Fed enters a new phase

This is an audio transcript of the FT News Briefing podcast episode: ‘Fed enters a new phase’

Marc Filippino
Good morning from the Financial Times. Today is Thursday, December 15th, and this is your FT News Briefing.

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The Federal Reserve eased up on its interest rate increases. Western sanctions haven’t crushed Russia’s economy, but Russians are trying to adjust to life without imports. And some billionaires are racing into space, but Ray Dalio is more interested in the deep blue sea.

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I’m Marc Filippino. And here’s the news you need to start your day.

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The Federal Reserve yesterday raised its benchmark policy rate by 50 basis points. This comes after four straight rises of 75 basis points. The European Central Bank and the Bank of England are today likely to follow the Fed with similar 50-basis-point increases. This week’s US inflation report for November showed a second straight month where the rate of price increases has slowed. It shows that the Federal Reserve’s interest rate hikes have been working, and economists say inflation has peaked. But Fed chair Jay Powell signalled that he’s worried about price pressures persisting. Yesterday, he said the full effects of the Fed’s rapid tightening are yet to be felt.

Jay Powell
If we need to be honest with ourselves, that 12-month core inflation is 6 per cent, CPI. That’s three times our 2 per cent target. Now it’s good to see progress, but let’s just understand we have a long ways to go.

Marc Filippino
The Fed also signalled its intention to keep squeezing the US economy in the coming year. US stocks ended yesterday slightly lower.

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Western powers and their allies have imposed unprecedented sanctions on Russia this year, its punishment for Moscow’s full scale invasion of Ukraine. In response, Russia’s central bank imposed capital controls and prevented a run on banks. So the Russian economy hasn’t collapsed. Instead, the FT’s Polina Ivanova has found the economy has steadily eroded. She joins me now to talk more about this. Hi, Polina.

Polina Ivanova
Hi.

Marc Filippino
So, Polina, you’re based in Berlin and you recently travelled to Moscow for a reporting trip. What is life like there? What did you see?

Polina Ivanova
It’s not like the Soviet Union of the 1980s. You’re not seeing empty shelves and long queues, by far, not. A few western shops have closed, but in general, everything, at least in central Moscow, looks rather the same. I don’t think there is a real sense of, kind of, economic pain. On the other hand, some absences of goods are noticeable. I mean, I notice it because this is my first trip back to Russia in probably more than a decade, where I’ve once again been asked by relatives to bring in certain goods that they couldn’t access, which they used to be able to access, you know, small things. But they’re used to a certain type of cleaning product or a certain type of medical item. So I guess in that sense, you do see that some people are noticing that the product lines are smaller, their options are more limited.

Marc Filippino
What’s the government doing to counter these sanctions? What can Moscow do?

Polina Ivanova
Really, Russia has three options. One is to increase imports from kind of what it calls friendly countries. So places like China, for example, or India, which it recently requested a kind of long list of goods, and help to import those. Another is import replacements. So if you’re, for example, missing a certain type of technology because it’s no longer available to you because it’s made by a western brand, you try and recreate that technology at home with varying degrees of success and, you know, with an obvious impact, both on quality and on things like economies of scale. And the third is smuggling. It’s bringing things in through parallel imports. And in fact, one of our interlocutors, an oligarch on the sanctions, presented Iran as this kind of beacon of hope. You know, they have their own supply chains and they’re able to produce a lot of the stuff that they need themselves. And if the things that they can’t produce, they find on the black market and this was presented as a kind of, this is a great outcome for Russia if we can, if we can make that happen, that’s a, that’s a good look.

Marc Filippino
Smuggling. OK. So how are people managing to smuggle goods into Russia?

Polina Ivanova
So I spoke to several people who are engaged in this kind of import-export trade as they call it, and some open front companies in Europe, for example, which don’t seem to have any link to Russia, and then they use those to buy goods from European companies who don’t know necessarily or maybe choose to turn a blind eye that the goods will then go to Russia, and then they send them via these different routes into the wider customs union that Russia has. Kazakhstan, for example, is a key destination. So goods are trucked to those areas and then through them into Russia.

Marc Filippino
So what’s the key takeaway here, Polina? Is it that sanctions aren’t working?

Polina Ivanova
I think actually, speaking to various people who are involved in kind of sanctions policy groups and that sort of thing, you know, I don’t think many of them were of the opinion that introducing sanctions and especially, you know, really tough sanctions, is going to cause a revolution or is going to get people to rise up against the government or is, in fact, going to get the government necessarily to reconsider, particularly since this is clearly, you know, an ideological move. So I think people were not expecting sanctions to have this effect, that they are so punishing that immediately there’s a U-turn on the decision to invade or something like that. I think what they were intended to do was to prevent Russia from having the economic capacity to launch another war or to really at length continue this one, keeping the economy going at a pace where it is able to create new weapons and fund the replenishment of its armed forces and this sort of thing. And in that sense, it’s, it is having an effect.

Marc Filippino
Polina Ivanova is the FT’s Moscow correspondent. Thanks, Polina.

Polina Ivanova
Thanks so much.

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Marc Filippino
Some billionaires are building rockets to explore space. You’ve got Jeff Bezos, Elon Musk and Richard Branson all sending things into the final frontier — not Ray Dalio. Dalio is the founder of the world’s largest hedge fund, Bridgewater Associates. He’s also an underwater exploration aficionado, and he’s just invested in a company that makes submarines for the super-duper wealthy. It’s called Triton.

Ortenca Aliaj
It’s pretty exclusive. They produce like four or five submarines a year.

Marc Filippino
That’s our M&A correspondent Ortenca Aliaj.

Ortenca Aliaj
They range in price from 2.5mn to about 40mn. So there’s a small pocket of people who can afford these. But they tell me they have a long waiting list. And apparently, yachting is now very boring. So the new accessory to have is a submersible.

Marc Filippino
Yeah. I mean, I’m terribly bored of my yacht, of course. We should mention that Dalio isn’t the only big backer of Triton. Movie director James Cameron, who directed Titanic, now also owns part of the submarine company Triton. Tell me a little bit more about that, Ortenca.

Ortenca Aliaj
They are both very, very passionate about this, as much as we like to joke (laughter) that this is a project for people who’ve gotten bored with yachting. They both seem to be extremely passionate about ocean exploration. And actually, one of the Triton submarines was used by our favourite man in the world, David Attenborough, when he dove into Australia’s Great Barrier Reef. But the main target market of this company is the, quote, unquote, “yachting class”.

Marc Filippino
OK. Now this is the key question, Ortenca. Is there any chance of you getting into one of these bad boys soon? Are you going to be doing a little submarine reporting?

Ortenca Aliaj
OK. So I have to admit, I’m desperate to go into one of these. (Laughter) So if Dalio is listening and the FT Weekend is listening (laughter), let me do a Lunch with the FT onboard a, an ocean explorer or onboard a submarine.

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Marc Filippino
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.

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