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This is an audio transcript of the FT News Briefing podcast episode: The biggest US rate rise in almost 30 years

Marc Filippino
Good morning from the Financial Times. Today is Thursday, June 16th, and this is your FT News Briefing. The Federal Reserve approves the biggest interest rate rise for the US in almost 30 years. The European Central Bank promises to protect weaker economies from its rate increases. Plus, a hedge fund founder lays out the link between American economic inequality and the January 6th Capitol riot. I’m Marc Filippino, and here’s the news you need to start your day.

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US interest rates are going up by three quarters of a percentage point. They haven’t risen that much since 1994. That’s like Netscape long ago. Fed chair Jay Powell started off his press conference yesterday talking about why this aggressive move is so important.

Jay Powell
The economy and the country have been through a lot over the past two and a half years and have proved resilient. It is essential that we bring inflation down if we are to have a sustained period of strong labour market conditions that benefit all.

Marc Filippino
The FT’s US economics editor Colby Smith was there covering the press conference and is now here to help us make sense of this interest rate hike. Hi, Colby.

Colby Smith
Hey, Marc.

Marc Filippino
So, Colby, up until recently, Fed officials had said that they were going to just keep interest rate hikes at half a percentage point. And then this week at yesterday’s meeting, the Fed, obviously as I just said, they raised interest rates by three quarters of a percentage point. Why did they change their mind and get so much more aggressive?

Colby Smith
They changed their mind because of two pretty alarming reports that were released on Friday that showed an unexpectedly large jump in consumer prices in May and a very, you know, worrying rise in inflation expectations that suggested that Americans more broadly are becoming more concerned about the outlook for inflation going forward. So I think these two reports together, Powell called the jump in inflation expectations eye catching, so I think in a lot of ways they realise 75 basis point hike was a lot more appropriate given underlying inflation trends.

Marc Filippino
So Colby, markets like this, at one point the S&P 500 was up 2 per cent after the Fed announced this news, but real people are going to be affected by this, right? That the Fed’s dual mandate, watching inflation and unemployment, they’re willing to let unemployment go up a little bit to get inflation rates down. So between higher interest rates and high inflation, that hasn’t level off yet. What does this do to the average American?

Colby Smith
So chair Powell kind of conceded to this point in the press conference where he said that the kind of path, this soft landing, which would be the ability to bring down inflation without, you know, substantial economic pain, that that was getting more and more challenging. To be fair, the unemployment rate is at historically low levels at the moment, at 3.6 per cent. Even the projection of the unemployment rate rising around 4 per cent in 2024, according to Powell that’s reflective of a soft landing. So they haven’t totally departed from this thinking that they can bring down inflation and they’re necessarily going to cause a recession. But at the same time, I think that path is becoming narrower and narrower. And that’s exactly what we heard from Powell.

Marc Filippino
Colby Smith is the US economics editor. Thanks, Colby.

Colby Smith
Thank you.

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Marc Filippino
Now when the European Central Bank said last week it would raise interest rates for the first time in more than a decade, it got a lot of folks worried. People are concerned that Europe could be headed back to a debt crisis like the ones we saw in 2012 and 2014. So the ECB held an emergency meeting yesterday and the central bank signalled it’s going to be lending a helping hand to weaker economies. Here’s the FT’s Martin Arnold.

Martin Arnold
The ECB announced that it was going to accelerate work on a new anti fragmentation instrument to tackle the recent turmoil in bond markets. But the announcement was short on detail as it was long on ambition. This reflects how the ECB has been backed into a corner. On the one hand, it wants to fight record levels of eurozone inflation by stopping bond purchases and starting to raise interest rates. But on the other hand, this tightening of monetary policy is causing turmoil in bond markets, causing the borrowing cost, particularly of weaker countries like Italy, to rise to levels they haven’t been at for eight years or more. And that’s threatening a new debt crisis in the eurozone, which the ECB realises it needs to keep a lid on.

Marc Filippino
So what does this tell us about the unique challenges facing the ECB?

Martin Arnold
There’s an apparent contradiction in what the ECB is trying to do. And that contradiction stems from the incomplete nature of the eurozone union. So whilst other central banks like the US Federal Reserve and the Bank of England can raise interest rates with a single-minded focus, the ECB has to always have one eye on the risk of fragmentation in eurozone bond markets. And that’s because whilst they share a single currency, eurozone countries have their own fiscal policy in their own bond markets, which leaves them vulnerable to investors betting on the chances of one or other of them could default on their debts, and the whole single currency zone could break up, which is something that the ECB as the guardian of the euro, could not allow. So at the same time that it’s raising interest rates and stopping most of its bond purchases, it needs to think about relaunching another bond-purchasing scheme to keep a lid on that fragmentation risk.

Marc Filippino
That’s the FT’s Frankfurt bureau chief Martin Arnold.

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Members of Congress are currently investigating the events that led to an attack on the US Capitol last year. It followed Donald Trump’s claims that the election was stolen from him. This week’s hearings have led to a number of revelations about what led to the January 6th riot, but what compelled people to go to DC, take up arms and try to harm politicians? Ray Dalio has spent his career observing the links between money and politics. Dalio is the founder and chairman of Bridgewater Associates, the world’s largest hedge fund. And he said that given the widening wealth gap in America, he wasn’t surprised by the Capitol riot.

Ray Dalio
So you lose the middle, you get greater and greater extremism. And then because it’s a win-at-all-cost approach, the laws and the Constitution become secondary. So, for example, if we’re dealing with some of the issues here in the United States today or in other countries, too, we see that there may be a possibility that neither side accepts losing the election.

Marc Filippino
Dalio was talking to the FT’s chief foreign affairs commentator Gideon Rachman for this week’s episode of the Rachman Review podcast. Dalio has made clear that he thinks wealth needs to be recycled more effectively and that billionaires like him should pay more taxes.

Ray Dalio
Yes, I’m a product of the system. Now that used to be perceived as living the American dream. But as always, when you have, let’s say, a capitalist system in which it distributes wealth unequally, that may not in and of itself be a problem, though it has problem elements to it, but it also creates a unfair system because those who are richer can better educate their children.

Marc Filippino
And Dalio says that the US needs to invest more in education.

Ray Dalio
There is hardly any better investment that you can make to have excellent education throughout the system. However, the Constitution makes it a state issue primarily. And when you go to states, in most states, it’s a tax district issue. So I, for example, live in Greenwich, Connecticut, and the average public school system here, the average per capita expense on that is $24,000 per student. So up the road in Bridgeport, Connecticut, 15 minutes where there is poverty, it’s $14,000 a student. And those areas need it more.

Marc Filippino
Ray Dalio is speaking to the FT’s chief foreign affairs commentator Gideon Rachman in this week’s edition of the Rachman Review podcast. The new episode is out today.

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Before we go, a quick update on the war in Ukraine. European leaders are scheduled to meet with Ukraine’s president this week, potentially as early as today. French President Emmanuel Macron, Italian Prime Minister Mario Draghi and German Chancellor Olaf Scholz will meet with Volodymyr Zelenskyy to talk about Ukraine joining the European Union. Sources tell the FT that the European Commission will probably recommend that Ukraine get EU candidate status on Friday. That’s the first step towards joining the bloc.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.


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