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CEO Daily: Wednesday, March 30

If the U.S. economy is doing fine, why has the Federal Reserve pared back plans for interest rate hikes this year?


That’s the question Columbia Business School Dean Glenn Hubbard asked Fed Chief Janet Yellen after her speech to the Economic Club of New York yesterday. It’s a question that’s been banging about financial markets in recent days. Has the Fed’s economic outlook changed? Or if not, has its “reaction function” – how it reacts to economic data – changed?


Neither, said Yellen. Her explanation is that slower growth overseas caused market disruption early this year, which led market participants to assume the Fed would slow rate increases, which drove down market interest rates, which helped stabilize markets and keep the Fed’s economic outlook largely intact. Follow that? “That may look like a shift in the reaction function,” she said, “but it really isn’t.”


The bottom line is that the Fed has turned a bit dovish. The funds rate is now expected to end the year at 0.75%, rather than 1%, even though the Fed’s economic outlook is largely unchanged. (Fortune’s Chris Mathews thinks the Fed is still overstating the risk of inflation. Read his analysis here.)


Yellen’s carefully scripted message, delivered to a ballroom packed with financial executives, cheered global markets. One ebullient economist told Bloomberg it was “her best performance since she has been chair.” Her effort to be transparent and about the central bank’s ever-changing intentions shows how much Fed-speak has evolved since I was a cub reporter three decades ago, when I chased down Paul Volcker to ask about rumors that the Fed was intervening in currency markets and was told: “We did what we did, we didn’t do what we didn’t do, and the result was what happened.”


Separately, former Fed Vice Chair Alan Blinder asked Yellen yesterday why U.S. productivity growth – which ultimately drives growth and living standards – has been a slim 0.5% for the past five years – far below historical averages. “It’s a source of huge concern,” she said. “We really don’t know.” That’s an honest answer.


Alan Murray

Top News

Foxconn to buy Sharp at a discount

Taiwan’s Foxconn agreed to acquire Sharp at a big discount to its original offer after a month of wrangling that sowed more doubts over whether the two companies can work well together and fend off fierce competition from smartphone display rivals. Foxconn will pay about $3.5 billion for a two-thirds stake, nearly $900 million less than its initial offer, the companies said. The deal marks the largest acquisition by a foreign company in Japan’s insular tech industry and the end of independence for a 100-year-old company that started out making belt buckles and mechanical pencils. Reuters

Spotify raises $1 billion in debt

The Swedish music streaming service has raised $1 billion in convertible debt from investors, a round led by private equity firm TPG and hedge fund Dragoneer Investment Group. Despite having the most users (reportedly about 30 million), the music streaming service has faced growing competition from others, most notably Apple’s own service which debuted last summer and already has more than 11 million paying subscribers. This week, music hosting service SoundCloud announced its own on-demand music subscription service that will also compete with Spotify and others. “This financing gives them the strategic resources to further strengthen their leadership position, ” said TPG partner David Trujillo in a statement. Fortune

Impeachment nears for Brazil’s Rousseff

Brazil’s largest party announced on Tuesday it was leaving President Dilma Rousseff’s governing coalition and pulling its members from her government, a departure that sharply raises the odds she could be impeached in a matter of months. The Brazilian Democratic Movement Party unanimously decided its six ministers in Rousseff’s Cabinet and all other party members with government appointments must resign immediately. Rousseff, meanwhile, has denied any wrongdoing and called the impeachment efforts a coup to oust her ruling Workers’ Party. The opposition is pressing to impeach her for allegedly breaking budget laws to boost spending in the run-up to her 2014 re-election. Reuters

SunEdison shares tumble 55%

Shares of renewable power firm SunEdison plummeted Tuesday as it teetered on the edge of bankruptcy amid slumping energy prices and swirling questions over the company’s accounting practices. SunEdison faces a “substantial risk” of bankruptcy, according to the U.S. Securities and Exchange Commission filing by a subsidiary, TerraForm Global. SunEdison develops, installs and operates alternative energy projects. The warning comes about two weeks after SunEdison delayed its annual report following concerns that the company had misreported certain aspects of its financial performance. Analysts say the company’s biggest issue is having enough cash.  USA Today

Around the Water Cooler

GOP candidates rip up loyalty pledge

All three Republican presidential candidates on Tuesday walked away from their pledge to support the winner of the nomination in the general election. Donald Trump and John Kasich said they would no longer abide by that loyalty pledge without knowing who the nominee is, while Ted Cruz made a personal and substantive case against supporting Trump. “No, I don’t anymore,” Trump said during Tuesday night’s CNN town hall, when asked if he still pledged to support the eventual party nominee if he was not deemed the winner. “I have been treated very unfairly” by the RNC, the Republican Party and “the establishment,” he said. Bloomberg

eBay buys startup to boost autos business

eBay is acquiring a new advertising startup as it looks to ramp up growth for its web-based used and new car emporium, eBay Motors. The marketplace giant said Tuesday it is buying Cargigi, a startup that provided online advertising services for car dealerships. Cargigi helped dealers post car sales listings on online classified sites such as Craigslist. The startup’s technology would be used to help add auto dealers’ inventory onto eBay Motors and will replace eBay’s Dealer Center. eBay Motors has been struggling against competition from Craigslist and a number of upstarts in the used car business including Beepi, Shift, and Vroom. Fortune

Soda consumption falls to 30-year low

Slumping demand for diet sodas sold by PepsiCo and Coca Cola propelled a decline for the broader industry, as overall sales of carbonated soft drinks dropped for the 11th consecutive year in the U.S. Total volume declined 1.2% in 2015, an acceleration from 2014’s 0.9% drop, as the biggest three players in the category all reported falling demand, according to a new report from industry tracker Beverage Digest. The group also reported that annual per capita consumption of carbonated soft drinks dropped to about 650 eight-ounce servings in 2015 – the lowest since 1985. Fortune

‘Natural’ product claims can be murky

There are no regulatory guidelines for what makes a household product “natural.” Makers of detergents and other household cleaners aren’t required by law to disclose their ingredients to consumers. And that has spawned an industry filled with labels that claim cleaners are eco-friendly, nontoxic, hypoallergenic or even vegetable-based. An example cited by The Wall Street Journal is Whole Foods Market’s laundry detergent Nature’s Power, which is made with “plant-derived soaps” but has the same top active ingredient found in mainstream peers. Regardless of the murky messaging, going green is working. U.S. sales of beauty, household and personal care products that make natural claims have grown 35% since 2012, versus 4% growth for the broader industry. The Wall Street Journal (subscription required)