Markets wait for a Fed pause, but no end to rate hikes

The Fed seems ready to pause

S&P 500 futures rose on Wednesday as investors bet the Fed will not change its key lending rate on the back of a string of unexpectedly positive economic data.

If the central bank moves as expected, it would break a streak of 10 consecutive rate hikes back to March 2022 — the Fed’s most aggressive pace since the 1980s. That said, many expect Wednesday’s decision to mark a break, not a reversal, from aggressive anti-inflation policies.

What Fed officials say may matter more than what they do. Central Bank Chairman Jay Powell is expected to suggest at his post-meeting press conference on Wednesday that he is not done raising rates just yet. That’s partly because the economy is still hotter than expected: Tuesday’s consumer price index report estimated core inflation — excluding energy and food prices — well above the Fed’s 2 percent target.

“We think Powell will get the message across that they need to do more to reduce inflation, and they are willing to do it,” Andrew Patterson, a senior economist at Vanguard, told DealBook. Mr. Patterson believes the Fed is planning at least one more rate hike this year.

(Some don’t even think the Fed should pause: Mohamed El-Erian, the chief economic adviser at Allianz and a critic of the central bank’s handling of inflation, argued this week that recent data support another rate increase.)

Still, stocks are booming. The S&P 500 is in bull market territory, aided by the frenzied performance of mega-cap technology stocks. Analysts are speaking of a “fear of missing out,” similar to the late-2020 and 2021 rally. According to Morgan Stanley, retail investors massively pounded into US stocks in May, especially big tech stocks, in the biggest monthly purchases released since 2010 .

That leaves investors hoping Mr. Powell doesn’t crash their party.

HERE’S WHAT HAPPENING

Donald Trump appears in a courtroom in Miami. The former president, the first to face federal charges, pleaded not guilty to charges that he compromised national security secrets by mishandling classified documents and obstructing investigators. Mr. Trump later held a fundraiser in New Jersey, striking a defiant tone.

Janet Yellen says a US-China decoupling would be a “mistake”. The Treasury Secretary testified to House lawmakers that an economic relationship with China remains crucial. State Secretary Antony Blinken will visit Beijing next week.

A federal judge temporarily blocks Microsoft’s deal to buy Activision Blizzard. The movement was intended to preserve the status quo as the FTC tries to challenge the $69 billion takeover. Microsoft has already faced backlash from US and UK regulators over the transaction.

The EU accuses Google of anti-competitive practices. Antitrust regulators accused the company of using its dominance in online advertising to undermine rivals. The US Justice Department filed similar charges against the tech giant in January.

Europe wants to crack down on AI

European Union lawmakers have just approved a first set of proposed rules designed to regulate artificial intelligence. The stakes are high: As businesses scramble to embrace tools like generative AI, governments scramble to erect guardrails.

The AI ​​law would impose unique limits. Introduced in 2021, before ChatGPT was online, the proposed requirements include publicly available summaries of the copyrighted material used to train AI systems; safeguards to prevent generative AI from producing illegal content; and a ban on live facial recognition.

Margrethe Vestager, the EU’s competition chief, said this morning she was thinking about it discrimination by AI greater risk from technology than human extinction.

But it is worth remembering that the proposal will be subject to further negotiations with other European bodies, including national parliaments, before it becomes law.

Tech giants have tried to shape the EU’s efforts. Sam Altman, the CEO of ChatGPT parent company OpenAI, recently warned that his company could leave Europe if the AI ​​law were too strict. (He then walked back.) Other top executives, including Alphabet’s Sundar Pichai, have pledged help the EU develop its rules.

Europe is leading the way. While policymakers in Washington agree that AI regulation is necessary, no bill is on the horizon. That said, the White House has published best practice guidelines for testing AI systems.

China is also trying to catch up, specifically aiming to subject AI tools to the same strict censorship it applies to other internet services. Beijing plans to have draft rules ready for lawmakers this year.

Marcelo Claure’s next big move

Marcelo Claure, SoftBank’s former chief operating officer, will announce his next big move on Wednesday: a new Latin American-focused growth equity firm called Bicycle Capital, backed by Mubadala, Abu Dhabi’s sovereign wealth fund. The company has $440 million in initial commitments and hopes to raise $500 million. Mr. Claure, whose family office has also invested, will serve as executive chairman.

Latin America has long been a focus for Mr. Claurewho grew up in Bolivia. He founded and sold Brightstar, a Latin American wireless distribution company, to Japanese conglomerate SoftBank in 2013 for more than $1 billion. Mr. Claure later took over at shared office company WeWork after its failed IPO in 2019, negotiated a severance package with co-founder Adam Neumann and helped clean up SoftBank’s investment.

Mr. Claure led SoftBank’s $8 billion Latin American fund, but left the company last year after a billion-dollar wage dispute. He invested $100 million this year in Shein, the Chinese fast fashion company, and is chairman of Latin America.

Dealmakers have been watching the region, attracted by a growing population with growing purchasing power, and regulations that make it easier for foreign companies to invest. According to the Latin America Venture Capital Association, $7.8 billion was invested in venture capital in 2022, following a peak of $15.9 billion in 2021 at the height of the boom.

Bicycle focuses on Mexico and Brazil. “Latin America has a unique combination of outstanding founders, a digitally savvy population and more opportunity than capital,” said Mr. Claure.

Binance gets postponed

Binance, the world’s largest crypto exchange, repelled attempts by the SEC to freeze the assets of its US operations during a hearing on Tuesday. Perhaps more importantly, the federal judge overseeing the case questioned the agency’s efforts to use its powers to regulate the crypto industry.

The judge urged the two parties to reach an agreement on the freezing of assets. In a packed courtroom, District of Columbia Judge Amy Berman Jackson urged Binance to agree to a partial freeze on its US arm and the SEC to allow the company to continue paying its bills.

Binance.US has argued that the SEC’s demand would be a “death penalty”, while an SEC lawyer accused the company of smuggling billions in assets out of the country.

Ms. Jackson also expressed some skepticism about the SEC’s efforts to rein in crypto. The agency has accused both Binance and its major rival, Coinbase, of allowing the sale of unregistered securities — i.e. crypto assets. She called the SEC’s use of its enforcement powers to regulate cryptocurrencies “inefficient and cumbersome.”

That said, Ms. Jackson added that Binance’s puzzled attitude to the agency’s legal arguments “ringed a little hollow” as questions about the legal status of crypto have been brewing for years.

The SEC faced heat on a second front on Tuesdaythen Republicans on the House Financial Services Committee sent it a letter questioning a proposed rule that defines an “exchange”.

Lawmakers said the proposed definition, which includes both centralized exchanges and automated decentralized finance protocols, exceeded agency authority and could stifle innovation.

Uneven progress on diversity in boardrooms

Boardroom diversity increased slightly last year, according to the latest annual report from Deloitte and Alliance for Board Diversity, shared exclusively with DealBook. But progress has been uneven, writes The Times’ Alisha Haridasani Gupta, as legal measures requiring broader representation have been dismantled despite years of pressure on corporate America.

Women and under-represented racial and ethnic groups As of June 2022, held about 45 percent of board seats at Fortune 500 companies — a high, and up from 38 percent in 2020. But women of color filled only 7.8 percent of those positions.

“There’s still a lot of work to be done,” said Carey Oven, the head of Deloitte’s Center for Board Effectiveness, adding that it would be decades before boardrooms reflected the diversity of the broader American population. At current rates, gender equality on the boards of Fortune 500 companies is still 20 years away and could take more than four decades to properly reflect the growing Hispanic population.

Recruitment doesn’t go deep enough, said Cid Wilson, president of the Alliance for Board Diversity, which has many different directors serving on different boards — what the report calls “recycled talent.” About 18 percent of female directors serve on more than one board: the percentage is 21 percent for women of color.

Nearly all laws mandating board diversity have been scrapped, including a boardroom quota in California. And companies now face a challenging political and cultural climate that makes their diversity efforts subject to increased scrutiny and potential backlash.

But consumer and shareholder pressure is unlikely to abatesaid Mr. Wilson. “The reality is that population diversity will only increase. And if you’re a company that wants to be competitive, you can’t ignore the importance of diversity, fairness and inclusion.”

READING THE SPEED

Offers

• Apollo, Sixth Street, and Warburg Pincus are said to be among the bidders for GreenSky, the specialty lender that bought Goldman Sachs as part of its failed foray into consumer finance. (Semafor)

• Bunge agreed Buy Viterra, a fellow grain shipper, for $8.2 billion to create a new agribusiness giant. (WSJ)

Policy

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