Hike or hold: Investors split ahead of Fed decision

0:28Hey guys, it's Mark checking in from my time off. Good morning from the Financial Times. Today is Monday, July 27th, and this is your FT News Briefing. To hike or not to hike, that is the question facing the Fed this week. Plus, violent wildfires continue to rage in France and Spain. And we'll talk about how developing countries are trying to plan for the next energy crisis. Countries from South Africa to India to Pakistan to the Philippines are, in some cases, for the very first time, thinking of acquiring these reserves or expanding what they have. I'm Victoria Craig, and here's the news you need to start your day.

1:19We're keeping tabs on interest rate decisions this week in the UK, Japan and here in the US. But it's that last one, what the Federal Reserve will do at its two-day meeting, that's still a bit of a toss-up. Investors have boosted bets that policymakers will opt to raise rates on Wednesday as this month's surge in oil prices threatens to ignite a fresh bout of inflation. Claire Jones is here to chat about what the discussion around that roundtable is likely to be. Claire is our U.S. economics editor. Hi there. Hi, Victoria. OK, so it's almost a 50-50 call. That's how one asset manager put the odds of a rate rise this week.

1:56What is going to be the deciding factor? So the market odds, as we are talking, something like 38 percent of a rate rise, that's unusually high this far out from a Fed meeting. Usually markets are pretty sure what the Fed's going to do at its next meeting a few days in advance. here it's not clear the way that the debate will go and the reason for that is Kevin Walsh and I think he's going to be the deciding factor here we don't know much about how Walsh the new Fed really views the economic outlook going into this meeting so that's really raised a lot of questions among Fed watchers as to what exactly he's going to go into the two-day meeting arguing.

2:45And it's that tight-lipped strategy from the Fed chair that's really sort of, as you mentioned, creating a lot more uncertainty. This marked change from Fedcoms of the recent past, could that potentially make for more market volatility after this decision if investors aren't quite pricing the odds correctly? Well, I think in the run-up to it, we've seen a very, very active federal funds futures market. And that really speaks to the fact that Walsh being tight-lipped does raise the prospect of more volatility. People just aren't sure how to pass the data, the remarks by other officials. We've also seen the oil price whipsaw in the six weeks since the Fed last met.

3:29There's a lot going on here. and without a clear narrative from the Fed chair, we've seen volatility in the room up to the meeting. And if we don't get clear remarks from him at the press conference after the decision on Wednesday, then yeah, we could see that volatility continue. Inflation, obviously very important to this decision. And the Fed's preferred inflation gauge sat just above 4 % in May. That's the latest read on that gauge. That's more than double the Fed's target. So is there a risk that the central bank is getting behind on its inflation fighting mandate? I think that is a real risk if you speak to a lot of people.

4:08The ones who've been most vocal in saying that we really need to take action on inflation sooner rather than later have been Laurie Logan, the head of the Dallas Fed, and her counterpart in Cleveland, Beth Hamak. Both of them have got votes on Wednesday, and it'll be very interesting to see if they vote for a hike, even if the bulk of the committee opts to hold interest rates. Claire, I just wonder how much geopolitics is going to affect the Fed's forecasting ability and their decision making at this meeting and in future meetings. With so much uncertainty about what's happening with the war in Iran, how does all of that factor in to the Fed's decision making here?

4:51I think that uncertainty may be one reason why we see a rate hold this week. Before the September meeting, which is when the Fed will next vote, we'll get a few more inflation readings and a bit more of a sense how much the US's inflation problem is going to be exacerbated by the war in Iran. So it doesn't help matters that we've seen the oil price shoot up to$100 per barrel, But we could see a tutelor again if we see a deal materialize. So Fed officials may just want to wait and see how due economic developments proceed over the coming weeks before voting for a rate rise. And as it stands, as of this recording, the U.S.

5:35and Iran have paused their fighting. And an Omani delegation spent the weekend in Tehran trying to find a way to manage shipping through the Strait of Hormuz and get that all going again. Claire, I know you're going to be watching all of these developments and how they affect monetary policy. Claire Jones, our U.S. economics editor. Thanks so much for your time. Thanks, Victoria.

6:01Worsening wildfires in France and Spain are stretching the region's firefighting capacity during peak tourism season. Both countries have deployed their militaries to contain the blazes which France's interior minister described as extremely violent and unpredictable. An area more than nine times the size of Paris has burned in France, setting a new record as neighboring nations join the firefighting efforts. More than 300 ,000 people have been evacuated across both countries, leaving tens of thousands in temporary shelters. Spain and France have been the epicenter of Europe's wildfire season this year.

6:38Even though the region started off wetter than normal this year, three heat waves in a row that dried out the land created the perfect storm for these wildfires to start and spread. And scientists say climate change has only made these conditions more extreme.

6:59We talked earlier about how the war in the Middle East is affecting oil prices in monetary policy, it's also forcing developing countries to focus on their emergency oil stockpiles. India and South Africa are among those building up their energy buffers. But are their efforts a race against time and money? The FT's Emerging Markets correspondent, Joseph Cotterall, joins me now to chat more about this. Hi, Joseph. Hi there. So this war, which has choked off supplies from the Strait of Hormuz, is now in its fifth month. So why are these developing countries only now focusing on their emergency stockpiles?

7:37It's important to remember, firstly, that advanced economies have had these strategic fuel reserves ever since the oil shock of the 1970s, and they have used them in this crisis. However, many developing countries have not had these reserves before, have not faced an oil shock of this magnitude before. So that's why countries from South Africa to India to Pakistan to the Philippines are, in some cases, for the very first time, thinking of acquiring these reserves or expanding what they have. And so what is the plan to expand those reserves exactly? South Africa, for example, has recently published a plan to expand its reserves for the first time in its democracy.

8:27So this is going back decades. India, which already had a system of national stockpiles, has also released some plans for its largest oil and gas producer to augment some storage and also to work with the Abu Dhabi National Oil Company to expand storage as well. And what is the timeline that we're talking about here? Because it seems like with oil in short supply, there are fewer and fewer places where these countries can actually get that crude oil. Many of these plans will be long term. Firstly, it's expensive to build the infrastructure, the storage tanks, pipelines, and so on. And it's also expensive to buy the fuel and oil once that is in place.

9:14If you don't have refining capacity, you don't have the ability to turn crude reserves very quickly into jet fuel, petrol and diesel. So it will take years to put in place the necessary infrastructure and to build up reserves. However, lots of countries do have storage that could be leased at short notice. So plenty of policymakers will be reviewing those plans. And again, the countries considering these reserves are pretty much the countries that were facing serious shortages. So if that is faring up again, those countries will be looking to low supplies. So if this is sort of a longer term objective, what happens in the shorter term?

9:58Because early in the war, we saw many of these countries that were low on supplies have to start rationing how much people could use. We have not gone back yet to the scenes we saw in March and April queues outside petrol stations. If this new flare-up continues, that might come back. That was successful in some countries in reducing demand. Next is reviewing subsidies. Lots of countries, again in Asia, do have very large fiscal subsidies. They could decide to roll those back. It would be extremely politically unpopular, but that may be the only option if this crisis lasts several months. Joseph Cotterill, our emerging markets correspondent, thank you so much for your time.

10:45Thank you very much.

10:52We've got one more story to tell you about before we go. America's leading AI companies have spent a record amount of money on lobbying in Washington this year. They're trying to limit unfriendly regulation and also shape rules around data centers and how their advanced models are vetted. Federal disclosures the FT has parsed show OpenAI nearly doubled what it spends on federal lobbying to more than$2 million in the first half of this year. Anthropic, meanwhile, nearly tripled its spending, while Google and Microsoft shelled out as much as in any quarter since 2020. All of this comes as artificial intelligence is reshaping industries across the world, including the book business.

11:32We have a great story today about why some publishers think AI could help authors, but then eventually try to replace them. We've got a link to that big read and all of the other stories in today's podcast in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news. Thank you.

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