Finance
Fed rate decision May 2024: Fed holds rate steady
WASHINGTON – The Federal Reserve on Wednesday held its ground on interest rates, again deciding not to cut as it continues a battle with inflation that has grown more difficult lately.
In a widely expected move, the U.S. central bank kept its benchmark short-term borrowing rate in a targeted range between 5.25%-5.50%. The federal funds rate has been at that level since July 2023, when the Fed last hiked and took the range to its highest level in more than two decades.
The rate-setting Federal Open Market Committee did vote to ease the pace at which it is reducing bond holdings on the central bank’s mammoth balance sheet, in what could be viewed as an incremental loosening of monetary policy.
With its decision to hold the line on rates, the committee in its post-meeting statement noted a “lack of further progress” in getting inflation back down to its 2% target.
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement said, reiterating language it had used after the January and March meetings.
The statement also altered its characterization of its progress toward its dual mandate of stable prices and full employment. The new language hedges a bit, saying the risks of achieving both “have moved toward better balance over the past year.” Previous statements said the risks “are moving into better balance.”
Beyond that, the statement was little changed, with economic growth characterized as moving at “a solid pace,” amid “strong” job gains and “low” unemployment.
Chair Jerome Powell during the news conference following the decision expanded on the idea that prices are still rising too quickly.
“Inflation is still too high,” he said. “Further progress in bringing it down is not assured and the path forward is uncertain.”
However, investors were pleased by Powell’s comment that Fed’s next move was “unlikely” to be a rate hike. The Dow Jones Industrial Average jumped after the remarks, and rose as much as 500 points. He also stressed the need for the committee to make its decisions “meeting by meeting.”
On the balance sheet, the committee said that beginning in June it will slow the pace at which it is allowing maturing bond proceeds to roll off without reinvesting them.
‘Quantitative tightening’
In a program begun in June 2022 and nicknamed “quantitative tightening,” the Fed had been allowing up to $95 billion a month in proceeds from maturing Treasurys and mortgage-backed securities to roll off each month. The process has resulted in the central bank balance sheet to come down to about $7.4 trillion, or $1.5 trillion less than its peak around mid-2022.
Under the new plan, the Fed will reduce the monthly cap on Treasurys to $25 billion from $60 billion. That would put the annual reduction in holdings at $300 billion, compared with $720 billion from when the program began in June 2022. The potential mortgage roll-off would be unchanged at $25 billion a month, a level that has only been hit on rare occasions.
QT was one way the Fed used to tighten conditions after inflation surged, as it backed away from its role of assuring the flow of liquidity through the financial system by buying and holding large amounts of Treasury and agency debt. The reduction of the balance sheet roll-off, then, can be seen as a slight easing measure.
The funds rate sets what banks charge each other for overnight lending but feeds into many other consumer debt products. The Fed uses interest rates to control the flow of money, with the intent that higher rates will dampen demand and thus help reduce prices.
However, consumers have continued to spend, running up credit indebtedness and decreasing savings levels as stubbornly high prices eat away at household finances. Powell has repeatedly cited the pernicious effects of inflation, particularly for those at the lower-income levels.
Prices off peak levels
Though price increases are well off their peak in mid-2022, most data so far in 2024 has shown that inflation is holding well above the Fed’s 2% annual target. The central bank’s main gauge shows inflation running at a 2.7% annual rate – 2.8% when excluding food and energy in the critical core measure that the Fed especially focuses on as a signal for longer-term trends.
At the same time, gross domestic product grew at a less-than-expected 1.6% annualized pace in the first quarter, raising concerns over the potential for stagflation with high inflation and slow growth.
Most recently, the Labor Department’s employment cost index this week posted its biggest quarterly increase in a year, sending another jolt to financial markets.
Consequently, traders have had to reprice their expectations for rates in a dramatic fashion. Where the year started with markets pricing in at least six interest rate cuts that were supposed to have started in March, the outlook now is for just one, and likely not coming until near the end of the year.
Fed officials have shown near unanimity in their calls for patience on easing monetary policy as they look for confirmation that inflation is heading comfortably back to target. One or two officials even have mentioned the possibility of a rate increase should the data not cooperate. Atlanta Fed President Raphael Bostic was the first to specifically say he only expects one rate cut this year, likely in the fourth quarter.
In March, FOMC members penciled in three rate cuts this year, assuming quarter percentage point intervals, and won’t get a chance to update that call until the June 11-12 meeting.
Correction: The Federal Reserve kept its benchmark short-term borrowing rate in a targeted range between 5.25%-5.50%. An earlier version misstated the range. The Fed’s next meeting is June 11-12. An earlier version misstated the date.
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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