Federal Reserve Chair Signals Interest Rate Cut | Business Matters (August 23)

Welcome back to Newsroom. For today's business matters, we have with us Don Ma. Don, it's good to see you. What is happening in the business world? So yeah, a lot happening. I'll get started right away on that. And first, I want to go to SpaceX. It's about to embark on one of its riskiest missions yet. So next week, the aerospace company will attempt the first ever private spacewalk. It's also going to test new equipment, including slim spacesuits and a cabin with no airlock. A billionaire entrepreneur, a retired military fighter pilot, and two SpaceX employees are scheduled for launch on Tuesday for the five-day mission. And next, driverless rides could be en route to Uber. The ride-sharing company has teamed up with General Motors Cruise for a multi-year partnership. Cruise is trying to revive its robo-taxi business. It stopped operations after one of its driverless vehicles dragged a pedestrian last October. This was after a human driver hit her. Both CEOs have expressed that they believe autonomous vehicles can be used safely. And the driverless ride option could be offered as soon as next year. Meanwhile, Subway is joining the fast-food value wars in terms of their menu by slashing the price of its foot-long subs. This comes as other chains like McDonald's, Burger King, and Starbucks have cut prices as well to lower back customers who are bulking at rising fast-food prices. And starting on Monday, Subway will sell any foot-long sandwich for $6.99, so that's a steep discount considering that some foot-longs can cost as much as $14 in some cities. However, the deal has a catch. The offer is only available via its app or website with the code 699FL, and the limited-time offer ends on September 8th. The big news in the financial world today is Powell, a Federal Reserve, signaling that lower interest rates are finally on the horizon. Chair Jerome Powell delivered a keynote speech at an annual gathering of central bankers and economists in Jackson Hole, Wyoming. Take a listen. Overall, the economy continues to grow at a solid pace. But the inflation and labor market data show an evolving situation. The upside risks to inflation have diminished, and the downside risks to employment have increased. The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. It appears that Powell's latest comments opened the door wide open for the first interest rate cut since 2020. It's slated for the Fed's upcoming policy meeting on September 17th and the 18th. The upcoming decision to cut rates is a sign that potentially officials feel confident enough that price pressures are coming under control, but also that the economy is weakening. Powell said the Fed will do everything it can to support a strong labor market as it makes further progress toward price stability. All right. Joining me now is Brian McCarthy. He's the chief strategist at Macro Lens. Brian, how are you doing? Good. Hey, Don. How are you? I'm good as well. So Powell's speech today, did it make it clear that there are likely a series of rate cuts or how deep the cuts will be, do you think? Yeah, there's a fascinating dynamic at the Fed now. Chair Powell basically pre-announced a September cut, didn't give us any indication of whether that might be 25 or 50 basis points. I found his comments to be very aggressive. He said, we do not seek or welcome further cooling in the labor market. He said the current level of the policy rate gives them ample room to respond to any risks. Unfortunately for Powell, and I think unfortunately for the economy, because I believe Powell's stance is the correct one, but unfortunately for him, he is in a minority on his own committee. Now he is the chairman and there is a history of the chairman sort of knocking heads to get what they want. It's not clear to me that Powell has that level of political capital at this point after the egregious inflationary error he engineered in 2021 and 2022. But we heard an array of other Fed officials in the couple of days leading up to his speech, all suggesting they were much more relaxed than he came off today, generally sounding okay with a 25 basis point sort of adjustment to policy. But none gave us the kind of tone Powell did, which again, I think is the correct stance. Hey, we're behind the curve. This labor market is clearly slowing. Historically, once it slows, that slowdown, the deceleration tends to gather steam and it seems like we're on the cusp of that kind of situation. So Powell himself ready to act aggressively, but he's really got some work to do to drag his colleagues along if that's the path he wants to pursue. So here's my question, though. He definitely acknowledged the weakness in the labor market, but is the situation worse than what he thinks or is it better than what he thinks? My own view is it's worse. We see aggressive cuts priced into the interest rate markets now. So the federal funds rate is currently around 5.3%. The market sees that being cut down to around 3% over the next a little less than two years. So reasonably aggressive expectations in the market. Market participants are very split over the outlook for economic growth, because frankly, if you look at the last few GDP reports, they were reasonably robust. However, my view is that this employment market has been showing underlying signs of weakness for many, many months. It's over a year now where the job gains are concentrated almost solely in government jobs, which are starting to slow. And in health care, which is not a demand story, health care jobs are growing because people are finally coming back to want to take those jobs. It's a labor supply story. But if you look at those two sectors, pretty serious weakness across industries in terms of payroll growth. And of course, we've seen the unemployment rate tick up almost a full percentage point now from its 2023 lows. That kind of move is usually associated with impending recession. So I think the Fed is late. I think the market, the stock market is telling them that 25 basis points isn't going to be enough, that they need to get on their horse. I think Powell gets that message. But again, it's not clear to me a majority of his colleagues on the committee do. All right. Last question here, Brian. Let me read this to you. Powell said that the time for policy change to the time has come for the policy to adjust. The directional travel is clear. You mentioned some of the quotes earlier. Is the Fed declaring a victory here over inflation? It sounds like it. Yes. He might as well have said mission accomplished. My own view, again, is that that is completely justified. We've had very good inflation numbers for the last several months. We have a break even inflation rates in the inflation indexed bond market, suggesting that the Fed is set to slightly undershoot its inflation target over the next five years, say. So all signs, all the dealings, as I read them, say that they are on course for at target or below target inflation. And if the economy is weakening as sharply as I think it is, they need to get ahead of that. Or, you know, again, the history is they get behind the curve and they cut 25 when the economy needs 50. And it just it gets away from them. And then they end up having to do something really, really super aggressive. So if they want to avoid that, they're better to start early. I think they're already late. 50 would be better next month. But it sounds like that was not going to be able to get that done. All right, Brian. Macro lens. Thank you very much today. All right, moving on from that, the Justice Department filed an antitrust lawsuit today against real estate software company RealPage. Attorney General Merrick Garland said the firm is engaging in an illegal scheme that allows landlords to coordinate rental price hikes. We allege that this software is developed, marketed and sold to enable landlords to sidestep vigorous competition in the rental market. Competing landlords agree to submit to RealPage on a daily basis their most sensitive non-public information, including rental rates, lease terms and projected vacancies. RealPage then combines this data from competing landlords and feeds it into an algorithm that provides real time pricing recommendations back to the competing landlords. Now, according to the suit, RealPage is violating antitrust laws through its algorithm. The DOJ claims that the algorithm allows landlords to align their prices to avoid a competition that will keep rents down. The government points to statements by RealPage executives themselves. DOJ says that those comments show higher ups realized they were hindering competition in the rental housing market. Now, in June, RealPage called the claims false and misleading. The company said that landlords decide their own rent prices and are free to reject its recommendations. The attorney general of eight states have joined the lawsuit. And staying with the real estate industry, it is adapting to new rules. Agents and buyers are still trying to figure out how to address. Here's the details on this story. Before, buyers' agents were in high demand because the home seller paid the agent. But now the buyer is supposed to negotiate with and pay their agent themselves. The new rule is creating confusion. It's best described as you're trying to change the oil of the car while the car is still moving. No one is particularly too clear on what these, quote, rules and regulations are. Broker Cindy Scholes focuses on New York City and the Hamptons. She says many in the industry aren't sure how to proceed. It was actually quite odd to work with a client without having an agreement. Someone would just, you know, you're going around with them. You have no idea what your actual structure is. Scholes says she thinks 30 percent of buyers will leave the industry. Buyers' reps have to work harder than ever. They have to deliver more value. Peter Gray is the president of Pyramid Real Estate Group, a group that includes buyers' agents. He says his firm had to do more work consulting lawyers and revising contracts. He says from now on, buyers' agents will have to be very sophisticated to be successful because they'll have to persuade buyers to pay for their service. They've created larger surveys and they've brought to the table more analytics, and they're demonstrating to the buyer all the different options, the pluses and the minuses, and showing also off-market listings. Gray believes buyers should still get agents because they do provide real value. But he does see many buyers skipping the agent since the new rule. It might eliminate buyers' agents from the market in a lot of ways, right? If buyers know they have to pay commission to an agent for being a buyer, they might just not be a buyer. Real estate investor Dutch Mendenhall works with real estate agents every day. He says he's always negotiated with agents directly. Meanwhile, data showing at least 51 congressional Democrats have accepted contributions from top food companies this congressional cycle. And that's despite some Democrats publicly accusing grocery chains of corporate greed. And this is based on a Reuters analysis of Federal Election Commission data. One Democratic campaign defended this by saying that criticizing donors demonstrates independence. So overall, donations are up this congressional cycle. Albertson's PAC has tripled its contributions so far compared to 2021 to 2022. Corporate PACs typically donate to both parties. Overall, 58 percent of Kroger's and Albertson's combined donations went to Republican congressional campaigns this cycle. And Chinese e-commerce retailer JD.com needs to reassure investors. And this is after Walmart pulled all its support. This week, Walmart sold off its nearly $4 billion stake in JD. That raised questions about Beijing-based platform's ability to withstand a slowed home market and competition. JD set itself apart with its business model. It sells directly to customers and heavily invests in supply chain and logistics. That helped the company double its market share from a decade ago. But that has led to high overhead pressure on profitability. JD's operating margins in the second quarter was about 4 percent, well below competitors Alibaba and Timu owner PDD Holdings. JD has also shown strategic weakness in its ability to tap into international markets compared to rivals. And Wall Street seemingly all smiles today after Chairman Jerome Powell's speech at Jackson Hole. All three major indexes ending up in the green. As you can see here, Dow up about 1.1 percent. And the S&P also 1.1 percent. And the Nasdaq up 1.5 percent. All eyes are on the now very likely September rate cut and how much that will be. All right. That's all the stories I have for you guys and our viewers today on Business Matters. Chris, Fiona. Don, it sounds like this Fed rate cut of 25 basis points to your guest, anyway, is too little too late. Yeah. As he was saying, the Fed is behind the curve. And, you know, a 25 basis point, if you are behind the curve, perhaps it seemed to him that it was a little small. He was hoping for a 50 percent basis. 50 basis point. Yeah. And I think this is very interesting to keep in mind, you know, with inflation, all this as well with the presidential election going on and inflation being such a big topic for that. Interesting to see how the candidates' policies will impact this as well. Yeah. Right. And if the if the stock market is buoyed by this Fed rate cut or potential more Fed rate cuts going forward, you know, how could that affect the election? Don Ma, thank you. Thank you very much.