Can Jay Powell stick the landing?

This is an audio transcript of the FT News Briefing podcast episode: Can Jay Powell stick the landing?

Jess Smith
Good morning from the Financial Times. Today is Thursday, August 25th, and this is your FT News Briefing.

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Hedge funds are betting against Italy. Japan just made a big shift on nuclear energy. And Pink Floyd has another private equity fan. Plus, Jay Powell is under pressure to pilot the US economy to a soft landing. We’ll look at how his predecessors managed this dilemma. I’m Jess Smith, in for Marc Filippino, and here’s the news you need to start your day.

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Investors are not optimistic about Italy and they’re ramping up their bets that Italian bond prices will fall. The FT reports that hedge funds have lined up their biggest bets against Italian government bonds since the global financial crisis in 2008. They’re concerned about political turmoil in Rome and the country’s dependence on Russian gas imports. Hedge funds also consider Italy one of the countries most vulnerable to the European Central Bank’s decision to unwind stimulus programmes that have propped up Italy’s bond market.

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Soaring energy prices have led Japan to make a dramatic U-turn on energy policy, specifically nuclear energy. Yesterday Prime Minister Fumio Kishida said the government will not only speed up the restart of nuclear reactors that have been shut down. It will look into building new reactors.

Kana Inagaki
It would be probably the biggest change in Japan’s energy policy since the Fukushima disaster in 2011.

Jess Smith
That’s the FT’s Tokyo bureau chief, Kana Inagaki.

Kana Inagaki
But from a political perspective as well, it is also quite significant that Prime Minister Fumio Kishida, that he has actually taken this political risk to actually restore Japan’s status as a nuclear power nation.

Jess Smith
Japan imports almost all of its energy and Kana says recent high costs and shortages have made Japanese people more open to restarting nuclear plants.

Kana Inagaki
We haven’t seen yet the immediate reaction to what people are thinking about the actually building new ones. But if you look at the market reaction, you know, you’ve seen shares in Tepco, which is the owner of the three reactors that melted down in Fukushima. I mean, Tepco shares were up 10 per cent. And nuclear supplier Mitsubishi Heavy Industries rose 6.9 per cent. So there’s definitely, you know, investor hopes for a revival of the nuclear sector.

Jess Smith
But Kana says despite the prime minister’s announcement, it won’t be easy either to build new reactors or restart existing ones.

Kana Inagaki
Right now there’s only six that are operational, and part of that is because even though some have received approval and have gotten clearance on the safety front, you know, there’s still a deep public distrust of nuclear power plants. And so it’s been hard to actually get the local support to restart them. So even though, you know, Kishida has said that he wants to do this, it doesn’t necessarily mean that the government can, just with that decision, restart the nuclear power plants.

Jess Smith
That’s the FT’s Tokyo bureau chief, Kana Inagaki.

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Many of the world’s central bankers are in Wyoming this week for the annual Jackson Hole symposium. Federal Reserve chair Jay Powell delivers a keynote speech tomorrow. But after he initially miscalculated how long high inflation would last, Powell is now under pressure to get monetary policy just right. He must rein in inflation without causing a bad recession with lots of job losses. In other words, he needs to nail a soft landing. The FT’s Colby Smith looked at how past Fed chairs have managed this challenge.

Colby Smith
So back in the 1970s, this is really the emblematic episode for the Fed that it wants to avoid here. This was a pretty tumultuous time for the central bank. You had a series of really big geopolitical shocks that ignited further rounds of price pressures. You had a recession as well in the early 70s. And when Arthur Burns, the Fed chair who took over in 1970, he approached the inflation situation in somewhat of a problematic way. He did raise interest rates, but when growth started to slow and you saw the unemployment rate tick up, instead of sticking with the high interest rate approach that had been working to bring down inflation, the Fed actually reversed course and they ended up cutting too early. So essentially what the 1970s created was this period of elevated inflation that was never really vanquished by the Fed.

Jess Smith
So, Colby, how did the Fed eventually get inflation under control?

Colby Smith
So when there was a change of leadership at the Fed in the late 1970s, you had Paul Volcker come in and he completely reset the way in which the Fed was going to approach the inflation problem. Rather than ease too quickly at the first sign that there was some kind of economic contraction, he instead said we need to have a recession in order to get this inflation situation under control. And what that resulted in was the federal funds rate rising to nearly 20 per cent, and essentially the economy was tipped into a painful recession. And the lesson there for the Fed today is if you fail to deal with inflation appropriately today, that it only raises the cost of dealing with it later on. And that’s exactly the point that Powell has really driven home in recent weeks.

Jess Smith
But after that, in the 1990s, the Fed was able to manage a soft landing. What did it do differently?

Colby Smith
So it’s a little bit of a different situation because notably, not just in comparison to the 1970s and 80s, but the current backdrop, is that inflation never really got out of control during this period. Instead, the Fed was acting pre-emptively. They raised interest rates from about 3 to 6 per cent, and they cooled the economy gradually. And by acting pre-emptively, but by also being quite restrained in how much tightening and they in the end delivered, they were able to keep growth intact and unemployment never really spiked in the way that we saw back in the 80s in particular.

Jess Smith
So Colby, what do past examples tell us about the Fed’s ability to manage inflation now?

Colby Smith
Well, I think all in all, it shows you that attaining a soft landing is really a rare outcome. You know, there’s been some interesting studies done that since the 1950s, the US economy has tipped into recession within two years every time inflation has exceeded 4 per cent and unemployment has fallen below 5 per cent. Now, we know on both of these fronts today the inflation situation is far worse than that figure and unemployment is far lower than 5 per cent. And I think it just shows that the odds are really stacked against the Fed as it seeks to navigate this next phase of the tightening cycle.

Jess Smith
Colby Smith is the FT’s US economics editor. Thanks, Colby.

Colby Smith
Thank you.

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Jess Smith
Musicians have been selling the rights to their songs in recent years as catalogue values have exploded and investors like the steady returns. The latest group to cash in is Pink Floyd.

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Jess Smith
One of the bestselling groups of all time is asking £400mn for its song copyrights and master recordings. The bidders include Sony Music and Warner Music and also the music label BMG, which is backed by the private equity firm KKR. Now, another private equity firm has thrown its hat into the ring. The FT has learned that Blackstone wants Pink Floyd, too, and it would strike a deal through its music investment company Hipgnosis. Hipgnosis already has holdings in Leonard Cohen and Justin Timberlake, among others. But a Pink Floyd deal could be worth more than all of them combined.

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Before we go, US president Joe Biden yesterday announced that he will cancel $10,000 in student loan repayments for eligible Americans. This could mean millions of people. We’d like to hear from our US listeners who currently have student debt, or just have thoughts on this, on how this might affect you. We’ll have a link in the show notes where you can record your response. We may use it in an upcoming episode.

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You can read more on all these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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