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The Fed Stays the Course on Rates

Press RoomBy 9 Mins Read

Stocks are again in record territory on Thursday after the Fed reiterated that it expected to cut interest rates three times this year despite facing a “sometimes bumpy road” to bring inflation down to its 2 percent target.

In a dose of good news for Wall Street and Washington, the central bank sees solid economic growth this year, and only a slight cool-down in the labor market. However, the Fed also said that inflation would stay hotter for longer.

The upbeat outlook is dividing Wall Street. Mohamed El-Erian, the economist who’s been critical of the Fed’s messaging, said the dovish pronouncement was evidence that the Fed was willing “to tolerate higher inflation for longer” as it mulled reducing a prime lending rate that’s at a 22-year high.

Others warn that resurgent inflation could dash the Fed’s timeline. “Upcoming inflation reports will take on increased importance in determining whether the first cut can come in June,” Michael Gapen, Bank of America’s chief U.S. economist, wrote in a research note on Wednesday after the Fed released its policy statement.

The futures market Thursday morning gave an 84 percent chance of a June cut, up from 60 percent on Wednesday. (Jay Powell, the Fed’s chair, did not say when the bank might cut rates.)

The Fed is at an inflection point, warn analysts at Liberum, the investment bank. Keeping rates unchanged could push the economy into recession. Moving too fast, or cutting more than three times, would push inflation toward 3.7 percent by early 2025, theywrote in a report this morning.

Powell drew a similar conclusion. “The risks are really two-sided here,” he said on Wednesday, though he saw the go-slow risk as doing “unnecessary harm to employment.”

The Fed itself is divided. Ten of the 19 policymakers see the prime lending rate falling to 4.625 percent or lower by the end of the year. It would take just one defection from the dovish camp to potentially scupper the central bank’s three-cut outlook.

Investors appear unfazed. The S&P 500, Dow Jones industrial average and Nasdaq Composite rose to record closes.

Up next is the Bank of England. At 8 a.m. Eastern, it is expected to announce that it will leave rates, which stand at a 16-year high, unchanged. The Swiss National Bank unexpectedly cut rates Thursday morning.

The Justice Department is reportedly poised to sue Apple. Federal prosecutors could file a suit against the tech giant as soon as Thursday, accusing it of blocking rivals’ access to key iPhone features, according to Bloomberg. It would mark a further escalation of the Biden administration’s crackdown on Big Tech. The last federal antitrust case against Apple was in 2012, over the price of digital books.

Apollo is said to have bid $11 billion for Paramount’s film and TV studio. Shares in the media conglomerate jumped 11 percent on Wednesday after The Wall Street Journal reported on the offer for the company’s crown jewel. But such a move would have to be approved by Shari Redstone, Paramount’s controlling shareholder, who reportedly favors a proposal to merge her National Amusements holding company with Skydance Media.

President Biden extends his financial lead over Donald Trump. Biden’s re-election campaign reported $71 million in cash on hand at the end of February, more than double what his opponent had, according to campaign filings. Separately, New York prosecutors questioned assertions by Trump’s lawyers that he’s unable to meet a bond in a civil fraud judgment.

An effort to force the Chinese company ByteDance to sell TikTok has gained some support in the Senate, after the Biden administration briefed lawmakers on the app’s national security risks. (“TikTok is a gun aimed at Americans’ heads,” Senator Richard Blumenthal, Democrat of Connecticut, said after the meeting.)

More urgency to pass the bill would suit the Biden administration, a senior government official who was at the briefing told DealBook, and the legislation could go to a vote later this spring — but it’s unclear whether senators will oblige.

The Justice Department’s concerns about TikTok’s ownership include:

  • The app’s collection of American user data;

  • TikTok’s proprietary algorithm, which is developed and maintained in China, where ByteDance employees are subject to government pressure;

  • And China’s increasing sophistication in its use of technology such as A.I. to spread disinformation.

TikTok’s Project Texas proposal isn’t enough. That arrangement would see the American tech giant Oracle oversee TikTok’s U.S. data flows, but that addresses only one of the Biden administration’s concerns, the officials said. The only acceptable solution, they added, is total divestment.

The bill fills in a gap in national security oversight of TikTok. The app’s ownership is already being reviewed by the Committee on Foreign Investments in the United States, the interagency panel that examines overseas deals for American assets for national security risks.

TikTok was born in part from ByteDance’s $1 billion acquisition of the U.S. start-up Musical.ly in 2017. But ByteDance has argued in court that TikTok’s growth didn’t arise from the deal, potentially limiting CFIUS’s purview. The Chinese company and national security regulators have been negotiating for years on the issue. (The Justice Department consulted on the House legislation.)

Federal officials played down critics’ concerns about breaking up TikTok. Beijing almost certainly wouldn’t allow the app to be sold and previously indicated it wouldn’t allow the algorithm, which allows the company to tailor content shown to users, to leave the country. Skeptics say a sale without the algorithm would leave TikTok nearly worthless — but the government officials argued that TikTok still has plenty to attract potential buyers.

How fast will the bill move through the Senate? A key leader — Senator Maria Cantwell, Democrat of Washington and the head of the Commerce Committee — said that the House legislation needs tweaks, and that she favors holding public hearings first.

Reddit is set to start trading in the public markets on Thursday, after pricing its I.P.O. at the top end of its range, valuing the social media company at $6.4 billion.

Wall Street is regarding the debut as a success — even as Reddit’s newly minted valuation falls short of the $10 billion value it gained in a 2021 private fund-raising round.

Reddit represents a “temperature check on the I.P.O. market,” Matt Kennedy, a senior strategist at Renaissance Capital, told DealBook. Its fulsome pricing suggests that investors are willing again to take risks on new offerings, as does the first-day pop in shares of Astera Labs, an artificial intelligence hardware company that began trading on Wednesday.

Those are positive signs for other companies said to be contemplating I.P.O.s this year, including Rubrik, a cloud data management company; SeatGeek, a ticketing platform; and ServiceTitan, a home services software provider.

The big lesson: I.P.O.s will still require a discount from previous valuations. Aside from some A.I. companies — Astera’s offering valued it at $6 billion, double its 2022 level — market debutantes will have to accept so-called down-round I.P.O.s. “Investors are still cautious,” Kennedy said. “I think we’ll need to see a string of I.P.O. winners before that attitude changes.”

A consequence: Some big privately held companies, like the payment processor Stripe, may continue to delay going public until sentiment improves.

Reddit’s largest shareholders are set to gain a windfall (at least on paper). The holdings of Advance Publications, the parent company of Condé Nast that’s controlled by the Newhouse family, are now valued at $1.4 billion. The stakes held by Tencent, the Chinese internet conglomerate, and Sam Altman, the C.E.O. of OpenAI, are valued at about $377 million each.

Not listed as a major holder in Reddit is Alexis Ohanian, the other co-founder, who is now a venture capitalist and the husband of the tennis star Serena Williams. (He’ll be on vacation with his daughter instead of at the Big Board to ring the opening bell.)

One thing to watch: whether trading will be affected by Reddit offering up to 8 percent of its shares to its most loyal users, many of whom have been critical of the I.P.O.

— John Ray, the acting C.E.O. of FTX, on Bankman-Fried’s bid to the court for a more lenient sentence after the crytpo exchange’s co-founder was ruled guilty of fraud.

During his term, President Biden has announced a series of big industrial policies, from the Inflation Reduction Act to billions in subsidies to bolster domestic chip manufacturing.

His latest initiative is intended to turbocharge the transition to electric and hybrid vehicles, but it also raises a thorny question: Can America’s infrastructure cope?

New E.P.A. rules will require most cars sold in the U.S. to be electric or hybrid by 2032. The rules will gradually limit allowed tailpipe emissions, but will give carmakers more time to adapt than previously planned.

That will essentially steer manufacturers to produce mostly low- or zero-emissions vehicles, which remain a small percentage of overall American sales. A record 1.2 million new E.V.s were sold in the U.S. last year, but that represented only 7.6 percent of total sales.

The electricity grid may struggle to meet demand. The National Renewable Energy Laboratory estimates that there will be 33 million E.V.s by the end of this decade, and 28 million charging ports will be needed to power their batteries.

Energy use in the U.S. is already surging, and peak electricity demand could rise by up to 25 percent by 2035.

Strategies are being developed to manage E.V. charging. Careful placement of charging stations, such as at workplaces, and allowing utilities to stop and start E.V. charging remotely based on overall electricity demand could help mitigate pressure on the system.

Prominent investors and entrepreneurs are also betting on nuclear energy to meet power needs. TerraPower, a company founded by Bill Gates, will start building the first of a new generation of nuclear power plants in the U.S. this summer.

And OpenAI’s C.E.O., Sam Altman, who also chairs Oklo, a nuclear fission microreactor start-up that’s set to go public this year, is backing the power source to satisfy the world’s growing energy needs, including from A.I.

Deals

  • Shares in Equinix, a data center operator, tumbled after the short-seller Hindenburg Research accused the company of being “an A.I. pipe dream.” (CNBC)

  • Donald Trump’s stake in his social media platform, Truth Social, is now valued at about $3.5 billion ahead of the company’s public debut — but he can’t sell it for at least more six months. (WSJ)

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