of that was just one single deal, which was a company called Harbor Energy that bought a sort of portfolio of lots of different oil fields in all sorts of places, Norway, Argentina, you know, Mexico and so on. Other deals have been in the U.S. Gulf of Mexico. And then more recently, we've seen some companies look at Southeast Asia, particularly Malaysia and Vietnam. Well, what do you think this all will ultimately mean for domestic oil production in the UK?

10:22Well, it's a bit chicken and egg because investment is falling and also production is falling. And companies say they don't want to invest for a couple of reasons, the first being the high tax rates. But the other problem they have is that the government keeps changing its policy over the North Sea. The current government basically has said it's not issuing any new exploration licenses in the basin. But they also say that, oh, well, maybe we'll allow companies that already have licenses to do these things called tiebacks, where you're kind of nearby an existing field and you can just tie the new field to the old one.

11:00So maybe we'll let companies do that. Either way, there are two really big projects called Rosebank and Jackdaw, both multi-billion dollar investments that are still waiting for final approval. So if we see that those projects don't get the go ahead, that would be a big blow to the industry. And I think people will say, well, you know, if we can invest billions and still have to walk away, then why should we be here at all? Malcolm, what does this shift in investment mean for the UK economy or the business environment overall? So it's a big running argument here. The people who are against more oil and gas exploration tend to be the environmentalists who say these projects will basically take the UK off track from its carbon targets.

11:49The people who support a domestic oil and gas industry say that it creates a lot of jobs. And even though it's not going to bring down the price of oil and gas in the UK, it's better for security of supply to have access to your own domestic gas rather than piping it in from Norway or importing it on a ship from the US. Malcolm Moore is the FT's energy editor. Thanks, Malcolm. Thank you.

12:18You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News briefing. Check back tomorrow for the latest business news.

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