Janet Yellen taught the macroeconomics course in my graduate program at LSE (more than a few years ago), and the image of her drawing a Phillips Curve on the giant blackboard remains etched in my brain. She taught that the relationship between falling unemployment and rising inflation is strongly supported by the data, at least in the short term. Those who argued otherwise were relying on theory or theology, but not facts.
But what about now? Unemployment has fallen to 5.3%, yet inflation remains stubbornly below 2% and shows no sign of rising. The Federal Reserve’s economic models keep predicting an inflation uptick, but the facts keep confounding the model.
That conundrum lies at the core of the current disagreement about raising interest rates among Fed officials. On Wednesday, New York Fed President William Dudley said the case for raising rates in September was “less compelling.” Markets soared as a result. Over the weekend, Fed Vice Chairman Stanley Fischer told the Fed’s conference in Jackson Hole that he is confident inflation will rise – you can read his full speech here. Markets today are falling again in response.
When there are disagreements at the Fed, it’s usually the chairman who breaks the tie. Yellen likely won’t show her hand before the September 16 meeting. But this may be the most important decision of her time in office, and it’s no surprise markets are paying close attention.
• Fed rate plan looks stable
There has been a lot of hand-wringing about how falling oil prices or swings in the market could derail the Federal Reserve’s plan to raise U.S. interest rates before the end of 2015. But WSJ’s noted Fed watcher Jon Hilsenrath contends the interest-rate strategy remains on track, saying many policy makers believe woes in China and a see-sawing stock market haven’t dented their view that the U.S. job market is improving and domestic economic output is expanding at a steady pace. WSJ (subscription required
• August markedly bad for stocks
While the Fed appears confident, the same cannot be said for global investors. Global equities are headed toward the biggest monthly decline in more than three years, Bloomberg reports, with some observers saying continued volatility is also expected. More than $5 trillion has been erased from the value of global shares in August, as worries about the state of China’s economy have spread. Potentially higher U.S. interest rates have also been a factor. Bloomberg
• Buffett takes stake in Phillips 66
Warren Buffett has made an investment of $4.48 billion in oil refiner Phillips 66, scooping up 10.8% of the company. Buffett’s Berkshire Hathaway had once held a large stake in Phillips 66 but shed much of it in early 2014 when the company swapped $1.35 billion of shares for a chemicals business it folded into its Lubrizol unit. The investment comes as crude oil prices have been sliced by more than half, though Phillips 66’s shares have been resilient. Reuters
• Netflix parting ways with Epix
After spending a reported $1 billion to stream content from cable movie channel Epix in a deal first inked in 2010, Netflix is now opting to part ways with the company at the end of September. So while films like “The Hunger Games” and “World War Z” will soon be removed from Netflix’s streaming website, the company is instead promising it will increase its own original programming. Some new projects include a comedy from Adam Sandler and a Bill Murray-Sofia Coppola collaboration. USA Today
Around the Water Cooler
• Uber hires prominent Jeep “hackers”
The two hackers that demonstrated they could hack into a Jeep over the Internet while the vehicle was in motion have joined Uber. They will join the startup’s research lab that was opened in Pittsburgh, Pa., earlier this year and become part of a team that also includes poached Carnegie Mellon software engineers and robotics researchers and former Google mapping executives. Fortune
• Has activism gone overboard?
Lawyer Wendell Willkie II has made the case that shareholder activism, a theme often highlighted in the CEO Daily, may be causing companies to act too quickly to improve their businesses to meet investor calls for speedy returns. In 1980, the average share of a company was held for 3 years vs just 6 months in 2010. That implies a culture in which investors expect immediate returns rather than take a long-term investment view. Essentially, that creates an environment that favors quick-acting activists. Fortune
• What 2016 could mean to Wall Street
It shouldn’t be a shock that with more than 20 candidates running for president across both major parties, there are different opinions on how to watch over Wall Street. But the stark differences in strategies highlights just how murky the future looks for big banks, which could be affected by a number of potential proposals that could upend Dodd-Frank financial reform, force big banks to split, or change how capital gains are taxed – all depending on who wins the presidency. New York Times (subscription required)
5 things to watch for this week
Jobs report, EU rates, and earnings — 5 things to watch for this week. This week’s story can be found here.