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| The Fed’s change of direction will only fuel America’s growing debt problem | The Fed’s change of direction will only fuel America’s growing debt problem |
| (4 months later) | |
| Sun 24 Sep 2017 13.36 BST | |
| First published on Sun 24 Sep 2017 07.00 BST | |
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| The moment was hugely significant and yet so heavily flagged that it passed without a tremor in the financial markets. Federal Reserve chair Janet Yellen confirmed last Wednesday that the central bank would start to unwind the vast holdings of government and mortgage debt it acquired in the years following the 2008 financial crash. | The moment was hugely significant and yet so heavily flagged that it passed without a tremor in the financial markets. Federal Reserve chair Janet Yellen confirmed last Wednesday that the central bank would start to unwind the vast holdings of government and mortgage debt it acquired in the years following the 2008 financial crash. |
| The Fed, under former chairman Ben Bernanke, more than quadrupled the size of its balance sheet, to $4.5tn, by purchasing Treasury bonds and mortgage-backed securities under a programme dubbed quantitative easing (QE). Many were from the effectively bust Fannie Mae and Freddie Mac mortgage lenders. | The Fed, under former chairman Ben Bernanke, more than quadrupled the size of its balance sheet, to $4.5tn, by purchasing Treasury bonds and mortgage-backed securities under a programme dubbed quantitative easing (QE). Many were from the effectively bust Fannie Mae and Freddie Mac mortgage lenders. |
| In 2014 Bernanke hinted that the time had come to sell some of this vast fund back to private investors or, more precisely, to stop buying back the bonds when they matured. | In 2014 Bernanke hinted that the time had come to sell some of this vast fund back to private investors or, more precisely, to stop buying back the bonds when they matured. |
| Widely seen as a precursor to much higher interest rates, this had the effect of sending the cost of borrowing in dollars over the next 30 years rocketing. | Widely seen as a precursor to much higher interest rates, this had the effect of sending the cost of borrowing in dollars over the next 30 years rocketing. |
| Markets across the world went into shock. The taper tantrum, as it became known, revealed how countries such as Turkey, which had borrowed heavily in dollars to revive its economy, were suddenly faced with the prospect of escalating interest bills. Ankara was hit especially hard after much of its corporate sector was revealed to be financed with dollars borrowed from New York banks. | Markets across the world went into shock. The taper tantrum, as it became known, revealed how countries such as Turkey, which had borrowed heavily in dollars to revive its economy, were suddenly faced with the prospect of escalating interest bills. Ankara was hit especially hard after much of its corporate sector was revealed to be financed with dollars borrowed from New York banks. |
| In the years in between, the Fed made the case for unwinding QE several times, but at any sign of a tantrum from the markets it throttled back. | In the years in between, the Fed made the case for unwinding QE several times, but at any sign of a tantrum from the markets it throttled back. |
| In December 2015, the Washington-based Fed made a move to increase interest rates and has made three more such moves since then, taking its base rate from a range of 0% to 0.5% (effectively 0.25%) to 1% to 1.5% (1.25%). | In December 2015, the Washington-based Fed made a move to increase interest rates and has made three more such moves since then, taking its base rate from a range of 0% to 0.5% (effectively 0.25%) to 1% to 1.5% (1.25%). |
| Now says Yellen, QE will be unwound on a parallel track, with a further four rate increases by the end of next year, without any promises about the timing of the interest rate rises. | Now says Yellen, QE will be unwound on a parallel track, with a further four rate increases by the end of next year, without any promises about the timing of the interest rate rises. |
| The question must be, why adopt a circumspect outlook over increases in the cost of borrowing when the Fed feels comfortable about reducing QE? Surely the US economy is strong enough to withstand both after registering annualised GDP growth of 3% in the past quarter. | The question must be, why adopt a circumspect outlook over increases in the cost of borrowing when the Fed feels comfortable about reducing QE? Surely the US economy is strong enough to withstand both after registering annualised GDP growth of 3% in the past quarter. |
| Yellen is quite rightly concerned about falling consumer prices and the prospect of entering 2018 with a plan for raising rates while forecasts show inflation heading back to 1% – and missing its 2% target by a country mile. | Yellen is quite rightly concerned about falling consumer prices and the prospect of entering 2018 with a plan for raising rates while forecasts show inflation heading back to 1% – and missing its 2% target by a country mile. |
| She has tried to explain away some of the drop in inflation by blaming one-off factors, but has conceded that core inflation, a measure that strips out volatile factors, will not head back to 2% until 2019, a year later than previously forecast. | She has tried to explain away some of the drop in inflation by blaming one-off factors, but has conceded that core inflation, a measure that strips out volatile factors, will not head back to 2% until 2019, a year later than previously forecast. |
| Another argument against a rate rise or unwinding of QE is the relationship between wages and inflation. The Fed had hoped that low unemployment and strong growth in new jobs would send wages through the roof. This would give the economy a solid foundation for growth, allow shops to increase prices and be the perfect pretext for raising interest rates. | Another argument against a rate rise or unwinding of QE is the relationship between wages and inflation. The Fed had hoped that low unemployment and strong growth in new jobs would send wages through the roof. This would give the economy a solid foundation for growth, allow shops to increase prices and be the perfect pretext for raising interest rates. |
| However, the US recovery is built on the same flimsy foundations as the UK’s. There are millions of low-paid jobs in the leisure and hospitality industries, the transport industry delivering Amazon parcels and in wholesalers’ distribution warehouses. There are no wage rises to be had in these workplaces, no fringe benefits and no job security. | However, the US recovery is built on the same flimsy foundations as the UK’s. There are millions of low-paid jobs in the leisure and hospitality industries, the transport industry delivering Amazon parcels and in wholesalers’ distribution warehouses. There are no wage rises to be had in these workplaces, no fringe benefits and no job security. |
| That’s why consumer spending growth in the US, like in the UK, is largely fuelled by consumer borrowing. | That’s why consumer spending growth in the US, like in the UK, is largely fuelled by consumer borrowing. |
| Worse, there is some evidence that lenders in the US are loosening the criteria they use for consumer lending, especially car loans, which could be sowing the seeds of the next crash. | Worse, there is some evidence that lenders in the US are loosening the criteria they use for consumer lending, especially car loans, which could be sowing the seeds of the next crash. |
| It is true that increasing the cost of credit could choke off demand for the riskiest loans. It is more likely to simply raise the cost of borrowing for millions of people, who will be forced further into debt. In this context, tightening monetary policy is a misstep. | It is true that increasing the cost of credit could choke off demand for the riskiest loans. It is more likely to simply raise the cost of borrowing for millions of people, who will be forced further into debt. In this context, tightening monetary policy is a misstep. |
| The smartphone wars are over – and both sides were victorious | The smartphone wars are over – and both sides were victorious |
| Ten years ago, they stood in rapturous lines. On Friday, the first person in the world to buy a new iPhone 8 Plus, in Australia, wasn’t even getting it for himself; he was queueing for the attention, and will give the phone to his mother. He’s waiting for the even-pricier iPhone X, with face recognition, animated emoji and a Samsung-made OLED screen, which won’t be available until November, and surely in short supply even then. | Ten years ago, they stood in rapturous lines. On Friday, the first person in the world to buy a new iPhone 8 Plus, in Australia, wasn’t even getting it for himself; he was queueing for the attention, and will give the phone to his mother. He’s waiting for the even-pricier iPhone X, with face recognition, animated emoji and a Samsung-made OLED screen, which won’t be available until November, and surely in short supply even then. |
| While the queues have died down compared to the past because Apple and the mobile networks sell a lot of phones online now, and in more countries – removing the need for “grey market” buyers – all the talk is about the forthcoming top-end phone, whose £999 starting price is also a standout feature of sorts. | While the queues have died down compared to the past because Apple and the mobile networks sell a lot of phones online now, and in more countries – removing the need for “grey market” buyers – all the talk is about the forthcoming top-end phone, whose £999 starting price is also a standout feature of sorts. |
| But has Apple snookered itself? The last time it released a “low-end” iPhone, with the 5C in 2013 alongside the “high-end” 5S, demand for the latter outstripped supply, while the “unashamedly plastic” 5C sat on shelves. Online ordering suggests the two iPhone 8 models are in plentiful supply, with only a few specific versions hard to get. Given that new iPhones have looked almost identical externally since 2014, perhaps Foxconn has got better at making them in huge volumes. | But has Apple snookered itself? The last time it released a “low-end” iPhone, with the 5C in 2013 alongside the “high-end” 5S, demand for the latter outstripped supply, while the “unashamedly plastic” 5C sat on shelves. Online ordering suggests the two iPhone 8 models are in plentiful supply, with only a few specific versions hard to get. Given that new iPhones have looked almost identical externally since 2014, perhaps Foxconn has got better at making them in huge volumes. |
| Perhaps. But more likely is that people are slavering at the idea of the X, just as they did for the 5S. Even so, Apple can now rely on a huge base of users who will upgrade over time at a predictable rate. If they can’t get an X (and it’s likely many will be disappointed because production seems to be severely limited), they’ll satisfy themselves with an 8. The smartphone wars are essentially over: the number of people switching in either direction between iPhones and phones using Google’s Android is tiny compared with the billions of users worldwide. | Perhaps. But more likely is that people are slavering at the idea of the X, just as they did for the 5S. Even so, Apple can now rely on a huge base of users who will upgrade over time at a predictable rate. If they can’t get an X (and it’s likely many will be disappointed because production seems to be severely limited), they’ll satisfy themselves with an 8. The smartphone wars are essentially over: the number of people switching in either direction between iPhones and phones using Google’s Android is tiny compared with the billions of users worldwide. |
| Now the iPhone’s look is changing, the 8 may be the last of its kind. It’s almost certain next year’s models will have the X’s OLED screen, adding LG as a supplier. And the queues? We’ve probably seen the last of those too. | Now the iPhone’s look is changing, the 8 may be the last of its kind. It’s almost certain next year’s models will have the X’s OLED screen, adding LG as a supplier. And the queues? We’ve probably seen the last of those too. |
| M&S duck à l’orange delivered in an hour: is it a good gig? | M&S duck à l’orange delivered in an hour: is it a good gig? |
| Having waited a decade longer than its rivals, M&S is finally taking its upmarket food halls online. Despite it being official that the internet has caught on, M&S chief executive Steve Rowe is treading carefully with two modest trials: a fast home delivery service in central London akin to Amazon and apps such as UberEats; and what is basically a click and collect service in Berkshire. | Having waited a decade longer than its rivals, M&S is finally taking its upmarket food halls online. Despite it being official that the internet has caught on, M&S chief executive Steve Rowe is treading carefully with two modest trials: a fast home delivery service in central London akin to Amazon and apps such as UberEats; and what is basically a click and collect service in Berkshire. |
| After a strong run, M&S food no longer sets the heather on fire, so seeking the sweet spot in Britain’s £180bn grocery market would seem wise. But M&S needs to tread more carefully than most in the controversial gig economy. In London, its orders are delivered by courier firm Gophr – which uses self-employed riders – but the retailer says it is “culturally aligned” with its own business. | After a strong run, M&S food no longer sets the heather on fire, so seeking the sweet spot in Britain’s £180bn grocery market would seem wise. But M&S needs to tread more carefully than most in the controversial gig economy. In London, its orders are delivered by courier firm Gophr – which uses self-employed riders – but the retailer says it is “culturally aligned” with its own business. |
| Rowe had better hope it truly is: his is not any online grocery service, this is a Marks & Spencer food delivery service. It needs to be truly special. | Rowe had better hope it truly is: his is not any online grocery service, this is a Marks & Spencer food delivery service. It needs to be truly special. |
| US economy | |
| Business leader | |
| Federal Reserve | |
| US interest rates | |
| Quantitative easing | |
| Janet Yellen | |
| iPhone | |
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