Markets Await the Fed’s Next Interest Rate Move

Waiting on the Fed and Treasury

The Fed hasn’t budged on interest rates since July, and it’s expected to stand pat again today. Still, an anxious Wall Street will be closely watching for any change in the central bank’s higher-for-longer strategy on rates, including the possibility of a new increase as soon as next month.

Investors will face a double whammy. Before Jay Powell, the Fed chair, speaks this afternoon, the Treasury Department will take center stage. At 8:30 a.m. Eastern, it will deliver its quarterly refunding update, rolling out a road map for how much it will borrow in the coming months.

Ordinarily, this is a routine announcement. But this Treasury update comes against a backdrop of big tensions in the bond market. Yields on 10-year Treasury notes jumped to a 16-year high last month as investors dumped bond holdings, sending borrowing costs higher for consumers and businesses.

The Treasury on Monday said that it would auction off more than $1.5 trillion in debt over the next six months, and it will disclose the details on how it will do that today.

A big concern: Issuing a torrent of debt into an already saturated market could add more volatility to both stocks and bonds. The S&P 500 suffered its third straight losing month yesterday, as potential escalation of the Israel-Hamas war emerged as a threat to global growth. Meanwhile, U.S. Treasuries have sold off in each of the past six months, according to Deutsche Bank.

Big questions swirl around what Powell will say. Investors will be parsing the language he uses to describe the rates outlook. At the last meeting in September, Fed policymakers said they saw room for another rate increase if inflation rebounded.

Since then, indicators have shown that hiring and consumer spending are growing briskly. Wage data published yesterday showed elevated employment costs, another sign that efforts to tame inflation will take longer than expected.

Wall Street is divided on what comes next. Economists at Vanguard and Bank of America say the Fed will probably have to raise interest rates again to blunt inflation. But Mohit Kumar, chief financial economist at Jefferies, said that “the bar for another hike is high.”

There’s more consensus that rates will remain higher for longer. The futures market this morning was pricing in 50-50 odds that the Fed’s first rate cut would come no sooner than next June, and that the prime lending rate would remain at or above 5 percent through next year.

HERE’S WHAT’S HAPPENING

Vice President Kamala Harris proposes new A.I. rules. Ahead of her appearance at Britain’s international summit on how to regulate artificial intelligence, Harris announced initiatives including a draft policy on how federal agencies can deploy the technology and a “political declaration” on establishing global norms for its military use. Meanwhile, Chinese scientists called for an international regulatory body to focus on the “existential” risks that A.I. poses.

WeWork reportedly plans to file for bankruptcy. The embattled co-working company could seek Chapter 11 protection as soon as next week, The Wall Street Journal reports, after it missed a bond interest payment last month. That would mark a new low for WeWork, whose fortunes have plummeted sharply over the past four years.

A jury clears Tesla in a lawsuit over its driver-assistance software. The carmaker’s Autopilot system was found not to be at fault in a 2019 California crash that killed a Tesla owner and injured two pedestrians. The verdict could herald how other cases involving Tesla’s software will play out.

A major British hedge fund closes in the wake of sexual misconduct accusations against its founder. Odey Asset Management said that it was shutting down, with some of its executives and funds moving to different firms. The move came months after The Financial Times reported on allegations by 13 women that the firm’s founder, Crispin Odey, had assaulted them.

The Bankman-Fried trial heads to a climax

Closing statements in Sam Bankman-Fried’s crypto fraud trial are set to begin this morning, meaning jury deliberations could start as early as tomorrow.

Bankman-Fried, the head of the collapsed cryptocurrency exchange FTX, is accused of masterminding a yearslong fraud that left customers, investors and business partners out roughly $10 billion. He has pleaded not guilty. If convicted, he could face the equivalent of a life sentence.

Here’s what we learned from his third day on the stand yesterday.

• Bankman-Fried said he was unaware that FTX customer funds had been misappropriated … until it was too late. He had previously testified that he learned around last October of the missing funds — essentially, they flowed from FTX to Alameda Research, the hedge fund Bankman-Fried had founded. His timeline contradicts that of company insiders, including Adam Yedidia, a former FTX developer who had testified that he had informed him in the summer of 2022 of an $8 billion hole in FTX’s accounts. (Bankman-Fried said he didn’t recall Yedidia using that language.)

• He called Alameda’s near-unlimited line of credit with FTX a “theoretical maximum.” On Monday, he conceded that Alameda could borrow up to $65 billion from FTX. Yesterday, he said the actual line of credit Alameda used in 2022 was $2 billion.

• He gave Bahamians special treatment. At the time of FTX’s collapse last November, regulators in the Bahamas, where it was based, were investigating the exchange. Amid a frenzy of customer requests to withdraw funds, Bankman-Fried offered to open a special window so that Bahamian customers could get their money out.

Meanwhile, Michael Lewis has his doubts. The author of “Going Infinite,” a new book detailing Bankman-Fried’s rise and fall that some critics feel is too sympathetic, gives the FTX founder low odds of winning. “I think it’s highly unlikely he doesn’t go to jail,” he told CNN’s Fareed Zakaria yesterday.

An “earthquake” hits the U.S. home sale market

A blockbuster court ruling in Missouri yesterday against the National Association of Realtors, the powerful group representing over 1.5 million American real estate agents, and large brokerages could upend the business of buying and selling homes in the U.S.

What happened: Midwestern homeowners had accused the N.A.R., which charges agents for the rights to call themselves realtors, and several brokerages of conspiring to keep commissions artificially high. Under current rules, homeowners must pay buyers’ agent fees when listing their properties.

If they don’t agree to the terms, with fees that average around 5 to 6 percent total including sellers’ fees, their house most likely won’t be seen on the database that underpins most home-listing services. That, the plaintiffs argued, undercut the ability of buyers and sellers to negotiate lower rates and added thousands of dollars to home prices.

The jury took less than three hours to find for the plaintiffs, awarding them nearly $1.8 billion in damages — which the presiding judge could treble to more than $5 billion.

“This is an earthquake,” Jason Haber, a real estate agent at Compass and a critic of N.A.R. and its leadership, told The Times. Analysts at Keefe, Bruyette & Woods have estimated that changes to commissions could reduce the $100 billion that consumers pay annually by almost a third.

The prospect of lower commissions immediately hit shares in publicly traded brokerages: eXp World Holdings fell 8.7 percent, while Compass fell 6 percent.

The N.A.R. pledged to appeal, while the other defendants in the case, Berkshire Hathaway’s HomeServices of America and Keller Williams, said they were at least considering appealing.

The industry’s legal troubles aren’t over. The N.A.R. faces another antitrust lawsuit. And the Justice Department is trying to reopen a settlement reached during the Trump administration over brokerage fees.

“If he hadn’t already been concerned about what could go wrong with A.I. before that movie, he saw plenty more to worry about.”

— Bruce Reed, the deputy White House chief of staff, who said President Biden grew more concerned about the perceived dangers of artificial intelligence in the wrong hands after watching “Mission: Impossible — Dead Reckoning Part One.”

How to use economic leverage in the Israel-Hamas war

As the U.S. and others move to prevent the Israel-Hamas war from escalating throughout the Middle East, analysts at the Atlantic Council, a think tank, have pointed to a potential tool in that effort.

Economic aid for countries like Egypt, Jordan and Lebanon could incentivize them to help contain the conflict, Josh Lipsky, the senior director at the council’s GeoEconomics Center, writes:

For instance, there is currently a $5 billion stalled IMF program and Cairo is desperate to have access to at least part of the money. Jordan was supposed to receive a $100 million loan from Japan for an upgrade to its electricity grid. Before October 7, France had committed (but not yet fully sent) over 30 million euros in financial relief to Lebanon.

There are dozens of similar financial levers the West could pull in the days ahead to get more collaboration on the Rafah crossing for humanitarian relief, reconstitute the cancelled Arab Leaders Summit in Amman with President Biden, and send a deterrence signal to Hezbollah to avoid escalation in the north. If ever there was a moment to leverage the combined influence of the dollar, pound, euro, and yen this is it.

An extra incentive to the West’s providing financial aid, Lipsky writes, is to pre-empt others like China from using their own money to exert influence in the region.

• In related news: Egypt is preparing to receive the first humanitarian departures from Gaza since Israel’s military campaign began. The Senate confirmed Jack Lew, a former Treasury secretary, as the next ambassador to Israel. And the billionaire financier Bill Ackman appeared to reconsider his earlier call to publicly identify individuals at Harvard and elsewhere criticizing Israel.

THE SPEED READ

Deals

• The health care payments company Waystar reportedly will delay its initial public offering to December or next year, after recent I.P.O.s underperformed. (WSJ)

• Private equity firms that used cheap borrowing to fund a decade of acquisitions are now being squeezed by higher rates and struggling to raise money for deals. (FT)

Policy

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