Fed trades ‘remarkably positive’ for ‘no precedents’ after volatile year

The cornerstone of the Federal Reserve Bank is seen in New York’s financial district. The US Federal Open Market Committee will meet on Tuesday and Wednesday. (Reuters/File)
Updated 16 September 2019

Fed trades ‘remarkably positive’ for ‘no precedents’ after volatile year

  • Authorities likely to cut interest rates by a quarter of a percentage point this week

WASHINGTON: A year ago, US Federal Reserve Chair Jerome Powell held a “remarkably positive outlook” for an economy enjoying a “historically rare” combination of good news including low unemployment, steady inflation and strong growth that were all expected to continue.

When the Fed meets this week, the discussion will be about just how badly that outlook has eroded, and whether officials should still describe themselves as simply tinkering with policies that are about right, or embarked on a more aggressive fight to keep the US recovery on track.

A headline decision to cut interest rates by a quarter of a percentage point is widely expected. More importantly, the Fed’s language and new economic projections will show how deeply a summer of trouble has been felt — from an intensifying US-China trade war and the relaunch of crisis-style stimulus by the European Central Bank to a stream of weak manufacturing data that may hint at larger problems for the US.

“At the end of 2018 it looked like the economy was moving forward in a continued solid manner,” said David Wilcox, director for the Fed’s division of statistics and research until the end of last year and now a fellow at the Peterson Institute for International Economics.

“The risks were predominantly to the upside and it was not prominent on our radar screen or anybody’s that the trade war’s machinations would be taken to the extent that they have been ... The news from abroad, by wide consensus, has been disappointing.”

The US Federal Open Market Committee meets on Tuesday and Wednesday, with a press conference by Powell scheduled to follow the release of the central bank’s statement. The Fed’s likely action to lower its target policy rate to a range of between 1.75 percent and 2 percent, policymakers hope, will boost the economy by easing borrowing costs on everything from car loans to corporate bonds.

Markdowns at the Fed

Since the end of last year, Fed decisions — to take rate hikes off the table in January and then to cut rates in July for the first time in a decade — have helped drive the average 30-year fixed rate home mortgage from an eight-year high of 4.94 percent to around 3.5 percent, for example, enough to save a homeowner more than $200 a month on a $250,000 loan. Since the July rate cut corporate bond issuance has surged as firms take advantage of record low long-term borrowing rates, saving them money or providing capital for projects.

Between September 2018 and their last set of quarterly forecasts issued in June, Fed officials slashed half a percentage point of expected growth from their median projection for 2019 and marked down inflation further away from their 2 percent target. 

At that September 2018 meeting, they had also projected that the fed funds rate would hit 3.1 percent by the end of 2019. It is currently at around 2.1 percent and likely heading lower.

New projections issued Wednesday will show whether officials think things are getting worse, and how much further they think they need to go in terms of rate cuts or other steps to stay ahead of any developing problems.

It’s a tough call that has divided Fed officials among those who want to cut fast and deep, those who want to go slow, and those who want to do nothing at all.

It’s all the economies

US data have been mixed since the Fed last met in July. Business investment has remained weak. Indicators of manufacturing output fell. Employment growth slowed. 

Yet even at the lower-than-expected level of 130,000, the number of jobs created in August is more than enough to absorb new entrants into the workforce and keep the unemployment rate at 3.7 percent.

Wage growth has continued, and “consumers remain the locomotive of the economy,” JP Morgan economist Michael Feroli said after retail sales jumped more than expected in August. 

“There is little reason to expect a near-term retrenchment,” as households benefit from a tight job market and, if the Fed cuts interest rates as anticipated, lower costs to fund home improvements or other large purchases.

In his final public comments before the upcoming meeting, Powell described the US labor market as in “quite a strong position,” and downplayed any risk of recession in the US. Yet it is not just US data Powell is concerned with.

Cirque du Soleil walks a tightrope through pandemic

Updated 06 June 2020

Cirque du Soleil walks a tightrope through pandemic

  • Suitors wage backstage battle to rescue debt-stricken Canadian circus icon
  • Among the potential bidders is former fire eater Guy Laliberte, who fouded the acrobatic troupe in 1984

MONTREAL: Its shows canceled due to the COVID-19 pandemic, an already heavily indebted Cirque du Soleil’s fight for survival has invited an intense backstage battle to try to save the Canadian cultural icon.

High on a list of potential suitors is former fire eater Guy Laliberte, who founded the acrobatic troupe in 1984 but later sold it.

“Its revival will have to be done at the right price. And not at all costs,” said the 60-year-old, determined not to see his creation sold to private interests.

The billionaire clown said after “careful consideration,” he decided “with a great team” to pursue a bid, but offered no details.

Under his leadership, the Cirque had set up big tops in more than 300 cities around the world, delighting audiences with contemporary circus acts set to music but without the usual trappings of lions, elephants and bears.

Then the pandemic hit, forcing the company in March to cancel 44 shows worldwide, from Las Vegas to Tel Aviv, Moscow to Melbourne, and lay off 4,679 acrobats and technicians, or 95 percent of its workforce.

Hurtling toward bankruptcy, the global entertainment giant and pride of Canada commissioned a bank in early May to examine its options, including a possible sale.

Meanwhile, shareholders ponied up $50 million in bridge financing for its “short-term liquidity needs.”

Laliberte, the first clown to rocket to the International Space Station in 2009, ceded control of the Cirque for $1 billion in 2015.

It has since fallen into the hands of American investment firm TPG Capital (55 percent stake) and China’s Fosun (25 percent), which also owns Club Med and Thomas Cook travel. The Caisse de depot et placement du Quebec (CDPQ) retains the last 20 percent.

The institutional investor, which manages public pension plans and insurance programs in Quebec, bought Laliberte’s last remaining 10 percent stake in the business in February, just before the pandemic.

Since 2015, the Cirque has embarked on costly acquisitions and renovations of permanent performance halls, while its creative spirit waned, according to critics in the Quebec press.

Meanwhile, it piled on more than $1 billion in debt.

Fearing that the Cirque would be “sold to foreign interests,” the Quebec government recently offered it a conditional loan of $200 million to help relaunch its shows as restrictions on large gatherings start to be eased worldwide.

But the agreement in principle is conditional on the Cirque headquarters remaining in Montreal and the province being allowed to buy US and Chinese stakes in the company at an unspecified time in the future, “at market value” and with “probably a local partner,” said Quebec Minister of the Economy Pierre Fitzgibbon.

“The state does not want to operate the circus, but the circus is too important to Quebec (to leave it to foreigners),” he said.

In addition to Laliberte, other prospective buyers include Quebecor, the telecoms and media giant of tycoon Pierre Karl Peladeau, whose opening lowball bid was outright rejected.

“It is essentially the value and reputation of the brand” that has piqued interest in the company, says Michel Magnan, corporate governance chair at Concordia University in Montreal.

But “as long as there are restrictions on gatherings of people, the future is not very rosy” for the Cirque, he said.

Several challenges await, according to Magnan.

“There were a lot of people working in all of these shows. Where are they now? What are they doing? How are they doing? In what shape are they, what state of mind?” he said.

“The more time passes, the more this expertise risks evaporating.”

Small consolation: The Cirque resumed its performances on Wednesday in Hangzhou, China, five months after a coronavirus outbreak in the city.