Cutting through the fog of the Russian assets debate

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Cautious Fed Sees One Rate Cut in 2024

The Federal Reserve is now calling for only one interest rate cut in 2024. But their forecast is likely overly cautious, and we think there will be two or more cuts this year.

As was widely expected, the Fed kept the federal-funds rate unchanged at a target range of 5.25%-5.50% at its June meeting. At the start of the year, markets expected rate cuts to be in full swing by this point. However, cuts have been delayed because of inflation’s upward surprise in early 2024.

More newsworthy are the new economic projections from the Federal Open Market Committee, last updated at the March meeting. The Fed is now expecting a December 2024 federal-funds rate of 5.1%, implying one 0.25% cut from current levels. By contrast, in March the Fed called for a 4.6% rate, implying three rate cuts.

Inflation shot up in the first quarter after being subdued in the second half of 2023. Core PCE inflation reached 4.4% annualised in the three months ending in March 2024, compared with 1.9% in the six months ending December 2023.

More recently, however, inflation has started to cool again, with core PCE inflation falling to 2.8% annualised in the three months ending in May (our estimates for May itself are based on CPI data). Suddenly, a benign environment for inflation could be returning, with the first-quarter uptick an aberration.

Making Progress on Inflation?

Wednesday’s Fed’s press release acknowledged “modest further progress toward the Committee’s 2% inflation in recent months” – a shift in language from “a lack of further progress” noted in the May meeting’s press release. Still, the Fed upped its forecast for core PCE inflation in the fourth quarter of 2024 to 2.8% year on year, from 2.6% during the March meeting. This largely accounts for why the central bank has shifted to calling for just one rate cut rather than three in 2024.

It’s unclear to what extent Wednesday’s CPI news was reflected in the latest Fed projections. Chair Jerome Powell mentioned that FOMC members can alter their forecasts post-release, but “most” generally don’t. The inflation projections imply a roughly 2.5% annualised core PCE inflation rate in the final six months of 2024, by our estimates. That marks no progress compared with the 2.5%-2.6% year-over-year core PCE inflation rate likely for May.

That’s too pessimistic, in our view. Instead, we see core PCE inflation at 1.7% annualised in the

UBS AM, Planet Tracker Seek to Mitigate Nature Risks

New report highlights problems faced by investors with the longevity of solar and wind assets, and potential impacts on habitats.

UBS Asset Management (AM) and Planet Tracker have joined their efforts to support investors providing finance for renewable energy solutions and mitigate harms to nature. In a new report, they provided a guide for industry practitioners on how best to integrate nature when looking at solutions for the energy transition…

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G7 strikes ‘provisional’ deal on $50bn loan to Ukraine

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KKR secures AUD500m private credit loan for Perpetual acquisition

KKR & Co has secured a private credit loan of approximately AUD500m ($331m) from Blackstone and Goldman Sachs Asset Management to help finance its purchase of Perpetual’s corporate trust unit, according to a report by Bloomberg.

The report cites unnamed sources familiar with the matter as revealing that the financing, which is structured as a covenant-lite unitranche deal, combines senior and junior debt without financial covenants and carries an interest margin in the mid-500 basis points range.

Perpetual recently announced KKR’s agreement to purchase its wealth management and corporate trust units for AUD2.175bn. This transaction underscores the growing role of the $1.7tn global private credit market in mergers and acquisitions amid high interest rates and decreased risk appetite from traditional lenders.

KKR is also securing separate financing for the wealth management businesses, leveraging around four times their earnings.

Innovative Firms Core to ABN AMRO Emerging Markets Strategy

New fund looks to offer exposure to European investors amid growing interest for opportunities in developing economies.

Companies driving technological innovation in emerging markets (EMs) will play a central role in ABN AMRO Investment Solutions’ (IS) and Boston Common Asset Management’s (AM) new ESG equities fund, aiming to help investors diversify their portfolios. The ABN AMRO Boston Common Emerging Markets ESG Equities Fund is an EM equities-dedicated…

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Wise shares tumble 23% as outlook disappoints

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Digital 9 Infrastructure thrown into chaos as director is ousted alongside last minute departure

At the trust’s annual general meeting yesterday (12 June), 60.3% of the votes were cast against Le Cornu’s re-election, with just 39.7% in support of him. The recently appointed chair Eric Sanderson thanked Le Cornu for his tenure and commitment to the company since he joined in April 2022. Digital 9 Infrastructure appoints chair to oversee managed wind-down The situation escalated, however, as Gailina Liew withdrew her re-election bid the day before the AGM, meaning Sanderson is currently the sole director on the board after the AGM. Meanwhile, the board had scrambled to appoin…

Federal Reserve holds interest rate steady amid cooling inflation

The announcement was made hours after the US consumer price inflation (CPI) came in at 3.3% for May, falling more than the flatline growth economists had expected. The Federal Open Market Committee highlighted the growing economic activity, citing strong job gains and low unemployment rate. US inflation falls to 3.3% in May It said it would “carefully assess incoming data, the evolving outlook, and the balance of risks” in order to decide when to start cutting. While the FOMC signalled it was planning just one rate cut for the year policy makers were dividend. Four expected n…

The Fed refuses to celebrate

This article is an onsite version of our Unhedged newsletter. Premium subscribers can sign up here to get the newsletter delivered every weekday. Standard subscribers can upgrade to Premium here, or explore all FT newsletters

Good morning. Stocks liked, but did not love, yesterday’s very encouraging inflation report. The S&P 500 rose less than 1 per cent. Perhaps the market’s animal spirits were suppressed by a rather hawkish Federal Reserve meeting (see below). But I suspect that the issue is that a lot of good news is already priced in. Email me: robert.armstrong@ft.com.  

The Fed is not being too cautious

Well this is good:

Using the metric Unhedged prefers (month-over-month change annualised), core CPI inflation fell to the Fed’s 2 per cent target in May. Huzzah. The three- and six-month averages are not there yet, and neither is the official year-over-year figure (3.4 per cent). But for one month, at least, the news is excellent.

All the more so because it was not housing inflation that accounted for the decline. Housing services inflation, for reasons that are now well rehearsed, is a lagging indicator which has trailed for longer than everyone expected. This continued in May, which saw a 0.4 per cent monthly increase in housing costs, the same as the previous three months. Instead, the disinflationary work was done by other services (airfares, car insurance and repairs, hotels) as well as goods (cars, clothes). This means that, as Steven Blitz of TS Lombard points out, services inflation ex-housing was close to zero in May. And this is the flavour of inflation that the Fed has said it is the most concerned about:

Blitz thinks sustained services disinflation will be hard to achieve if wages continue to grow at their current pace. This thought was echoed by Fed chair Jay Powell in his press conference yesterday, when he noted that while he did not see wage growth as a principal cause of inflation, wages’ current pace of growth (4 per cent or so) is probably inconsistent with inflation staying at target.  

It’s not just wages that Powell and his colleagues are cautious about. Right from the first sentence of the May meeting press release, the monetary policy committee struck a sober tone that was at odds with the giddy news in the CPI report. Last month’s dour comment that “in recent months, there has been a lack of further progress towards the committee’s 2 per cent inflation