What we’re reading (8/23)
“Powell’s Rate Cut Signal Reflects Economy’s Delicate Position” (Wall Street Journal). “Federal Reserve Chair Jerome Powell cautiously laced up an interest-rate cut next month but delivered a subtle message to anyone expecting aggressive easing: Don’t expect a downhill sprint. The debate among central bankers gathered in Wyoming’s Grand Teton National Park over the past two days suggests the focus is now shifting beyond the September meeting to whether the Fed will entertain cutting again at either of its final two meetings of the year, in October and December. Powell’s cautious tone reflected the tricky economic dynamics the Fed is grappling with: a labor market he described as showing “curious” signs of softness despite a low unemployment rate, and tariff-driven price increases that are just beginning to work their way through the economy.”
“The Fed Gives Up” (Scott Sumner). “The Fed…has basically given up on the whole idea of reforming monetary policy based on the insights of our top monetary theorists. They’ve removed the useful policy reforms of the 2020 document (average inflation targeting) but promised not to repeat the mistake of doing the very different policy that was actually implemented during 2021-22. In a sense, we are back to the 2% flexible inflation target announced back in 2012 and informally adhered to for the most part since the early 1990s.”
“Why Is The Yield Curve Steepening?” (Torsten Sløk). “The US yield curve has started steepening, not only 2s10s but also 10s30s, see the first chart below. There are three reasons why this is happening: 1. The Fed is cutting rates. 2. If the market thinks the Fed is cutting for political reasons, it puts upward pressure on inflation expectations and ultimately long rates, which also steepens the curve […] 3. Growing Treasury issuance is putting upward pressure on long rates[.]”
“Credit Fuels The AI Boom — And Fears Of A Bubble” (Bloomberg). “key players in the industry acknowledge there is probably pain ahead for AI investors. OpenAI Chief Executive Officer Sam Altman said this week that he sees parallels between the current investment frenzy in artificial intelligence and the dot-com bubble in the late 1990s. When discussing startup valuations he said, ‘someone’s gonna get burned there.’ And a Massachusetts Institute of Technology initiative released a report indicating that 95% of generative AI projects in the corporate world have failed to yield any profit.”
“Corporate Share Repurchases And The 2023 Excise Tax” (Don Autore, et al.). “The Inflation Reduction Act of 2022 imposes a 1 % excise tax on US corporate share repurchases, effective January 1, 2023. The tax's implementation is associated with a significant decline in corporate repurchases that is not offset by a corresponding increase in dividends. Aggregate repurchases decline from about $1 trillion in 2022 to just over $800 billion in 2023, and the average firm reduces quarterly repurchases (as a fraction of market capitalization) by roughly 25 %. The decline in repurchases by US firms far exceeds a contemporaneous decline in repurchases by Canadian firms, is large in a historical context, and is not driven by firm fundamentals. Tax-induced cuts to repurchases are associated with an increase in cash but no increase in investment, implying that the tax has not generated the stated policy objective.”
