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Daniels win big at the Directors Guild Awards, raising Everything Everywhere’s Oscar chances – The A.V. Club
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Elon Musk Explores Raising Up to $3 Billion to Help Pay Off Twitter Debt
Elon Musk
‘s team has been exploring using as much as $3 billion in potential new fundraising to help repay some of the $13 billion in debt tacked onto Twitter Inc. for his buyout of the company, people familiar with the matter said.
In December, Mr. Musk’s representatives discussed selling up to $3 billion in new Twitter shares, people familiar with the matter said.
Mr. Musk’s team has said to people familiar with the finances of the company that an equity raise, if successful, could be used to pay down an unsecured portion of the debt that carries the highest interest rate within the $13 billion Twitter loan package, people familiar with the matter said.
Paying off the debt would provide welcome financial relief to Twitter, which has struggled to keep advertisers on the platform. In November, Mr. Musk said Twitter had suffered “a massive drop in revenue” and was losing over $4 million a day. He also said that month that bankruptcy was a possibility for the company, although Mr. Musk later shared more upbeat prospects for the company, saying he expects Twitter to be roughly cash-flow break-even in 2023 as he has slashed some 6,000 jobs.
The state of the fundraising talks couldn’t be learned. In mid-December, Mr. Musk’s team reached out to new and existing backers about raising new equity capital at the original Twitter takeover price.
Mr. Musk’s advisers had hoped to reach a deal to raise cash at the initial takeover price by the end of 2022, according to an email sent to prospective investors at the time. However, some prospective backers said they balked at the terms, given concerns about Twitter’s financial performance. The Musk team didn’t specify a funding amount or purpose for the fundraise in the email.
Fidelity, one of the co-investors that backed Mr. Musk’s takeover of Twitter, wrote down its stake in Twitter by 56% in November, public filings show, suggesting Mr. Musk would face an uphill battle raising funds at the original valuation from outside investors. The banks holding the $13 billion in debt that backed his takeover of the company haven’t yet received any formal notice of any repayments, people familiar with the matter said.
Layoffs Across the Tech Industry
Representatives for Mr. Musk didn’t respond to requests for comment.
Twitter’s unsecured bridge loans, which total $3 billion, are the most expensive portion of the $13 billion debt package Mr. Musk incurred as part of his $44 billion acquisition of the social-media company. They carry an interest rate of 10% plus the secured overnight financing rate, a benchmark interest rate that has shot up in recent months and currently sits at 4.3%.
With every quarter that passes without Twitter refinancing the debt, the interest rate goes up by an additional 0.50 percentage point, according to regulatory filings. Twitter’s first quarterly interest payment is due at the end of the month, the filings show.
Twitter’s annual interest burden has increased by over $100 million since he announced the takeover deal last April, as the overnight rate has increased. At the time of the announcement, the overnight rate was 0.3%.
Elon Musk has said that Twitter is losing over than $4 million a day.
Photo:
Marlena Sloss/Bloomberg News
Twitter’s total interest expense has been estimated to be roughly $1.25 billion a year, according to a December analysis by
Jeffrey Davies,
a former credit analyst and founder of data provider Enersection LLC. By that estimate, Twitter is incurring roughly $3.4 million every day in interest-payment obligations.
On Dec. 13, Mr. Musk tweeted “beware of debt in turbulent macroeconomic conditions, especially when Fed keeps raising rates.”
Repaying the unsecured bridge loans would leave Twitter with a debt burden that has much more manageable interest rates. Twitter’s $6.5 billion in term loans and $3 billion in secured bridge loans carry an annual interest burden of 4.75% and 6.75%, respectively, plus the overnight rate, according to public filings.
A potential deal would also provide a degree of relief for the banks that backed Mr. Musk’s takeover of the social-media company and that intended to sell the debt to third-party investors but changed course after deteriorating market conditions sank Wall Street’s appetite for exposure to risky bonds and loans.
The $13 billion of Twitter debt on bank balance sheets, one of the biggest “hung deals” of all time, has helped contribute to a drag in the number of mergers and acquisitions as banks’ firepower to back deals is tied up.
Morgan Stanley,
the lead bank on Twitter’s debt deal, has approximately $807 million in unsecured bridge debt on its balance sheet, while
Bank of America Corp.
,
Barclays
PLC and MUFG Bank Ltd. each have approximately $623 million of exposure, according to public documents and calculations by The Wall Street Journal.
Each of the four banks have more than $2 billion in other Twitter debt commitments on their balance sheets separate from the unsecured bridge facility, including term loans and other secured debt, the documents show.
Representatives of those banks declined to comment.
—Corrie Driebusch, Alexa Corse and Laura Cooper contributed to this article.
Write to Berber Jin at berber.jin@wsj.com and Alexander Saeedy at alexander.saeedy@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
SpaceX raising $750 million at $137 billion valuation, a16z investing
A long exposure photo shows the path of SpaceX’s Falcon 9 rocket as it launched the ispace mission on Dec. 11, 2022, with the rocket booster’s return and landing visible as well.
SpaceX
Elon Musk’s re-usable rocket maker and satellite internet company, SpaceX, is raising $750 million in a new round of funding that values the company at $137 billion, according to correspondence obtained by CNBC.
Last month, Bloomberg first reported that SpaceX was allowing insiders to sell at $77 per share, which would have put the company’s valuation near $140 billion. The company raised more than $2 billion in 2022, including a $250 million round in July, and was valued at $127 billion during an equity round in May, CNBC previously reported.
According to an e-mail sent to prospective SpaceX investors, Andreessen Horowitz (also known as a16z) will likely lead the new funding round. Early SpaceX investors included Founders Fund, Sequoia, Gigafund and many others.
A16z also participated in Elon Musk’s leveraged buyout of Twitter, a $44 billion deal that closed in late October 2022.
SpaceX and a16z did not immediately respond to a request for comment.
Last year, SpaceX achieved several new milestones but faced delays to its Starship program, which is part of NASA’s effort to bring astronauts back to the moon.
On the upside, the company’s satellite internet service, Starlink, exceeded 1 million subscribers and provided a lifeline to users in Ukraine who suffered infrastructure disruptions after Russia’s invasion. SpaceX also managed to surpass 60 reusable rocket launches in a single year via its Falcon program.
The company is currently continuing development of its Starship and Super Heavy launch vehicles at the company’s Starbase facility in Boca Chica, Texas. It’s not clear when the company will move to the next step of the program, which entails an orbital launch test of these larger vehicles.
As Musk has repeatedly sounded off about geopolitical issues on Twitter, NASA Administrator Bill Nelson recently asked SpaceX President and COO Gwynne Shotwell whether his “distraction” as the new owner and CEO of Twitter might affect SpaceX’s work with the space agency, NBC News reported. Nelson said that Shotwell reassured him it would not.
NASA is now considering whether SpaceX can help rescue residents on the International Space Station, including an astronaut and two cosmonauts with Russia’s Roscomos, according to CNET. Russia’s Soyuz capsule sprung a coolant leak in December, and an investigation is underway to determine if the spacecraft can safely return the crew home or if emergency measures will need to be taken instead.
Chevy Chase recreates iconic scene from ‘Christmas Vacation’ at Raising Cane’s
MORTON GROVE, Ill. (Gray News) – It’s a beaut, Clark!
Chevy Chase recreated an iconic scene from “Christmas Vacation” during a lighting ceremony at a Raising Cane’s in Illinois.
Hundreds of people gathered for the lighting ceremony Tuesday night at the Raising Cane’s restaurant in the Chicago suburb of Morton Grove.
The event was filmed for a holiday commercial.
A video shared by the restaurant chain shows Raising Cane’s founder Todd Graves introducing Chase to the crowd as the actor holds a pair of extension cords.
“Drumroll, please,” Chase says as he plugs in the cords. Of course, the lights don’t work, but like in the film, the display lights up on the second try.
Fortunately, unlike in “Christmas Vacation,” the display did not cause a city-wide power outage.
Chase and Graves then drove away in a replica of the Griswold family’s iconic wood-paneled station wagon, complete with a Christmas tree strapped on top.
Copyright 2022 Gray Media Group, Inc. All rights reserved. TMX contributed to this report.
Dow futures drop 300 points as rates jump, raising fears about a recession
Stock futures fell Thursday as interest rates jumped with Federal Reserve officials signaling interest rate hikes to slow inflation are far from over.
Futures tied to the Dow Jones Industrial Average dipped 316 points, or 0.9%. S&P 500 futures slipped 1.1%, while Nasdaq-100 futures fell 1.2%.
St. Louis Federal Reserve President James Bullard said in a speech that “the policy rate is not yet in a zone that may be considered sufficiently restrictive.”
“The change in the monetary policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023,” added Bullard.
The 2-year Treasury Yield jumped to 4.42% Thursday morning, raising fears higher rates would send the economy into a recession.
Stocks most vulnerable to a recession and higher rates led the losses in premarket trading. Financials led by Wells Fargo were lower. Tech shares Tesla and Netflix declined.
The latest moves followed a down day on Wall Street, the second in three days. The S&P 500 and Nasdaq Composite fell 0.83% and 1.54%, respectively. The Dow Jones Industrial Average lost 39.09 points, or 0.12%.
Downward pressure emerged from weak guidance from Target, which reported a decline in sales as inflation pinches shoppers heading into the holiday season. The Minneapolis-based chain ended 13% lower, while its forward guidance cast doubt on other retailers.
Sam Bankman-Fried’s Alameda quietly used FTX customer funds without raising alarm bells, say sources
Tom Williams | CQ-Roll Call, Inc. | Getty Images
The quant trading firm Sam Bankman-Fried founded was able to quietly use customer funds from his exchange FTX in a way that flew under the radar of investors, employees and auditors in the process, according to a source.
The way they did it was by using billions from FTX users without their knowledge, says the source.
Alameda Research, the fund started by Bankman-Fried, borrowed billions in customer funds from its founder’s exchange, FTX, according to a source familiar with company operations, who asked not to be named because the details were confidential.
The crypto exchange drastically underestimated the amount FTX needed to keep on hand if someone wanted to cash out, according to the source. Trading platforms are required by their regulators to hold enough money to match what customers deposit. They need the same cushion, if not more, in the event that a user borrows money to make a trade. According to the source, FTX did not have nearly enough on hand.
Its biggest customer, according to a source, was the hedge fund Alameda. The fund was partially able to cover up this activity because the assets it was trading never touched its own balance sheet. Instead of holding any money, it was borrowing billions from FTX users, then trading it, the source said.
None of this was disclosed to customers, to CNBC’s knowledge. In general, mixing customer funds with counterparties and trading them without explicit consent, according to U.S. securities law, is illegal. It also violates FTX’s terms of service. Sam Bankman-Fried declined to comment on allegations of misappropriating customer funds, but did say its recent bankruptcy filing was a result of issues with a leveraged trading position.
“A margin position took a huge hit,” Bankman-Fried told CNBC.
In making some of these leveraged trades, the quant fund was using a cryptocurrency created by the exchange called FTT as collateral. In a lending agreement, collateral is typically the borrower’s pledge to secure repayment. It’s often dollars, or something else of value — like real estate. In this case, a source said Alameda was borrowing from FTX, and using the exchange’s in-house cryptocurrency, FTT token, to back those loans. The price of the FTT token nosedived 75% in a day, making the collateral insufficient to cover the trade.
In the past week, FTX has crashed from a $32 billion cryptocurrency powerhouse, into bankruptcy. The blurred lines between FTX and Alameda Research resulted in a massive liquidity crisis for both companies. Bankman-Fried stepped down as CEO of FTX and said Alameda Research is shutting down. The company has since said it’s removing trading and withdrawals, and moving digital assets offline after a suspected $477 million hack.
When asked about the blurred lines between his companies in August, Bankman-Fried denied any conflict of interest and said FTX was a “neutral piece of market infrastructure.”
“I put a lot of work over the last few years into trying to eliminate conflicts of interest there,” 30-year-old Bankman-Fried told CNBC in an interview. “I don’t run Alameda anymore. I don’t work for it, none of FTX does. We have separate staffs — we don’t want to have preferential treatment. We want as best as we can, to treat everyone fairly.”
Margin trading
Part of the issue, according to the same source, was FTX’s web of complicated leverage and margin trading. Its “spot margin” trading feature let users borrow from other customers on the platform. For example, if a customer deposited one bitcoin they could lend it to another user and earn yield on it.
But every time an asset was borrowed, FTX subtracted the borrowed assets from what it needed to keep in its wallets to match customer deposits, a source says. In a typical situation, an exchange’s wallets need to match what customers deposit. But because of this practice, assets were not backed one-to-one and the company was underestimating the amount they owed customers.
The trading firm Alameda was also able to take advantage of this spot margin feature. A source says Alameda was able to borrow customer funds, essentially for free.
The source explained that Alameda could post the FTT tokens it held as collateral and borrow customer funds. Even if FTX created more FTT tokens, it would not drive down the coin’s value because these coins never made it onto the open market. As a result, these tokens held their market value, allowing Alameda to borrow against them – essentially receiving free money to trade with.
FTX had been able to sustain this pattern as long as it maintained the price of FTT and there was not a flood of customer withdrawals on the exchange. In the week leading up to the bankruptcy filing, FTX did not have enough assets to match customer withdrawals, the source said.
Outside auditors likely missed this discrepancy because customer assets are an off balance sheet item, and therefore, would not be reported on FTX’s financial statements, the source said.
That all crumbled last week.
CoinDesk reported that the majority of Alameda’s balance sheet consisted of FTT tokens, shaking the confidence of consumers and investors. Changpeng Zhao (CZ), the CEO of one of its largest rivals, Binance, publicly threatened to sell his FTT tokens on the open market, crashing the price of FTT.
This chain of events sparked a run on the exchange, with customers withdrawing roughly $5 billion before FTX paused withdrawals. When customers went to pull their money out, FTX didn’t have the funds, sources say.
‘No one saw this coming’
Former employees also told CNBC that the financial information they had access to about the company was inaccurate as a result of these accounting methods. CNBC reviewed a screenshot of FTX’s financial data that a source said was taken last week. Although the company was insolvent at the time, a former employee says the data incorrectly suggested that even if all customers were to withdraw their funds, FTX would still have more than a billion dollars left over.
Three sources familiar with the company told CNBC that they were blindsided by the company’s actions and that, to their knowledge, only a small cohort knew that customer deposits were being misused. Employees said in some cases, their life savings are tied up on FTX.
“We’re just shocked and devastated,” a current FTX employee said. “I feel like I’m in a movie that’s playing out in real time. No one saw this coming.”
As a result of the public backlash FTX has faced over these missing funds, employees who say they were just as devastated as customers are now facing financial hardship, harassment surrounding their involvement with the company, and tarnished future employment prospects.
“We could not believe how we were being betrayed,” a former employee said.
The Fed is raising interest rates, but there’s another tool that it hopes will help crush inflation and deflate market bubbles
© Joshua Roberts/Reuters
Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on his nomination to become chairman of the U.S. Federal Reserve in Washington, U.S., November 28, 2017. Joshua Roberts/Reuters
- The Fed has ratcheted up interest rates this year, but that’s only half of its approach to fighting inflation and taming frothy markets.
- Quantitative tightening is meant to suck excess liquidity from the market, fighting inflation and deflating bubbles.
- Experts say there is the potential it goes too far, but the Fed can avoid a crisis if it eases up on QT gradually.
Inflation has weighed on markets all year, with the Fed hiking rates by over 300bp in a scramble to rein in sky-high prices.
Load Error
The aggressive and historic rate hikes are just half of its approach though, and there’s another tool the central bank has been employing more recently to help crush inflation and deflate market bubbles that formed as a result of years of easy monetary policy.
Unfortunately for investors, that tool is also set to weigh on stock and bond markets, maybe even more so than the Fed’s rate hikes. Such a massive change in liquidity conditions has sparked fears that quantitative tightening—the runoff of the Fed’s $9 trillion balance sheet—could end in a market crash.
Here’s how two experts explain the Fed’s QT regime, and why it’s a delicate balancing act between fighting inflation and keeping markets afloat.
What is quantitative tightening and what does it mean to reduce liquidity?
When the Fed undertakes quantitative tightening, it’s reducing the size of its balance sheet. Those are the assets the central bank has accumulated, such as long-term government bonds, which eventually mature and allow the Fed the get back the principal on those bonds. Once they mature, the Fed can either reinvest that money, or it can reduce the size of its balance sheet by simply letting the bonds “run off.” During quantitative tightening, the Fed chooses not to reinvest.
This is slightly different than if the Fed were to actually sell the bonds on its balance sheet into the market, but it has a similar effect of pushing rates higher.
The Fed is shaving off around $95 billion of Treasury bonds and mortgage securities from its balance sheet a month. Essentially, that’s lowering the demand for long-term bonds, causing real long-term interest rates to increase.
What is the effect of QT?
The Fed hopes it can help reduce inflation. When real-long term interest rates increase, that lowers asset prices, bringing a slowdown to inflation. Higher rates also encourage households to save more, discouraging the kind of consumption or investment that overheats the economy and stimulates inflation.
Does it impact stocks?
Similar to higher interest rates, which can eat into corporate profitability and depress stock prices, QT can have an adverse effect on equities.
Remember, QT drains liquidity from markets by removing a guaranteed buyer of massive amounts of debt securities. Removing that much liquidity from the market inevitably has a cascading effect, and bubbles like the meme-stock craze that took hold of markets during the pandemic will wane.
According to Amir Kermani, an economist at UC Berkley, this is also because when long-term interest rates for bonds increase, investors will want to shift from stocks to long-term bonds.
So, no more meme stock craziness?
Taken together, quantitative tightening and interest rate hikes will likely put a lid on meme stocks and asset speculation in general, RBA analyst Michael Contopoulos told Insider.
But it’s also not just about quantitative tightening.
“That would be way too simplistic to just boil it down to that,” Contopoulos said. He pointed out that a lot of the pandemic-era stimulus money has worked its way out of savings, which was a major driver for interest in stocks. The Fed’s rates hikes have also reduced the appetite for stocks this year by increasing short-term interest rates.
With three-month government-guaranteed Treasuries yielding upwards of 4%, why risk money in the stock market that’s down 20% year-to-date?
When will QT end?
The quantitative tightening regime can’t last forever, Kermani says, and it’s likely that the Fed will need to start slowing the pace of its balance sheet reduction. That’s largely because money coming off the balance sheet has mostly been coming from the excess reserves, which are used by banks to meet liquidity needs.
Kermani estimates that the financial system may not be able to tolerate banks’ excess reserves dipping below $2 trillion, which could lead the Fed to stop QT sometime late 2023. He added though that the Fed would likely wait for clearer signs of inflation rolling over before slowing the pace of quantitative tightening.
Do stocks rally after QT ends?
There’s hope for a 2023 bull run, according to Bank of America, which says even a shift from quantitative tightening to “tinkering” would stimulate stocks.
Though, other experts have their doubts as to the tailwinds provided by an end to QT.
“Quantitative tinkering will have a temporary effect,” Contopoulos said. “Our research shows the profit recession is just about to start and will pick up steam into 2023.”
He noted that stocks were largely influenced by the Fed “popping the liquidity bubble” in the first six to nine months of this year, but Fed policy will have a smaller impact on stocks later as markets shift focus to corporate earnings.
“I think the next leg of the race lower in stock prices is going to be driven more by the lack of earnings growth than it is going to be by anything the Fed does.”
Is it possible the Fed’s messes this up?
Kermani says quantitative tightening won’t necessarily lead to a crash in stock prices—as long as the Fed reduces its portfolio gradually. But he thinks it would be a mistake to suddenly halt the quantitative tightening process altogether at this point.
“That’s a huge mistake for the Federal Reserve to change their mind because of being afraid of what’s going to happen to stock prices. We don’t want to live in a world where the Fed is in charge of insuring the stock market. So I think some gradual adjustment of market prices is actually not bad,” he said.
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Britain’s shadow banking system is raising serious concerns after bond market storm
Analysts are concerned about a knock-on effect to the U.K.’s shadow banking sector in the event of a sudden rise in interest rates.
Photo by Richard Baker | In Pictures | Getty Images
LONDON — After last week’s chaos in British bond markets following the government’s Sep. 23 “mini-budget,” analysts are sounding the alarm on the country’s shadow banking sector.
The Bank of England was forced to intervene in the long-dated bond market after a steep sell-off of U.K. government bonds — known as “gilts” — threatened the country’s financial stability.
The panic was focused in particular on pension funds, which hold substantial amounts of gilts, while a sudden rise in interest rate expectations also caused chaos in the mortgage market.
While the central bank’s intervention offered some fragile stability to the British pound and bond markets, analysts have flagged lingering stability risks in the country’s shadow banking sector — financial institutions acting as lenders or intermediaries outside the traditional banking sector.
Former British Prime Minister Gordon Brown, whose administration introduced a rescue package for Britain’s banks during the 2008 financial crisis, told BBC Radio Wednesday that U.K. regulators would need to tighten their supervision of the shadow banks.
“I do fear that as inflation hits and interest rates rise, there will be a number of companies, a number of organizations that will be in grave difficulty, so I don’t think this crisis is over because the pension funds have been rescued last week,” Brown said.
“I do think there’s got to be eternal vigilance about what has happened to what is called the shadow banking sector, and I do fear that there could be further crises to come.”
Global markets took heart in recent sessions from weakening economic data, which is seen as reducing the likelihood that central banks will be forced to tighten monetary policy more aggressively in order to rein in sky-high inflation.
Edmund Harriss, chief investment officer at Guinness Global Investors, told CNBC Wednesday that while inflation will be tempered by the decline in demand and impact of higher interest rates on household incomes and spending power, the danger is a “grinding and extension of weakening demand.”
The U.S. Federal Reserve has reiterated that it will continue raising interest rates until inflation is under control, and Harriss suggested that month-on-month inflation prints of more than 0.2% will be viewed negatively by the central bank, driving more aggressive monetary policy tightening.
Harriss suggested that sudden, unexpected changes to rates where leverage has built up in “darker corners of the market” during the previous period of ultra-low rates could expose areas of “fundamental instability.”
“When going back to the pension funds issue in the U.K., it was the requirement of pension funds to meet long-term liabilities through their holdings of gilts, to get the cash flows coming through, but ultra-low rates meant they weren’t getting the returns, and so they applied swaps over the top — that’s the leverage to get those returns,” he said.
“Non-bank financial institutions, the issue there is likely to be access to funding. If your business is built upon short-term funding and one step back, the lending institutions are having to tighten their belts, tighten credit conditions and so forth, and start to move towards a preservation of capital, then the people that are going to be starved are those that require the most from short-term funding.”
Harriss suggested that the U.K. is not there yet, however, for there is still ample liquidity in the system for now.
“Money will become more expensive, but it is the availability of money that is when you find sort of a crunch point,” he added.
The greater the debt held by non-banking institutions, such as hedge funds, insurers and pension funds, the higher the risk of a ripple effect through the financial system. The capital requirements of shadow banks is often set by counterparties they deal with, rather than regulators, as is the case with traditional banks.
This means that when rates are low and there is an abundance of liquidity in the system, these collateral requirements are often set quite low, meaning non-banks need to post substantial collateral very suddenly when markets head south.
Pension funds triggered the Bank of England’s action last week, with some beginning to receive margin calls due to the plunge in gilt values. A margin call is a demand from brokers to increase equity in an account when its value falls below the broker’s required amount.
Sean Corrigan, director of Cantillon Consulting, told CNBC Friday that pension funds themselves were in fairly strong capital positions due to higher interest rates.
“They’re actually now ahead of funding on the actuarial basis for the first time in I think five or six years. They clearly had a margin problem, but who is the one who’s thinly margined?” he said.
“It’s the counterparties who’ve passed it on and shuffled it around themselves. If there is an issue, maybe we’re not looking at the right part of the building that’s in danger of falling down.”
Central Banks May Stoke Risks by Raising Interest Rates Together
Central banks around the world are raising their key interest rates in the most widespread tightening of monetary policy on record. Some economists fear they may go too far if they don’t take into account their collective impact on global demand.
According to the World Bank, the number of rate increases announced by central banks around the world was the highest in July since records began in the early 1970s. On Wednesday, the Federal Reserve delivered its third 0.75 percentage-point increase in as many meetings. This past week its counterparts in Indonesia, Norway, the Philippines, South Africa, Sweden, Switzerland, Taiwan and the U.K. also upped rates.
Moreover, the size of those rate rises is larger than usual. On Sept. 20, Sweden’s Riksbank increased its reference rate by a full percentage point. It hadn’t previously raised or lowered rates by more than half a point since adopting its current framework in July 2002.
Those central banks are almost universally responding to high inflation. Inflation across the Group of 20 leading economies was 9.2% in July, double the rate a year earlier, according to the Organization for Economic Cooperation and Development. Higher rates cool demand for goods and services and reassure households and businesses that inflation will be brought down over the coming year.
But some worry that central banks are effectively pursuing national responses to what is a global problem of excess demand and high prices. They warn that central banks as a group will thus go too far—and push the world economy into a downturn that is deeper than necessary.
“The present danger…is not so much that current and planned moves will fail eventually to quell inflation,”
Maurice Obstfeld,
formerly chief economist at the International Monetary Fund, wrote earlier this month in a note for the Peterson Institute for International Economics, where he is a senior fellow. “It is that they collectively go too far and drive the world economy into an unnecessarily harsh contraction.”
There are few signs that central banks are going to pause and take stock of the impact of their rate increases to date. The Fed indicated Wednesday it would likely raise rates 1 percentage point to 1.25 percentage points over its next two meetings. Economists at JPMorgan expect central bankers from Canada, Mexico, Chile, Colombia, Peru, the eurozone, Hungary, Israel, Poland, Romania, Australia, New Zealand, South Korea, India, Malaysia and Thailand to raise rates in policy meetings scheduled through the end of October.
That is an array of central-bank firepower with few precedents. But do they all need to be doing so much if they are all doing the same thing?
Most economists accept that inflation in any one country isn’t solely due to forces within that country. Global demand also affects the prices of easily traded goods and services. This has long been apparent with commodities such as oil; a boom in China drove up prices in 2008 even as the U.S. slid into recession. It has also been true in recent years of manufactured goods, whose prices were boosted worldwide by disruptions to supply chains, such as at Asian ports, and elevated demand from government stimulus. One Fed study found that U.S. fiscal stimulus raised inflation in Canada and the U.K.
Sweden’s Riksbank, led by Gov. Stefan Ingves, raised its reference rate by a full percentage point this week.
Photo:
Mikael Sjoberg/Bloomberg News
But an individual central bank’s focusing on matching supply and demand at a national level could go too far, because other central banks are already weakening the global demand that is one of the drivers of national inflation. If each central bank does so, the excess tightening globally may be significant.
The World Bank shares Mr. Obstfeld’s worries, warning in a report that “the cumulative effects of international spillovers from the highly synchronous tightening of monetary and fiscal policies could cause more damage to growth than would be expected from a simple summing of the effects of the policy actions of individual countries.”
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The Economic Outlook with Larry Summers and the Fed’s Neel Kashkari
WSJ Chief Economics Correspondent Nick Timiraos sits down with former Treasury Secretary Lawrence Summers and Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, to discuss the steps the Fed is taking to battle inflation.
That risk could be reduced through coordination between central banks—for example, when they cut key interest rates together during the global financial crisis. Likewise, in 1985 when advanced economies acted together to bring down the dollar and then again in 1987, when they acted together to support it.
Fed Chairman
Jerome Powell
noted Wednesday that central banks have coordinated interest-rate actions in the past, but that it wasn’t appropriate now when “we’re in very different situations.” He added that contact among global central banks is more or less ongoing. “And it’s not coordination, but there is a lot of information-sharing,” he said.
If coordination isn’t feasible, a more attainable goal may be, as the World Bank advised, for national policy makers to “take into account the potential spillovers of globally synchronous domestic policies.”
Fed Chairman Jerome Powell said it wasn’t appropriate for central banks to coordinate interest-rate actions at the moment.
Photo:
Drew Angerer/Getty Images
Mr. Powell suggested that already happens. The Fed’s forecasts always take account of “policy decisions—monetary policy and otherwise [and] the economic developments that are taking place in major economies that can have an effect on the U.S. economy,” he told reporters.
Many central banks are worried about raising rates too little in the face of stiff inflation. “In this environment, central banks need to act forcefully,” said
Isabel Schnabel,
a policy maker at the European Central Bank, in a late August speech. “Regaining and preserving trust requires us to bring inflation back to target quickly.”
“Informal coordination would be beneficial,” said
Philipp Heimberger,
an economist at the Vienna Institute for International Economic Studies. “Systematic thinking on the impact of interest-rate hikes would need to take into account what other central banks are doing simultaneously. This would be a game changer.”
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Mr. Heimberger said that the Fed has a key role as the prime mover behind the rise in global interest rates and that it should “seriously consider the implications of its interest-rate hiking cycle for other parts of the world.”
Gilles Moëc,
chief economist at insurer
AXA SA,
is doubtful that effective coordination is achievable and argues that in its absence, central banks should tread more carefully as they contemplate further rate rises.
“Once monetary policy is in restrictive territory, I think it becomes dangerous to hike mechanically at every policy meeting without taking the time to assess how the economy is responding,” Mr. Moëc said. “The quantity of new info between two meetings can be too small and the risk of overreaction rises.”
Write to Paul Hannon at paul.hannon@wsj.com
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