This is an audio transcript of the FT News Briefing podcast episode: Federal Reserve plans to hike rates in 2022

Marc Filippino
Hello from the Financial Times. Today is Thursday, September 23. And this is your FT News Briefing.

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The Federal Reserve’s timetable for raising interest rates appears to be drawing closer. And a US State Department adviser defends the new security pact with the UK and Australia. Meanwhile, a few big names are lining up behind the private equity fund of a former Treasury secretary. What’s more, market analysts are wondering if the crisis at one of China’s biggest real estate developers could wreak havoc on global markets. James Kynge of the FT reminds us that China is not a free market financial system.

James kynge
The Beijing government is telling the banks, OK, I need you to stop bailing out a certain real estate developer. These banks can only follow the orders of the central government.

Marc Filippino
I’m Marc Filippino, and here is the news you need to start your day.

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Yesterday’s Federal Reserve meeting was a bit giddy.

James politi
It was really very important, perhaps the most important meeting of the year.

Marc Filippino
It’s the FT’s Washington bureau chief, James Politi, who pretty much sums it up. He said the Fed had signaled it was ready to start slowing its asset purchases by $ 120 billion per month. It is the bond buying program to support the US economy during the pandemic. He also said the Fed was starting to consider interest rate hikes starting next year.

James politi
The bottom line is that the Fed believes the economy is somehow strong enough to be able to live without massive monetary support. So that’s sort of allaying some of the concerns about the Delta variant on the US recovery. He is convinced that some kind of fiscal policy environment will be conducive to stronger and more sustainable growth. And it shows that the inflationary worries that have erupted this year are also unlikely to be a heavy blow to the economy. The Fed is convinced that inflation will be transitory. He may start raising interest rates sooner than he expected, but he does not expect any stagflation scenario.

Marc Filippino
So, James, I have to ask, given all the news yesterday, why were the markets so calm? The S&P was up just under 1 percent, but markets generally hate the prospect of a rate hike. They like low rates because it means cheap money is flowing through the economy. So, you know, what gives?

James politi
I think, first of all, the idea of ​​a descending timeline starting in November had been widely telegraphed, really, by the Fed and other Fed officials over the past few weeks. So it was planned. And on the interest rate hikes, I think it’s true that it was a little surprising to see the split, the kind of nine-to-nine split on the FOMC between those who think the first rate hike interest will take place next year and those who think it will happen in 2023. I think it was a bit of a surprise, but I think markets, investors and economists are gradually getting used to a Reserve slightly more hawkish federal government.

Marc Filippino
It was the FT’s Washington bureau chief, James Politi.

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Former US Treasury Secretary Steven Mnuchin just landed a big investment from SoftBank. The Japanese tech conglomerate has invested an undisclosed sum of money in Mnuchin’s new private equity fund. The fund is worth two and a half billion dollars and is called Liberty Strategic Capital. SoftBank will join another major donor, the Saudi Arabia Public Investment Fund. A source told the FT that SoftBank’s decision to invest in Mnuchin’s Liberty Strategic Capital was influenced by the Saudi fund, which is administered by Saudi Crown Prince Mohammed bin Salman.

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The big story in the markets this week has been the financial crisis and one of China’s biggest real estate developers, Evergrande. One of the things the saga illustrates is how important real estate has played in the history of China’s economic growth. The construction boom has been extraordinary. But now, according to a mind-boggling statistic, there is enough empty apartment space to accommodate 90 million people. So what are the Chinese officials doing with all these vacant apartments (demolition noise)? They blow them up. Well, at least in this case. You hear the sound of a forest of half-built skyscrapers in southwest China collapsing after a demolition explosion. This is James Kynge from the FT with some background.

James kynge
There has been the largest migration in human history from rural areas of China to cities in the past 20 to 30 years. Hundreds of millions of Chinese rural residents moved to cities and so there must have been a big construction boom to accommodate them. But the flip side is the way financing works in China, it is state-owned banks that are very reluctant to withdraw their credit from real estate developers, thus causing these real estate developers to go bankrupt. And that is why this excess supply of real estate has persisted for several years now.

Marc Filippino
So, James, long-term demand is likely to drop, right?

James kynge
China’s overall population is not yet in decline, but it is heading for decline. And with the number of women between 22 and 35 expected to decline by around 30% over the next decade, people are predicting a significant decline in the population over that 10-year period. And that means there will be much less demand for property that is already heavily in surplus in cities across the country. And that leads to projections that many real estate developers, who have huge debts on their books, face a rather unsustainable future.

Marc Filippino
So, James, there is another side to that. We recently learned from our economic reporter in China, Sun Yu. He told us that local governments, like big cities, are really dependent on real estate sales.

James kynge
This is really the untold story, the truth of how local governments, including several thousand across China, fund themselves is really telling and very dependent on the real estate market itself. About a third of the income these local governments receive comes from the sale of land to developers who, of course, use that land to build high-rise buildings, etc. So, if developers are now faced with a really lackluster market, not being able to sell the property they have built, they will not have the money available to buy the land. And that means these local governments are going to face a very big hole in their balance sheets. And that will mean that they may not be able to finance the bonds that they have issued in order to build infrastructure all over China, which is another big part of China’s growth that we can see. that this is already starting to happen.

Marc Filippino
So do you think that a larger systemic crisis is looming in the Chinese financial system, given the importance of real estate as a proportion of GDP?

James kynge
When we talk about the systemic crisis in China, we always have to appeal to the enormous power of the Chinese Communist Party because, fundamentally, it is not a free market financial system. If the Beijing government says to the banks, OK, I need you to stop bailing out a certain real estate developer, these banks can only follow orders from the central government. So what we’re talking about is probably not a systemic problem in the way we would perceive it in the West, that is, contagion. This type of scenario in China is quite hard to believe. It is therefore likely that there will be a much softer decline in financing for real estate developers. But it would be handled by Beijing in a way that wouldn’t cause the collapse of, say, several real estate developers or several hundred real estate developers and thus cause an economic crisis for the country.

Marc Filippino
James Kynge is the FT’s Global China Editor.

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British Prime Minister Boris Johnson was in Washington this week and met with President Joe Biden. It seems to have been a pretty happy visit a week after the UK and US joined Australia in forming a new security partnership to counter China. The pact has ruffled a few feathers, however, including those of France. Australia has canceled a huge submarine contract with France and will instead buy nuclear submarines from the United States as part of the deal. Here’s US State Department Advisor Derek Chollet with a little background.

Derek cholet
The capability of nuclear powered submarines in particular is substantial in the sense of their ability to project power throughout the Indo-Pacific. But the agreement over time could lead to other areas of military procurement as well, be it artificial intelligence, quantum, all kinds of things that will help define the armies of the future.

Marc Filippino
It was US State Department Advisor Derek Chollet speaking with FT’s Gideon Rachman. You can hear the whole conversation in this week’s episode of our Rachman Review podcast, which comes out every Thursday.

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You can read more about all of these stories at FT.com. This has been your daily FT News briefing. Make sure to come back tomorrow for the latest business news.

This transcript was generated automatically. If by any chance there is an error, please send the details for correction to: [email protected]. We will do our best to make the change as soon as possible.


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