Finance
Fed holds interest rates higher for even longer as inflation remains high
The Federal Reserve won’t lower interest rates until its certain inflation will meet 2% target rate. (iStock)
The Federal Reserve said that a lack of progress in bringing inflation down over the last few months is why it is holding interest rates where they are for now.
On Wednesday, the central bank announced it would maintain the federal funds rate range at 5.25% to 5.5%, where rates have held steady since July. Fed officials have said in past meetings that they anticipated rate cuts for 2024 but need more confidence that inflation is heading toward the 2% target rate. Federal Reserve Chair Jerome Powell reiterated this sentiment on Wednesday when speaking with reporters and said it would likely take longer for the central bank to gain this confidence.
“Our restrictive stance of monetary policy has been putting downward pressure on economic activity and inflation, and the risks to achieving our employment and inflation goals have moved toward better balance over the past year,” Powell said. “However, in recent months, inflation has shown a lack of further progress toward our 2% objective, and we remain highly attentive to inflation risks.”
The inflation data registered this year has been higher than the Fed expected. The latest reading of the personal consumption expenditures (PCE) price index, excluding food and energy prices – a key metric the Federal Reserve tracks to measure inflation – increased by 3.7% after rising to 2% in the fourth quarter, raising concerns that inflation may be headed in the wrong direction and could spark another rate increase.
On an annual basis, prices rose 3.5% in March, more than the 3.2% growth last month and above the 3.4% growth economists had expected, according to the Consumer Price Index (CPI) released by the Bureau of Labor Statistics (BLS).
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SOCIAL SECURITY: COLA INCREASING BUT MEDICARE COSTS RISING TOO IN 2024
Stagflation risk inflated
While inflation ticked up, U.S. gross domestic product (GDP) dropped faster than expected in the first quarter, at an annual rate of 1.6% for the first quarter after rising 3.4% in the fourth quarter, according to the Bureau of Economic Analysis (BEA). Those two factors have sparked concerns about the risk of stagflation.
However, Powell told reporters that those concerns are misguided and said that economic growth remains solid and the PCE, the Fed’s preferred inflation gauge, is under 3%. Powell also noted that it was unlikely that the Fed would raise interest rates again at its next meeting.
“I was around for stagflation. It was 10% unemployment. It was high single-digit inflation and very slow growth,” Powell said, referencing the stagflation in the 1970s, which was triggered by a large spike in oil prices.
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MILLENNIALS ARE DESPERATE TO BUY A HOME, MOST WILLING TO PAY A MORTGAGE RATE ABOVE 7%: SURVEY
How higher interest rates impact your wallet
A higher-for-longer policy stance means consumers must brace for a continued high borrowing costs environment. Relief isn’t likely to come until later in 2024, according to Michele Raneri, TransUnion vice president of U.S. research and consulting.
“As long as interest rates remain relatively high, it’s vital that consumers continue to use credit smartly, especially when it comes to higher-interest products such as credit cards,” Raneri said. “It’s best to only use these cards to the extent there is confidence they can be paid off relatively soon, as interest can pile on quickly, particularly at the higher rates of today. In addition, consumers should consider exploring lower interest products to help consolidate their higher interest debt and lower their monthly payments.”
Mortgage rates have ticked above 7% in recent weeks and that, combined with high home prices, has rendered housing unaffordable for many. Borrowing costs will not likely ease until the Fed dials back interest rates. And the same is true for car financing. The average borrowing cost for new vehicles was 7.1% in the first quarter, while used-vehicle APRs rose to 11.7% in the fourth quarter, according to a recent Edmunds report.
“The Fed is signaling with today’s announcement that there isn’t enough confidence that inflation will continue to drop toward the 2% target,” CoreLogic Chief Economist Selma Hepp said. “We will continue to observe interest trends, but we don’t expect a meaningful dip in mortgage rates for the remainder of the year. What is promising, however, is that some markets are showing an increase in inventory, especially on the lower end of home prices. That is the light at the end of the tunnel for the housing market right now.”
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THIS IS THE #1 CITY FOR FIRST-TIME HOMEBUYERS, AND OTHER HOT US HOUSING MARKETS
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Finance
Warren Buffett says Greg Abel will make Berkshire Hathaway investing decisions when he’s gone
OMAHA, Nebraska — Warren Buffett said Saturday his designated successor Greg Abel will have the final say on Berkshire Hathaway’s investing decisions when the Oracle of Omaha is no longer at the helm.
“I would leave the capital allocation to Greg and he understands businesses extremely well,” Buffett told an arena full of shareholders at Berkshire’s annual meeting. “If you understand businesses, you’ll understand common stocks.”
Abel, 61, became known as Buffett’s heir apparent in 2021 after Charlie Munger inadvertently made the revelation at the shareholder meeting. Abel has been overseeing a major portion of Berkshire’s sprawling empire, including energy, railroad and retail.
Buffett offered the clearest insight into his succession plan to date after years of speculation about the exact roles of Berkshire’s top executives after the eventual transition. The investing icon, who’s turning 94 in August, said his decision is influenced by how much Berkshire’s assets have grown.
“I used to think differently about how that would be handled, but I think that responsibility should be that of the CEO and whatever that CEO decides may be helpful,” Buffett said. “The sums have grown so large at Berkshire, and we do not want to try and have 200 people around that are managing a billion each. It just doesn’t work.”
Berkshire’s cash pile ballooned to nearly $189 billion at the end of March, while its gigantic equity portfolio has stocks worth a whopping $362 billion based on current market prices.
“I think what you’re handling the sums that we will have, you’ve got to think very strategically about how to do very big things,” Buffett added. “I think the responsibility ought to be entirely with Greg.”
While Buffett has made clear that Abel would be taking over the CEO job, there were still questions about who would control the Berkshire public stock portfolio, where Buffett has garnered a huge following by racking up huge returns through investments in the likes of Coca-Cola and Apple.
Berkshire investing managers, Todd Combs and Ted Weschler, both former hedge fund managers, have helped Buffett manage a small portion of the stock portfolio (about 10%) for about the last decade. There was speculation that they may take over that portion of the Berkshire CEO role when he is no longer able.
But it seems, based on Buffett’s latest comments, that Abel will have final decisions on all capital allocation — including stock picks.
“I think the chief executive should be somebody that can weigh buying businesses, buying stocks, doing all kinds of things that might come up at a time when nobody else is willing to move,” Buffett said.
Abel is known for his strong expertise in the energy industry. Berkshire acquired MidAmerican Energy in 1999 and Abel became CEO of the company in 2008, six years before it was renamed Berkshire Hathaway Energy in 2014.
Correction: Berkshire’s equity portfolio is worth $362 billion. A previous version misstated the figure.
Warren Buffett walks the floor ahead of the Berkshire Hathaway Annual Shareholders Meeting in Omaha, Nebraska on May 3, 2024.
David A. Grogen | CNBC
OMAHA, Neb. — Warren Buffett revealed that he dumped Berkshire Hathaway’s entire Paramount stake at a loss.
“I was 100% responsible for the Paramount decision,” Buffett said at Berkshire’s annual shareholder meeting. “It was 100% my decision, and we’ve sold it all and we lost quite a bit of money.”
Berkshire owned 63.3 million shares of Paramount as of the end of 2023, after cutting the position by about a third in the fourth quarter of last year, according to latest filings.
The Omaha-based conglomerate first bought a nonvoting stake in Paramount’s class B shares in the first quarter of 2022. Since then the media company has had a tough ride, experiencing a dividend cut, earnings miss and a CEO exit. The stock declined 44% in 2022 and another 12% in 2023.
Paramount
Just this week, Sony Pictures and private equity firm Apollo Global Management sent a letter to the Paramount board expressing interest in acquiring the company for about $26 billion. The firm has also been having takeover talks with David Ellison’s Skydance Media.
Paramount has struggled in recent years, suffering from declining revenue as more consumers abandon traditional pay-TV, and as its streaming services continue to lose money. The stock is in the red again this year, down nearly 13%.
Buffett said the unfruitful Paramount bet made him think more deeply about what people prioritize in their leisure time. He previously said the streaming industry has too many players seeking viewer dollars, causing a stiff price war.
OMAHA, Neb. — Warren Buffett said that Berkshire Hathaway is looking into an investment in Canada.
“We do not feel uncomfortable in any shape or form putting our money into Canada,” he told an arena full of investors Saturday. “In fact, we’re actually looking at one thing now.”
The billionaire investor has placed bets in the country in the past. He’s previously taken a roughly $300 million position in Home Capital Group that investors took as a vote of confidence in the troubled Canadian mortgage underwriter.
The “Oracle of Omaha” said during the annual shareholder meeting that he does not expect to make significant bets outside the U.S., saying his recent investments in Japanese trading houses were a compelling exception. But Buffett noted the similarity in operations between the Canada and the U.S.
“There’s a lot of countries we don’t understand at all,” Buffett said. “So, Canada, it’s terrific when you’ve got a major economy, not the size of the U.S., but a major economy that you feel confident about operating there.”
Warren Buffett walks the floor and meets with Berkshire Hathaway shareholders ahead of their annual meeting in Omaha, Nebraska on May 3rd, 2024.
David A. Grogen | CNBC
Buffett did not reveal the specific company he’s looking at north of the border or whether it was public or private.
“Obviously, there aren’t as many big companies up there as there are in the United States,” Buffett said. “There are things we actually can do fairly well that Canada could benefit from Berkshire’s participation.”
Canada’s S&P/TSX Composite Index is up about 5% this year. The economy has large financial and commodity industries.
The Berkshire Hathaway shareholder meeting is exclusively broadcast on CNBC and livestreamed on CNBC.com.
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