Why the Fed Might not Be Done Raising Rates

The Fed’s new dilemma

The futures market this morning is overwhelmingly pointing to a big pause by the Fed at its rate-setting meeting next month as inflation moderates. But, as some Fed officials warn, it’s too early to declare mission accomplished.

That tinge of uncertainty is muting investor enthusiasm. Stocks initially rallied on Thursday following a Consumer Price Index and core inflation reading that showed price increases moderated again last month, further evidence that the Fed’s 18-month crusade to tame inflation by raising lending rates is showing strong results. (Exhibit A: The last two C.P.I. reports have shown the smallest back-to-back gains in nearly two years.) But later in the day a lackluster Treasuries auction, signaling sluggish demand for U.S. debt, took the air out of the rally in stocks and bonds.

The good news: Inflation has fallen sharply in the past year. The C.P.I. data showed further drops in so-called “core goods” prices, such as new and used cars and household furnishings. That’s a big change from a year ago, when pandemic-related supply-chain bottlenecks made such goods more scarce, pushing up prices. Another promising indicator: Rent inflation is easing.

President Biden was quick to point out the positive, as he looks to woo voters by talking about an improving economic outlook. “Today’s report shows that our economy remains strong,” he said in a statement.

Several economists seem to agree. In a report on Thursday, Bank of America’s Michael Gapen and Stephen Juneau called the latest C.P.I. figure “encouraging,” adding that “we wouldn’t be surprised to see another soft August print given declines in wholesale used car prices.”

The less-good news: Food and fuel prices remain wild cards. “The recent sharp rise in crude oil, diesel and gasoline prices pose substantial upside risks to headline inflation in August,” Mahmoud Abu Ghzalah, an economist at Berenberg Capital Markets, wrote in a client note.

That’s enough to keep the debate open about the future path of interest rates. Mary Daly, president of the San Francisco Fed, struck a hawkish tone, saying it would be premature to declare that rate increases should be taken off the table. “It is not a data point that says victory is ours,” Daly, a nonvoting member of the Fed’s rate committee, said following Thursday’s report. “There’s still more work to do.”

Energy prices will be a key data point to watch. “With oil prices and gasoline prices edging higher, the Fed may feel compelled to conclude its rate hike campaign with one last ‘insurance’ rate hike — but could now wait until the November meeting to decide,” Quincy Krosby, chief global strategist for LPL Financial, wrote in a research note.

HERE’S WHAT’S HAPPENING

The Supreme Court pauses Purdue Pharma’s settlement over the opioid epidemic. The justices issued an order to temporarily block a bankruptcy deal that capped the Sackler family’s liability at $6 billion and would have shielded them from more civil lawsuits. The decision will likely delay payment to the thousands who have sued the Sacklers and Purdue, maker of the prescription painkiller OxyContin.

The Maui wildfire death toll rises to at least 55, as questions grow about the official response. Survivors have described harrowing escapes, and some said emergency warnings were too slow or nonexistent. President Biden issued a major disaster declaration and state officials are discouraging tourists from visiting Maui.

President Biden calls China a “ticking time bomb” because of economic problems. At a political fund-raiser, Biden pointed to weak growth, high unemployment and an aging work force and warned that countries in trouble often do “bad things.” A day earlier, the president issued an executive order to restrict investments in key tech sectors in China.

California is set to allow driverless taxis in San Francisco. Regulators said Cruise and Waymo would be allowed to offer commercial robotaxi services in the city without restrictions, despite objections from city officials who said the vehicles have not been proven to be safe.

A good deal for luxury?

American luxury-goods companies have long wanted to build a multibrand rival to take on the European giants that dominate the industry. Tapestry, the owner of Coach and Kate Spade, said on Thursday that it would pay $8.5 billion to buy Capri, the company behind Michael Kors and Versace, in an attempt to do just that.

But investors were skeptical: Tapestry’s shares closed 16 percent lower.

Tapestry said the deal would be “transformational.” Big luxury conglomerates like LVMH and Kering have relied heavily on scale to outperform smaller groups like Salvatore Ferragamo and Burberry. They’ve used that heft to secure advantages on everything from access to prime real estate to advertising. Tapestry and Capri said the deal could lower their costs by $200 million over the next three years.

But there is a lot of skepticism greeting the all-American tie-up. Tapestry is taking on a lot of debt via an $8 billion bridge loan — the largest M.&A. debt financing deal this year. And Capri depends heavily on Michael Kors, which generates 70 percent of its revenue. But that brand is not seen as high-end and has been hit by weak demand recently. (Tapestry presumably sees an opportunity after turning around Coach.) By comparison, Versace, Capri’s only real luxury brand, accounts for just a fifth of sales.

Being a public company won’t help either. The European heavyweights, including Hermès and Richemont, benefit from being family-controlled companies, which means they typically have more time to make deals work, The Wall Street Journal points out. Tapestry doesn’t have that advantage.

Are more deals in the offing? M.&A. in the sector is heating up. Kering bought a 30 percent stake in Valentino last month and acquired the perfume company Creed for $3.5 billion in June. And speculation is swirling that Bernard Arnault of LVMH is weighing a bid to buy Bergdorf Goodman from Neiman Marcus.

One bit of potentially good news: China lifted a pandemic-era ban on group travel to more countries, including the U.S. and Britain. Chinese tourists were the biggest spenders overseas before the health emergency shut borders, and the country’s consumers are still a crucial market for the luxury industry.

Womenomics boosts summer spending

Taylor Swift is on pace to make music history as her “Eras” concert tour looks set to top $1 billion in sales, and Beyoncé’s “Renaissance” tour could make even more than that.

The record-setting musicians add to the narrative that the summer’s “revenge spending” spree is being led by women. The global box-office haul for “Barbie,” directed and co-written by Greta Gerwig and starring Margot Robie, who was also a producer, last week topped $1 billion.

Beyoncé, Ms. Swift and Barbie have become economic forces. Concert- and moviegoers aren’t just buying billions worth of tickets; they’re splashing out on the wardrobe, nails and, in the case of the music stars, airfare and hotel rooms — a fact noted by economic data-crunchers at the Fed and Sweden’s official statistics agency. The Times’s Jeanna Smialek and Jordyn Holman reveal another mind boggling stat: Swift’s tour could generate $4.6 billion in economic activity, surpassing the 2008 Beijing Olympic Games.

High inflation and an uncertain economy aren’t fazing these hardcore fans. Economists have noted that we’re witnessing a kind of revenge spending (or “fun-flation”), in which consumers, many of whom were cooped up during the pandemic, spend a big chunk of their income on entertainment and fun nights out — regardless of what the splurge costs them.

That kind of exuberant spending may prop up the economy in surprising ways. “I think Taylor Swift is great for the soft landing,” Brett House, an economist at Columbia Business School, told The Times.

“Elon is working on accelerating the rebrand and working on the future. And I’m responsible for the rest. Running the company, from partnerships to legal to sales to finance.”

— Linda Yaccarino telling CNBC that she has autonomy in her role as the C.E.O. of Elon Musk’s X, the social media platform formerly known as Twitter.

David Solomon’s tough task

David Solomon became C.E.O. of Goldman Sachs five years ago, and it’s been a slog. The investment bank’s stock lags its peers, profits have fallen and the firm is pulling back from a high-profile effort to get into consumer lending.

Mr. Solomon has received a fair amount of criticism from partners, former executives and investors. He’s launched an overhaul that has included three rounds of layoffs and has led to the departure of senior executives. DealBook was first to report that John Rogers, the bank’s longtime chief of staff, would hand over some of his responsibilities to an associate of Mr. Solomon’s predecessor, Lloyd Blankfein.

In a sign of the displeasure, Mr. Blankfein has even offered to help right the ship, reports The Times’s Rob Copeland:

One day in mid-June, Lloyd Blankfein called David Solomon, chief executive of Goldman Sachs. Mr. Solomon had not been expecting it.

Mr. Blankfein, a big Goldman shareholder and Mr. Solomon’s predecessor, had lost $50 million since January on his stake because of the bank’s sinking stock. He made it clear to Mr. Solomon that his patience was waning, according to three people briefed on the conversation. Mr. Blankfein offered to provide him with more hands-on advice, or even return to the firm in any capacity that might help, the people said.

Mr. Solomon, politely but firmly, turned Mr. Blankfein down.

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