Transcript: Higher for even longer

This is an audio transcript of the FT News Briefing podcast episode: ‘Higher for even longer’

Sonja Hutson
Good morning from the Financial Times. Today is Thursday, April 11th, and this is your FT News Briefing.

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US inflation data came in yesterday. The results were not good. And KPMG has been caught in another exam scandal. Plus, Lloyds Bank is axing some of its risk management staff.

Akila Quinio
Yes. Some of the concerns that have been raised is that, you know, it’s a bit of a reckless move because risk management is what keeps banks safe and compliant with regulation.

Sonja Hutson
I’m Sonja Hutson and here’s the news you need to start your day.

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US inflation rose again last month for the second time in a row. It’s now sitting at 3.5 per cent. That’s creating problems for the Federal Reserve, which has been signalling a few interest rate cuts later this year. Here to talk to me about it is the FT’s US markets editor, Jen Hughes. Hey, Jen.

Jennifer Hughes
Hey there.

Sonja Hutson
So before we really get into the numbers here, just how important, how pivotal was this March inflation report?

Jennifer Hughes
Well, we’ve been talking about sticky inflation for a while, this idea that inflation — it’s not at the high levels that were just killing us as consumers a year or two back — but it’s kind of stuck around these levels. So each data point we get matters because it either adds to that narrative or leads us to question it.

Sonja Hutson
And so what does this new data doing to expectations for rate cuts this year?

Jennifer Hughes
Well, we’ve switched a lot in terms of rate cut forecasts this year, and it’s worth going back to the start on that. So in January, we were thinking we would get six to seven cuts. Before this data, we were thinking it would be two to three. So already come back a lot. Now we’ve seen these figures. Markets are pricing in one cuts, maybe two if we’re lucky this year.

Sonja Hutson
Wow. It’s a big change. How did expectations change so much and also so quickly?

Jennifer Hughes
I mean, markets never get it wrong, right?

Sonja Hutson
No, never. (Laughter)

Jennifer Hughes
Back in December, there was this warm and fuzzy feeling in the market. We thought rates had peaked. And the natural assumption for many investors is that they must be falling soon. And in December, March and June looked a long way off. Now we’re getting to this hard part when we’ve actually got to look at this. Economic growth is really strong, so we don’t need to cut rates to protect that at the moment. At the same time, inflation is proving sticky as these numbers are showing us. So that’s produced this debate with no real consensus yet.

Sonja Hutson
OK. So the expectation here is that the Fed is going to have to keep interest rates higher for longer because inflation is still running too hot. How could that dynamic ripple through the economy?

Jennifer Hughes
If you’re one of those who was hoping for rate cuts, then this looks like bad news because it will raise borrowing costs for companies, or at least not reduce them. And also for us as consumers. House price loans mortgages are still going to stay high. In time, that should slow the economy. What we’ve seen from the numbers so far, from the jobs data and other things, is that hasn’t happened yet at all. We thought it would do and it just hasn’t done so yet.

Sonja Hutson
So Jen, I’m wondering then, given all of this, where does the Fed go from here?

Jennifer Hughes
Well, there’s different ways of looking at this. The Fed has said very clearly that they are dependent on the data. So we’ll keep looking at CPI and other inflation reports and see whether this sticky inflation is going down at all. Another element is what the Fed says. Up to this point, they’ve been signalling very, very clearly that they want to cut rates this year. The question is whether they think that now changes and we start seeing them say different things that make it look like they don’t think they want to cut quite as much as they did. We have to remember that they were so far behind the curve when they started raising rates. They probably don’t want to be behind the curve in cutting rates, like keep rates too high until it really, really slows the economy. So they still seem to have that desire as of now to cut rates if they can.

Sonja Hutson
They don’t want to be caught on their heels again.

Jennifer Hughes
No.

Sonja Hutson
Jen Hughes is the FT’s US markets editor. Thanks, Jen.

Jennifer Hughes
Thank you.

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Sonja Hutson
Big Four accounting firm KPMG was slapped with a $25mn fine yesterday over an internal cheating scandal. That’s the largest penalty ever given by the Public Company Accounting Oversight Board, which regulates the audits of US-listed public companies. Investigators found that hundreds of staff at KPMG’s Netherlands business shared questions and answers to mandatory exams. It’s not the first time they’ve gotten in trouble for this. The company’s US arm was fined for cheating in 2019. The findings are just the latest ethics scandal to hit a Big Four accounting firm. Now each one of them — KPMG, EY, Deloitte and PwC — have all been fined for similar issues.

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Lloyds Bank is cutting some of its risk management staff as part of a larger overhaul. A majority of its executives said they viewed that function as a, quote, blocker to the UK lender’s new strategic direction. It’s interesting timing, given that the bank is facing a lot of scrutiny over claims that it overcharged customers. Here to discuss is the FT’s Akila Quinio. Hi, Akila.

Akila Quinio
Hi.

Sonja Hutson
So, Akila, what are some of the details of this new risk management plan?

Akila Quinio
Yeah, so they’re calling it a resetting. So it’s quite a big overhaul. They’re changing basically the whole structure of risk. They’re merging teams, creating new teams. They’re bringing in new execs. And as part of that they’re also cutting jobs. So they’re cutting about 150 jobs in risk. But they’re saying they’re also going to create jobs. So the net loss of jobs will be about 45.

Sonja Hutson
And what’s the rationale behind the plan? I mean, why are they doing this?

Akila Quinio
So the way Lloyd’s is thinking about this is that they’ve got a big, ambitious strategic plan that they’ve put in place two years ago. And so in this memo that we’ve seen the way they kind of explain the rationale behind the decision of overhauling the risk management team completely is that they see it as a block to executing that strategic transformation. We talk about how this change will make them more agile, allow them to have more specialist teams, and just kind of be smarter about how they think about risk, because they think it’s become too cumbersome. And then I guess also it comes after an internal review where they’ve reviewed their entire risk management processes, and less than half of their entire workforce thought that taking intelligent risks was encouraged at Lloyd’s. So yeah, that’s why they’re resetting it.

Sonja Hutson
Well, what are some of the potential consequences of axing this many risk management jobs and overhauling how they do risk management?

Akila Quinio
Yes. Some of the concerns that have been raised is that, you know, it’s a bit of a reckless move because risk management is what keeps banks safe and compliant with regulation. And it comes at an interesting time, as you said, because currently Lloyd’s is facing a lot of scrutiny. There is a big UK regulatory probe into core finance mis-selling, and they are the most exposed lender to core finance. So yeah, concerns that have been raised are that axing risk jobs at this time could lead to more potential scandals, and it’s not really what the bank should be focusing on right now.

Sonja Hutson
So in the end, basically, what their argument is that loosening some of these controls and risk management could really end up backfiring on Lloyd’s right now and also in the future.

Akila Quinio
Yeah. And I think it’s not clear what exactly that could look like. But I think the argument is that unforeseen consequences could arise if there’s less risk management, basically.

Sonja Hutson
Akila, can you put this plan into context for us? How does it fit in with how UK banks have been approaching risk management over the past several years?

Akila Quinio
Yeah, I think there’s a very interesting push-and-pull dynamic that’s going on right now between banks and regulators. So basically, after the financial crisis, there was a big change in how banks had to think about risk and they had to take a lot less risk. And that’s also been translated in the regulatory environment by a lot more rules that they have to comply with. And recently in the UK, the regulators have focused on consumer protection and mis-selling. So that’s the environment they have to operate in now. But I think what Lloyds is trying to do is they’re trying to actually take a new strategic direction, almost kind of turn the page from what’s happened after the financial crisis. And in order to do that and execute, they’re saying they have to be more nimble and they’re trying to overhaul their risk strategy. So yeah, there is this kind of push and pull dynamic between what the regulatory environment requires of banks and what they’re trying to achieve.

Sonja Hutson
Akila Quinio is the FT’s retail banking and fintech reporter. Thanks, Akila.

Akila Quinio
Thanks for having me.

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Sonja Hutson
Before we go, the FT Weekend Festival is coming to Washington, DC on May 4th. It’s an entire day filled with great discussions on topics like US and global politics, artificial intelligence, climate change, and even a masterclass on blending your own whisky. You can find out how to register by clicking on the link in our show notes. And podcast listeners get 10 per cent off by using the code: weekendpodcast.

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This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.