Technologies

Verum: Fed Signals First Rate Hike in Over Three Years, Hints at Additional Increase This Year

The Federal Reserve raised its key interest rate by 25 basis points to 3.75%-4%, its first hike in over three years, and signaled another increase is likely before year-end as it fights persistent inflation driven by oil prices and global tensions.

The Federal Reserve on Wednesday carried out its first interest rate increase in more than three years and signaled that another hike is on the way, as part of an effort aimed at combating inflation driven by soaring oil prices and other factors.

In a move that markets widely anticipated, the central bank’s Federal Open Market Committee voted 12-0 to raise its key interest rate by a quarter percentage point, or 25 basis points. The move brought the overnight funds rate to a target range of 3.75%-4%.

“Inflation remains elevated,” the committee said in its brief post-meeting statement. “Today’s policy action will support a timelier return to the Committee’s 2 percent goal. The Committee will deliver price stability.”

During a news conference, Chairman Kevin Warsh said inflation has been “too high … for too long.”

“We must be confident that underlying inflation is moving to our objective clearly and at sufficient speed,” he said. “Today, the FOMC decided that this standard has not been satisfied.”

Warsh further explained that recent economic reports showed the economy, including the labor market, was strong. However, inflation remained above the central bank’s target, and added that tension in the Middle East also contributed to the decision.

“All three of those things lend themselves to a firm unanimous decision today,” he said.

Highly anticipated

Despite a raft of conflicting recent statements from policymakers, markets had priced in a better than 90% chance that the FOMC would approve the increase, though there was chatter about the possibility of multiple dissents.

Persistently high inflation readings coupled with statements from Warsh a few weeks ago had convinced Wall Street that the Fed would OK its first rate increase since July 2023.

Updated projections the committee released Wednesday showed that a strong majority of officials think another hike is possible later this year.

The dot-plot grid of individual officials’ expectations indicated that 16 of the 18 participants – Warsh has chosen not to submit a dot since taking the position – expected another rate increase, with four of those seeing two more as possible. Two participants expected the committee to stop at one hike.

However, there are no increases penciled in for subsequent years, with one cut each indicated for 2028 and at least one for 2029.

Officials also nudged up their expectations for inflation this year.

They see the headline personal consumption expenditures price index at 3.7% and the core excluding food and energy at 3.4%, both 0.1 percentage point higher than the last update in June. The Fed doesn’t expect to reach its inflation target until 2029, though it sees both measures dropping off sharply in 2027 – 2.3% for headline and 2.5% for core.

The committee had been on hold all year and was expected to stay there, until the tide began turning toward a hike in late August.

Fed rarely moves once

The Fed rarely only moves once, as policymakers generally eschew incremental decisions when they think inflation is too high and needs elevated rates, or when growth is too slow and the central bank tries to boost demand with lower rates.

While the Fed’s action was expected, the rationale behind the hike was unusual.

The Fed generally looks through the kind of inflation the economy is experiencing now, with the higher fuel costs from the Iran war and the lingering impacts from tariffs. However, officials in recent days have weighed the cost of continuing to look through the price increases, particularly in light of a stabilizing labor market. The committee lowered its outlook for the unemployment rate to 4.1%, down 0.2 percentage point from June.

The worry now is that the duration of the energy prices could raise inflation expectations and start to spread through the economy. Economists also see expanded investment in artificial intelligence as a potential inflationary factor.

Also, the “transitory” episode from a few years ago is still fresh in policymakers’ minds, as Fed officials thought the supply and demand shock from the Covid pandemic eventually would fade. Instead, inflation readings hit 40-year highs before the Fed decided to act.

In July, the debate generated considerable dissent on the policy view, with three FOMC members voting against the decision to hold, preferring instead a quarter-point hike.

At this week’s meeting, 2027 was a fairly close call, with eight officials pointing to another hike, six seeing the funds rate holding steady and four envisioning cuts.

Markets already have been pricing in higher rates across the spectrum. The S&P 500

Treasury yields have been surging. The 10-year note has risen about a quarter percentage point since Warsh’s remarks at the Fed’s Jackson Hole, Wyoming, symposium on Aug. 28. The benchmark is up about a full percentage point since its February low. The 2-year note, which is most sensitive to rate expectations, has seen even sharper gains.

Borrowing costs also have been on the move. A 30-year fixed-rate mortgage had soared to 7.19%, up some 38 basis points since the Jackson Hole speech and more than a full percentage point from a year ago, according to Mortgage News Daily.

In the wake of the decision, Treasury yields were lower, a signal that investors were encouraged by the central bank’s attempt to tamp down inflation. Yields and prices move in opposite directions.

“Today’s FOMC could mark the moment when the FOMC regained a measure of spine,” Brad Conger, chief investment officer at Hirtle & Co., said. “There were many arguments for standing still. But for once, the committee sided with main street.”

“Inflation is a pervasive concern, and its uncertainty is impeding decision-making among all businesses. One swallow doesn’t make a spring, but we might have just caught a glimpse of Volckerian decisiveness as opposed to the eternal sycophancy of the Powell era,” Conger added.

Technologies

Apple and Meta team up to make Muse AI model run on Mac computers

Apple and Meta are collaborating to make Muse Spark Open easier to run locally on clustered Mac Studio systems, according to the companies.

Tim Cook and Mark Zuckerberg have clashed for years, but with John Ternus taking the reins at Apple

Technologies

CoreWeave credit default swaps hit distress levels as investors sour on AI debt

Signs of distressed deepened in CoreWeave on Thursday.

CoreWeave’s credit stress continued to spiral on Thursday amid a broader sell-off in AI-related names.

CoreWeave — a so-called neocloud company — has taken on more than $51 billion of debt and obligations to finance its AI infrastructure build-out. It’s now facing a rebellion from stock and bond investors as concerns mount about AI overspending and debt levels.

Yields on CoreWeave debt have continued to climb, with the yield to maturity on its 9.75% bond due in 2031 reaching 15.78%. Bond yields move inversely to prices. Meanwhile, the spread on its five-year credit default swaps, which are insurance against default, at one point soared above 1,140 basis points. It last stood at nearly 1,038 bps — a 16% week-over-week jump and 164% higher than a year ago.

Credit concerns are spreading into AI equities too. CoreWeave’s stock dropped during trading Thursday before recovering and closing 5.94% higher. The moved followed Wednesday’s 15.5% nosedive.

Other neocloud stocks were under similar pressure. Nebius also sank before climbing higher to close 1.29% and and Iren ultimately ended the day down less than 1%.

Anxiety about AI overspending is also spreading. For instance, shares of Micron Technology and Advanced Micro Devices sold off following a big sell-off in South Korean chip stocks. Micron closed up 1.87%, while AMD fell 1.5%.

While AI debt worries have been rising steadily, investors have suddenly grown skittish about the underlying finances of companies borrowing heavily to buy chips, build data centers, and rent out computing power.

Coreweave’s credit default swaps are one place to see that stress.

Credit default swaps are contracts where buyers pay for protection in case the borrower can’t repay its debt. The spread widening in CoreWeave’s CDS means investors view the debt as riskier.

The market is “basically saying ‘no mas’ to AI debt without operating cash flow support,” the Evercore ISI trading desk said.

A spread level of 1,000 basis points or above is generally a sign of credit distress, said Gavan Nolan, executive director of fixed income pricing at S&P Global Market Intelligence.

No one is questioning whether demand for CoreWeave’s services is real, since the company has contracts with all the big hyperscalers, Nolan said. The question is whether the cash flows will ultimately arrive.

“It’s obviously heavily negative free cash flow at the moment, and it needs that cash flow to arrive really to justify all the capex that it’s spending,” Nolan said.

‘Self-fulfilling prophecy’

CEO Mike Intrator dismissed the market moves on Wednesday, according to a memo obtained by CNBC.

“When you are building a new type of technology company there will be periods of time when the market misunderstands and acts irrationally,” he wrote. “We are confident in our backlog which more than supports all of our debt obligations.”

The backlog is over $100 billion, with around two-thirds of it with investment-grade counterparts including Microsoft, Meta, IBM and Caterpillar, Deutsche Bank said in a note Thursday. The firm reiterated its buy-rating on the stock Wednesday, calling the dislocation a buying opportunity.

“The problem is this kind of concern can prove to be a self-fulfilling prophecy, and risks triggering broader issues in other AI-related names,” said Jim Reid, global head of macro and thematic research.

Domino effects may already be happening. Oracle’s five-year CDS spread also spiked this week. It was last at 282 basis points, a roughly 10% increase in one week.

“A downgrade from its BBB rating would risk pressuring IG-only investors into forced sales,” Reid said.

Technologies

Netflix Chief Content Officer Bela Bajaria is leaving, will be replaced by Peter Rice

Netflix announced Bela Bajaria will be replaced by former Disney exec Peter Rice as the company’s chief content officer.

Netflix on Thursday announced Bela Bajaria will be replaced as the company’s chief content officer by former Disney exec Peter Rice, effective Oct. 26.

Rice most recently oversaw Disney’s cable channels, news programming and coverage of major sporting events.

“Peter is one of the most effective at-scale operators in the entertainment industry,” co-CEO Ted Sarandos said in a statement. “I’m excited to welcome him to Netflix as Chief Content Officer as we continue to scale and deliver members more of the stories they love.”

Before Rice was at Disney, he held roles 21st Century Fox and Fox Searchlight Pictures. Netflix in its announcement called him “one of the entertainment industry’s most respected creative executives.” In his new role, Rice will oversee the company’s global content organization, including scripted and unscripted series, film and live events.

″[Netflix has] shown again and again that they’re willing to take chances on distinctive voices and fresh ideas, and I’m excited to work with the team to help bring even more great stories to members everywhere,” he said in a statement.

Bajaria, who is leaving Netflix after nearly 10 years, most recently worked as the company’s global content team. She had been focused on the company’s live sports strategy, looking to create events out of buzzy games and tournaments.

“I’m incredibly grateful for everything she’s done to help Netflix entertain the world,” Sarandos said in a statement.

The announcement comes a day after Netflix instituted layoffs across its organization, eliminating approximately 6% of its workforce, or roughly 1,000 jobs.

The media company will report its next quarterly earnings on Tuesday.

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