The Fed Fights a Two-Headed Monster

Plus: China is playing Tinder. ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌ ‌

March 21, 2023

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TOGETHER WITH

Good morning,

Maybe he needs to switch to decaf.

Laxman Narasimhan, who was slated to take the reins as Starbucks’ CEO on April 1st, is already in control of the global coffee giant, outgoing chief Howard Schultz told staffers in a surprise goodbye memo on Monday. While Schultz’s two decades as the most caffeinated exec in America ended in a finely-ground fog of labor disputes that will put him before Congress in the coming weeks, Narasimhan apparently couldn’t wait to get started, and must have been pounding ventis in the wings.

Morning Brief

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The banking crisis is crashing The Fed’s inflation fight.

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Microsoft keeps sweetening the antitrust pot.

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China gets creative trying to boost its birth rate.

Fiscal Policy

The Fed Weighs Inflation, Banking Crisis Ahead of Possible Rate Hike

Here we go again. The Federal Reserve will decide on Wednesday just how aggressively it wants to pursue its rate-hiking, inflation-fighting campaign, only this time it will do so against the backdrop of a roiling bank crisis.

Addressing one crisis may only exacerbate the other, and (surprise, surprise) pretty much all of Wall Street has an opinion on what Fed Chair Jerome Powell and his board should do.

Powell’s Sophie’s Choice

It’s less a question of what Powell will do than what will happen when he does it. The smart money is on yet another 25 basis point increase, an acknowledgment that inflation — as well as the high consumer spending and a strong labor market — remains persistent. A month ago, another small hike may have been met with optimistic predictions of a soft landing. But that crash-free fantasy has been harshed by the reality that many mid-tier, regional banks are at risk of becoming overleveraged if rates continue to increase, potentially sending them the way of Silicon Valley Bank.

The Fed is already at work mitigating the spread of SVB’s collapse, offering some banks one-year loans on more friendly terms than the current 4.75% interest rate, and sources told The Wall Street Journal that Fed officials could continue to utilize emergency lending tools if the banking sector continues to falter. But inflation is likely to persist whether or not banks are properly prepared for rate hikes. That leaves Powell fighting a war on two fronts, putting him in a position of potentially having to pick between his two mandates: maximum employment and price stability.

Suddenly everyone is turning to their personal crystal ball to see where the Fed falls:

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“I would advise them to go ahead with the 25,” Richard Clarida, Fed vice chair circa 2018 to 2022, told the WSJ. “If they pause, you can get into this ‘what do they know that we don’t know.’”

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Eric Rosengren, former Boston Fed president, offered a different perspective to the WSJ: “One 25-basis-point increase now will have a fairly modest effect on inflation, but it could have an amplified effect on financial conditions.”

Have Your Rate and Eat it Too: Some rate-hike doves have raised an alternative viewpoint: the prospect of becoming the next SVB may be scaring banks into self-consciously tightening their own lending policies — which is the intended effect of a rate hike anyways. “You would want to say, ‘This is doing some of our monetary policy job for us,’” former Fed Governor Jeremy Stein told the WSJ. “If you can communicate that well and effectively, the choice between 25 and 0 is less consequential than how you explain it.”

– Brian Boyle

Tech

Microsoft Says It Wants To Launch App Store Rival

(Photo Credit: Ed Hardie/Unsplash)

As if Microsoft weren’t already all up in Google’s grill with its gussied-up new Chat-GPT-powered Bing, now it wants to make an app store too.

Xbox head Phil Spencer told the Financial Times Microsoft plans to launch an app marketplace to compete with Apple and Google as soon as next year, so long as antitrust authorities wave through its proposed acquisition of game maker Activision Blizzard.

Press F To Persuade Regulators

Xbox’s owner announced its intention to buy Activision Blizzard for $69 billion in January 2022 and if it goes through it will be the biggest deal in video game history. But it’s faced some full-throated objections from Xbox’s rival PlayStation. The fear is that ownership of game titles means Microsoft could potentially make them Xbox exclusive, and execs at both companies have publicly bickered over whether Microsoft could seal PlayStation gamers off from wildly popular games like Call of Duty.

Microsoft has already run into some sticky patches with regulators. The UK Competition and Markets Authority said last month the deal raises concerns, and the company has been trying to convince the EU of the deal’s soundness by notching licensing deals with competitors (though not PlayStation).

Spencer’s comments about launching a Microsoft app store are not entirely out of the blue as the company started laying the groundwork in October, but the timing is important:

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The new EU Digital Markets Act is expected to come into force in March 2024, and may compel Apple and Google to allow access to each others’ app stores on their devices. For Apple especially, that’s a big hole being blown in the side of its walled garden.

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Regulators in the EU have previously targeted Apple and Google’s control of their app stores with antitrust investigations, so Spencer’s comments seem geared towards portraying Microsoft as a competitive force to challenge the Gapple duopoly.

Candy Crushing It: Microsoft opening up its own app store for mobile games would come with some distinct advantages. The Activision Blizzard deal would bring mobile game maker King, which makes the era-defining phone game Candy Crush, under Microsoft’s umbrella. Plus a bespoke app store would mean being able to side-step the in-app payment taxes both Apple and Google impose.

– Isobel Asher Hamilton

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Economics

Chinese City Launches State-Sponsored Dating App

What’s more romantic than a candle-lit dinner? A candle-lit dinner organized by your local city officials.

Guixi, a city in China with a population of around 640,000 inhabitants, has launched its own dating app with the aim of boosting the marriage rate in the region and, implicitly, the birth rate.

Baby Un-boom

Local Chinese authorities have ramped up their interest in boosting China’s birth rate since the nation’s population was found to have fallen in 2022 for the first time in 62 years. Declining birth rates have long spooked sovereign states, as they portend aging populations with more retirees and a proportionally smaller workforce to pay into state pension pots.

China has tried to clamp down on a tradition it views as partially responsible for young people’s reluctance to get married, where a prospective husband pays a sum to his bride-to-be’s family. In recent years, the prices have shot up:

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One local official told Bloomberg families charge suitors as much as $43,000 as a betrothal gift.

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China has added a raft of other policies to encourage marriage and kids such as promoting marriage leave, increasing subsidies for newborn babies, and making it easier for unmarried couples to register children.

China isn’t the only nation pulling the Tinder card. Japan has also used state-sponsored matchmaking services to combat a now three-decade-long decline in births. Prime Minister Fumio Kishida said in January the nation was “on the brink of not being able to maintain social functions.” So, no pressure, kids.

The Wrong Approach? Pronatalist policies are not necessarily a good solution to declining birth rates. Prof. Feinian Chen, a professor of sociology at Johns Hopkins University, told Bloomberg that the increasingly entrenched expectation that women will stay home and raise the children means “the opportunity costs of having more children or having children at all are simply too high.”

– Isobel Asher Hamilton

Extra Upside

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Not So Prime Time: Amazon is laying off another 9,000 employees.

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Eager for Beavers: London wants to introduce a beaver couple later this year.

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