Markets Await a Fed Pause — but Not an End to Rate Increases

The Fed looks poised to pause

S&P 500 futures are up on Wednesday as investors bet that the Fed will not change its prime lending rate, thanks to an array of unexpectedly positive economic data.

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

What Fed officials say may matter more than what they do. The central bank’s chair, Jay Powell, is expected to suggest at his post-meeting news conference on Wednesday that he isn’t done raising rates. That’s in part because the economy is still running hotter than expected: Tuesday’s Consumer Price Index report put “core” inflation — excluding energy and food prices — well above the Fed’s 2 percent target.

“We think Powell will deliver the message that they have more to do to bring inflation down, and that they are willing to do it,” Andrew Patterson, a senior economist at Vanguard, told DealBook. Mr. Patterson believes that the Fed is planning at least one more rate increase 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 figures support another rate increase.)

Still, stocks are booming. The S&P 500 is in bull market territory, helped by the runaway performance of megacap tech stocks. Analysts speak of a “fear of missing out” vibe, akin to the rally of late 2020 and 2021. According to Morgan Stanley, retail investors binged on U.S. stocks in May, particularly big-name tech stocks, in the biggest one-month buying spree since 2010.

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

HERE’S WHAT’S HAPPENING

Donald Trump appears in a Miami courtroom. The former president, the first to face federal charges, pleaded not guilty to accusations that he put national security secrets at risk by mishandling secret documents and obstructed investigators. Mr. Trump later held a fund-raiser in New Jersey, striking a defiant tone.

Janet Yellen says that a U.S.-China decoupling would be a “mistake.” The Treasury secretary testified before House lawmakers that an economic relationship with China remains critical. Secretary of State Antony Blinken is visiting Beijing next week.

A federal judge temporarily blocks Microsoft’s deal to buy Activision Blizzard. The move was meant to preserve the status quo as the F.T.C. seeks to challenge the $69 billion takeover. Microsoft has already faced pushback from U.S. and British regulators over the transaction.

The E.U. charges Google with anti-competitive practices. Antitrust regulators accused the company of using its dominance in online advertising to undercut rivals. The U.S. Justice Department brought similar charges against the tech giant in January.

Europe wants to get tough on A.I.

European Union lawmakers just approved a first-in-the-world set of proposed rules meant to regulate artificial intelligence. The stakes are high: As the corporate world rushes to embrace tools like generative A.I., governments are scrambling to put up guardrails.

The A.I. Act would impose first-of-their-kind limits. Introduced in 2021, before ChatGPT was online, its proposed requirements include publicly available summaries of the copyrighted material used to train A.I. systems; safeguards to prevent generative A.I. from producing illegal content; and bans on live facial recognition.

Margrethe Vestager, the E.U.’s competition chief, said this morning that she considered discrimination by A.I. a bigger risk from the technology than human extinction.

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

Tech giants have sought to shape the E.U.’s efforts. Sam Altman, the C.E.O. of the ChatGPT parent OpenAI, recently warned that his company could leave Europe if the A.I. Act was too tough. (He then backtracked.) Other top executives, including Sundar Pichai of Alphabet, have pledged to help the E.U. devise its rules.

Europe is ahead of the pack. While Washington policymakers agree that A.I. regulations are needed, there’s no bill on the horizon. That said, the White House has published best-practice guidelines for how to test A.I. systems.

China is also seeking to catch up — with the particular goal of making A.I. tools subject 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, the former chief operating officer of SoftBank, will announce his next big move on Wednesday: a new Latin America-focused growth equity firm called Bicycle Capital that is backed by Mubadala, Abu Dhabi’s sovereign wealth fund. The firm 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. Claure, who grew up in Bolivia. He founded and sold Brightstar, a Latin American wireless distribution company, to the Japanese conglomerate SoftBank for more than $1 billion in 2013. He went on to lead a turnaround at the SoftBank-backed telecom company Sprint before spearheading its merger with T-Mobile. Mr. Claure later took over at the shared office company WeWork after its failed initial public offering in 2019, negotiating a severance package with its co-founder Adam Neumann and helping to clean up SoftBank’s investment.

Mr. Claure led SoftBank’s $8 billion Latin America fund, but stepped down from the company last year after a billion-dollar pay dispute. He invested $100 million this year in Shein, the Chinese fast fashion company, and serves as its Latin America chairman.

Deal-makers have been eyeing the region, drawn by a growing population with expanding purchasing power, and regulations that make it easier for foreign companies to invest. Venture capital investing there was $7.8 billion in 2022, according to the Latin America Venture Capital Association, after a high of $15.9 billion in 2021 at the peak of the boom.

Bicycle will focus on Mexico and Brazil. “Latin America has a unique combination of excellent founders, a digitally savvy population, and more opportunities than capital,” Mr. Claure said.

Binance gets a reprieve

Binance, the world’s largest crypto exchange, fended off efforts by the S.E.C. to freeze the assets of its U.S. business at a hearing on Tuesday. Perhaps more important, 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 sides to strike a deal on an asset freeze. In a packed courtroom, Judge Amy Berman Jackson of the District of Columbia pressed Binance to agree to a partial freeze for its U.S. arm and the S.E.C. to let the company keep paying its bills.

Binance.US has argued that the S.E.C.’s demand would be a “death penalty,” while an S.E.C. lawyer accused the company of shuttling billions’ worth of assets out of the country.

Ms. Jackson also showed some skepticism of the S.E.C.’s efforts to rein in crypto. The agency has accused both Binance and a big rival, Coinbase, of allowing the sale of unregistered securities — that is to say, crypto assets. She called the S.E.C.’s use of its enforcement powers to regulate crypto “inefficient and cumbersome.”

That said, Ms. Jackson added that Binance’s posture of surprise over the agency’s legal arguments “rang a little hollow,” given that questions about crypto’s legal status have been around for years.

The S.E.C. faced heat on a second front on Tuesday, when Republicans on the House Financial Services Committee sent it a letter questioning a proposed rule defining an “exchange.”

The lawmakers said that the proposed definition, which would include both centralized exchanges and automated decentralized finance protocols, exceeded the agency’s authority and could stifle innovation.

Uneven progress on boardroom diversity

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

Women and underrepresented racial and ethnic groups occupied roughly 45 percent of board seats at Fortune 500 companies as of June 2022 — a high, and up from 38 percent in 2020. But women of color filled only 7.8 percent of those positions.

“There is still a lot of work to do,” 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 U.S. population. At present rates, gender parity on the boards of Fortune 500 companies is 20 years away and it could take more than four decades for them to properly reflect the growing Hispanic population.

Recruitment doesn’t go deep enough, said Cid Wilson, chair of the Alliance for Board Diversity, with many diverse directors serving on several boards — what the report calls “recycled talent.” Roughly 18 percent of female directors serve on more than one board: The rate is 21 percent for women of color.

Almost all laws mandating board diversity have been struck down, including a boardroom quota in California. And companies now face a tricky political and cultural climate that makes their diversity efforts subject to greater scrutiny and potential blowback.

But pressure from consumers and shareholders is unlikely to let up, Mr. Wilson said. “The reality is that, population-wise, diversity is only going to increase. And if you’re a company that is looking to be competitive, you cannot ignore the importance of diversity, equity and inclusion.”

THE SPEED READ

Deals

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

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

Policy

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