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Federal Reserve chair Jerome Powell on Wednesday said there isn't yet "clear progress" that decades-high inflation has turned a corner, despite rapid interest rate increases and slowing economic growth.

Why it matters: The assessment signals that the Fed will continue raising interest rates higher than its leaders expected, and will likely keep them high next year in its effort to tamp down inflation. 

What they're saying: "It will take substantially more evidence to give comfort that inflation is actually declining." Powell said at an event hosted by the Brookings Institution.

"By any standard, inflation remains much too high" 

Catch up quick: The Fed has raised rates 6 times since March, with four of those increases by a historically large 0.75 percentage point. Fed officials have hinted at a downshift in the pace of rate hikes, in part to assess the lagged nature of their hikes so far on the economy. That slowdown could come "possibly as soon as the December meeting," Powell said.

Powell also offered a similar message to the one he offered earlier this month, following the Fed's last policy decision: Although the rate increases will be of a smaller magnitude, it's likely rates will ultimately have to be higher than officials previously thought.

"The timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level," Powell said.

Speaking during a Q&A session after the speech, Powell said there is still a chance the economy averts a recession, though the odds have slimmed. "To the extent we need to keep rates higher longer, that's going to narrow the path to a soft landing," Powell said. 

Zoom out: The Fed has walked a fine line in recent weeks, trying to signal that, while it will soon back off the ultra-aggressive pace of rate hikes, the battle against inflation is far from over. There is more ground to cover, Powell said.

The labor market remains out of whack, Powell said, with demand for workers far exceeding the supply of available employees. 

Some of that is due to a smaller labor force that stems from a wave of pandemic-era retirements, which Powell said has shown little sign of reversing itself. Adding to the problem is slower growth in the working-age population.

All of it is contributing to wages that — from the Fed's perspective — are rising at far too quick a pace. 

Between the lines: October's softer-than-expected Consumer Price Index report showed signs of easing price pressures, stoking optimism that inflation had peaked. The Fed, though, isn't yet convinced: "Down months in the data have often been followed by renewed increases," Powell said.

But the optimism showed up in financial markets after the CPI report: The S&P 500 is up over 10% from the low point in October. Yields on government bonds dropped notably from the high point of the prior month.

That wasn't a welcome development for the Fed, and officials have tried to dampen the mood in recent weeks. Tightening financial conditions — lower stock prices, higher yields on government bonds, and a stronger U.S. dollar — is an important tool for the Fed to slow borrowing and spending in the economy.

Stock prices climbed to the highest level of the day following Powell's speech, with the S&P 500 rising nearly 2%. The yield on the U.S. 10-year Treasury bond dipped slightly to 3.71%, holding well-below the high of 4.15% in October. 

Editor's note: This story has been updated with additional reporting.

Fed chair Powell: No "clear progress" toward lower inflation

"We have more ground to cover," Powell said on Wednesday.

Powell speaks at the Brookings Institution on Wednesday. Photo: Valerie Plesch/Bloomberg via Getty Images

Federal Reserve

Stock market

Jobs

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

Markets

Axios Markets

The 2008 financial crisis was caused when a formerly boring industry — banking — got taken over by risk-seekers. Crypto was dominated by risk-seekers from the beginning, making the current implosion all but inevitable.

Why it matters: The bankruptcy of FTX has precipitated renewed calls for tougher and more effective regulation of the crypto markets, with the idea being that such regulation would make the industry safer and less risky. 

The catch: Almost no one in crypto has any real desire for it to be safe and boring. The only thing it's proved really good at is providing a venue for high-risk speculation.

Indeed, there's a strong case that the best thing to do with crypto is to keep it entirely unregulated, lest regulation confer undeserved legitimacy on the asset class.

Driving the news: In an interview with Kelsey Piper of Vox this week, FTX founder Sam Bankman-Fried admitted that his repeated calls for more regulation of the crypto industry were insincere and done only for their PR value. 

The big picture: Nick Dunbar, in "The Devil's Derivatives," his masterful account of the financial crisis, draws a distinction between "the men who hate to lose" and "the men who love to win." 

Most humans are in the "hate to lose" camp. As Dunbar says, "normal people are constitutionally, genetically, down-to-their-bones risk averse: they hate to lose money."

Crypto speculators are in the risk-seeking minority: "somebody who, when confronted with uncertainty, sees not danger but opportunity ... For them, the misery of losing barely merits a moment’s consideration. Such people have a very high tolerance for risk. To be more precise, they crave it."

It's the mindset captured by Adam Fisher in his (sadly now deleted) profile of SBF: "Very high risk multiplied by dynastic wealth trumps low risk multiplied by mere rich-guy wealth." 

"SBF needed to find a path on which he’d be a coin toss away from going totally bust."

The catch: If you take that path and flip enough coins, you're almost certain to go totally bust sooner or later. 

SBF was explicitly unworried about that. He calculated everything in terms of "expected value," even if the probability of actually realizing that value was tiny. 

"SBF would have kept flipping double or nothing," tweeted Harvard's Jason Furman. "With probability 0.00001% he would have ended up owning the entire universe. And with probability 99.99999% bankruptcy."

What they're saying: "SBF needed extreme risk to maximize the expected value of his lifetime earnings," wrote Fisher. 

By the numbers: SBF told Fisher that his goal was to make $5 trillion. 

If his plan had a 0.02% chance of succeeding, and would otherwise go to zero, that would give it a positive expected value of $1 billion — a number high enough to make it well worth pursuing, even with a 99.98% chance of ignoble failure. 

The bottom line: As SBF explained in 2020, his philosophy was that "all-in maximizes long term growth." Always keep risking everything.

That helps explain why his back-office and compliance teams were so small — and why FTX ended up going to zero. 

It also helps explain why crypto more broadly is so volatile and prone to blow-ups. 

The huge risks embedded in the cryptoverse

FTX's bankruptcy prompts renewed calls for tougher regulation of the crypto markets

Illustration of the "mind blown" emoji as an exploding coin.

Zambia is restructuring its debts, and causing a stare-down battle between China, on the one hand, and the IMF and World Bank, on the other. 

Why it matters: Eventually, either China or the MDBs are going to have to blink. An important precedent will be set either way.

How it works: The history of sovereign debt restructuring is, in one sense, quite simple:

Ruritania borrows money by issuing some kind of debt instrument.

Ruritania discovers it can't pay its debts.

Ruritania's creditors eventually realize the same thing, and agree to restructure their debt instrument so that they get something back. 

Ruritania's creditors conclude that they held the wrong kind of debt instrument, and need to hold something that can't get restructured. 

Ruritania, now with a smaller debt burden, returns to the market — but this time issues a new debt instrument that doesn't have a history of getting restructured. 

Where it stands: Like all the best stare-down battles, this one is taking place in the footnotes of G20 communiqués. 

For the record: The latest communiqué, which came out this week, has 52 paragraphs, 9,700 words, and one footnote. (There's also a 1,186-page version "with annexes" but I am too scared to open it.)

The footnote, in full: "Noting that one member has divergent views on debt issues in paragraph 33, and emphasized the importance of debt treatment by multilateral creditors like MDBs."

To be clear: The "one member" in question is China.

The big picture: The MDBs, or multilateral development banks, have so-called preferred creditor status. Which means they always get paid back in full, partly because they lend at well below market rates. 

China, however, wants them to participate in "debt treatment" — which means it wants them to write down at least some of their debts. 

By the numbers: Zambia owes China $5.9 billion, per former Treasury official Brad Setser's excellent summary of the situation. The MDBs are owed $2.7 billion. Total external debt is $20 billion.

"I don’t think there is any 'give' in the MDBs," Setser emails Axios. "Their preferred status is not up for negotiation."

The bottom line: Zambia is a crucial test case for many other countries that are going to have to restructure their debt in coming years. (Looking at you, Ghana.)

Zambia's debt restructuring precedent

It's creating a standoff between China and the multilateral development banks.

Illustration of a hundred dollar being built by construction vehicles.  

Zambia

The downfall of FTX founder Sam Bankman-Fried (SBF) hit the effective altruism (EA) movement particularly hard.

State of play: SBF was one of the largest donors in the EA ecosystem, and that source of funds has dried up forever.

Other believers in EA are reconsidering their prior beliefs in light of what they've learned about SBF.

Even SBF himself turns out to have professed his belief in EA largely for selfish reasons. 

The big picture: One of the central debates in philanthropy is when and whether to make risky investments that might have zero positive effects. 

The so-called "worm wars" are a prime example. Oversimplifying massively, EA-adjacent philanthropies like GiveWell can support deworming programs even if they think they probably don't work, if the cost is low enough and the benefits (if they do exist) are high enough. 

Where it stands: The weakness of pursuing low-probability outcomes with positive expected value has become very obvious — especially within the EA community, which is small and very focused on the FTX fiasco.

For the record: In a Twitter DM conversation, Vox's Kelsey Piper put it to SBF that he was "really good at talking about ethics, for someone who kind of saw it all as a game." 

"I had to be. It's what reputations are made of." 

SBF talked about how "we woke westerners" play a game — where "we say all the right shibboleths and so everyone likes us." 

In other words: By talking at length about EA, SBF gained exactly the credibility he needed within Silicon Valley and the broader culture.

The bottom line: EA did more for SBF than SBF did for EA. 

EA should have been much less reliant on SBF. Now it's paying the price for being too closely associated with him. 

The hit to effective altruism

SBF was one of the largest donors in the EA ecosystem, but that source of funds is now gone.

A tweet saying "is this effective altruism?"

Philanthropy

Data: Johnson Associates; Chart: Axios Visuals

Year-end bonuses are expected to be much lower this year than in the bonanza of 2021, according to projections released Tuesday morning.

The big picture: It's been a hard year. M&A slowed, IPOs dried up and revenue declined.

Investment bankers are expected to do the worst, with bonuses plunging as much as 45%. No surprise given the drop-off in deal-making.

"Economic headwinds showed no signs of abating," Alan Johnson, managing director of Johnson Associates, which released the estimates, said in a statement.

Our thought bubble: At least they're not getting paid in crypto.

Bonus bummer on Wall Street

Investment banking bonuses could be down by as much as 45%.

Wall Street

Sam Bankman-Fried knew exactly what risks he was taking; he explained them in some detail in a podcast last year. From his point of view, they were risks worth taking. From the point of view of other crypto-market participants now surveying the rubble, however, they most certainly were not.

Why it matters: FTX and Alameda Research were both fully controlled by a single man with a highly idiosyncratic risk appetite. The final result: Ingnominious bankruptcy. 

His personal philosophy of wealth meant that, in contrast to most billionaires, there was no point at which he took his foot off the growth pedal in order to start dialing back on risk. 

The big picture: SBF, as he's universally known, was in many ways the public face of crypto. 

No other industry player had so much credibility — and money — that Tony Blair and Bill Clinton would fly to the Bahamas to make a joint appearance at his crypto conference.

That credibility is now shot to smithereens, and there's no one who can take his place. It's a safe bet that neither Clinton nor Blair will ever appear at a crypto conference again.

Between the lines: SBF was hyperaware of the risks involved when an exchange allows its clients, and especially its biggest clients, to lever up. He was also gaining edge in an incredibly risky way: By borrowing money against his own token, FTT. 

The idea: He was a big enough whale, especially when it came to FTT, that he could effectively set its price, and therefore ensure he would never face a margin call. 

That was a +EV trade, to use one of SBF's favorite terms — it had (or was supposed to have) positive expected value. On the other hand, in the low-probability event that it didn't work out, it could wipe him out — and take much of the rest of the crypto market with it. 

The bottom line: In SBF's utilitarian calculations, that was a risk worth taking. In theory, a bet can be a smart bet even if it doesn't always work out. In practice, however, that's generally not the case when you're risking absolutely everything. 

The catch: We live in a fat-tailed world where the unlikely happens every day. Do this trade for a few years, and you're bound to lose once. And when you lose once, that's game over. (At least until Andreessen Horowitz bankrolls your next company.)

Sam Bankman-Fried's risk-taking didn't pay off

His credibility — much like his money — disappeared.

Illustration of the silhouette of Sam Bankman-Fried crumbling and falling. 

Cryptocurrencies

🖼️ Paul Allen's art profit

You might have heard that art is a fantastic alternative asset class that has outperformed the S&P 500. Microsoft co-founder Paul Allen, from beyond the grave, is here to say: Not so much.

Driving the news: In the biggest and most blockbuster art sale of all time, a selection of paintings and sculptures from Allen's collection was auctioned at Christie's in New York this week. In total, the art sold for more than $1.6 billion.

How it works: Allen, a prolific collector, bought many works at auction — which means we know exactly how much he paid for them. The Cézanne that sold on Wednesday for $137.8 million, for instance, was bought in 2001 for just $38.5 million. By looking at the resale values, it's possible to see how much the art rose in value. 

Between the lines: There are many reasons why these numbers massively overstate the broader returns to art investment. 

Paul Allen was, as the title of the auction says, a visionary. Most collectors don't have his unique combination of a great eye and deep pockets in the 1990s, when first-rate art was particularly cheap. 

Collectors coveted Allen's art in particular: Because of the quality of the collection as a whole, Allen provenance has real value. 

Allen's estate has the luxury of being able to time the market. The collector died in 2018, but this art is only being sold now, at a time of extraordinary demand.

The resale price includes "seller's premium" — the amount the Allen estate paid to Christie's and its guarantors. So the cash-on-cash return will be lower than the numbers on this chart. 

Christie's and the estate both had every incentive to sell those works — and only those works — for which demand is currently hot. The paintings the estate didn't sell will have seen much less appreciation. 

By the numbers: Even with all those tailwinds, the average annualized growth rate on the 11 lots with public entry prices was just 6.2%. On average, Allen held them for 18 years before selling them.

By contrast, even after its fall this year, the S&P 500 still boasts a compound growth rate of 8.9% over the past 18 years. 

The bottom line: Allen would have made more money just buying an S&P 500 index fund.

Paul Allen's art didn't outperform the stock market

Allen would have likely made more money buying an S&P 500 index fund.

Paul Allen

Illustration of a several frames arranged galley wall style.

One of the main ways that Sam Bankman-Fried (also known as SBF) gained credibility was by finding a way to take the famous "greed is good" line from "Wall Street" and try to make it true. 

Why it matters: SBF wasn't just the face of the crypto industry; he was also the standard-bearer of the effective altruism (EA) movement. That, too, has been damaged by his downfall.

How it works: As a recent glowing profile of him from one of his investors put it, SBF adopted a philosophy, EA, whereby "he was going to get filthy rich, for charity’s sake." (Annoyingly, the profile has now been taken down, but you can read it here or just ask me for the PDF.)

By pledging to give away all his wealth and ostensibly abnegating any material luxuries, SBF created a world where he had no real fear of losing money.

Or, as the same profile put it: "If the amount won multiplied by the probability of winning a bet is greater than the amount lost multiplied by the probability of losing a bet, then you go for it." 

The catch: SBF seems to have been bad at actually giving his billions away, beyond a few relatively small political donations. 

His philanthropy, the FTX Future Fund, claims it has "committed over $160 million" in grants — but it's unclear how much of that was actually paid out. 

The fund's entire staff has now resigned. 

Between the lines: SBF was a hedge-funder at heart — someone who turns money into more money. In his mind, the opportunity cost of giving away money today was enormous, since he could turn it into much more money tomorrow. 

When SBF did spend real money, on things like arena naming rights, SuperBowl ads, or speaking fees for former heads of state, it was aimed at generating growth for FTX. That helped to create a $32 billion valuation for his exchange — paper wealth that was effectively impossible to donate to good causes. 

Weirdly, SBF also seems to have invested hundreds of millions of dollars in external VC funds over which he had no control. 

Be smart: If your purpose in making lots of money is to give it away, then it makes sense to find a job with a high disposable income. 

If giving away your money hurts your ability to make more money, that raises huge ethical and philosophical conflicts. 

SBF did try to retain moral clarity in his dealings with investors and the public. But even that fell through when crisis hit.

What they're saying: "Right now, my #1 priority--by far--is doing right by users," SBF tweeted on Thursday, adding that he would "give anything I have" to make that happen. 

The tweets are consistent with SBF's earlier letter to shareholders in FTX, where he said that "Our first priority is to protect customers and the industry" and that it was "non-negotiable."

The catch: SBF's tweet on Thursday came only after an earlier tweet thread, on Monday, where he said that “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries).”

That tweet has been deleted, probably because it's simply not true. The WSJ has reported that FTX lent more than half of its customer funds to its sister company Alameda, and Reuters earlier reported that FTX had transferred at least $4 billion of its funds to Alameda.

That would explain why FTX had to pause withdrawals on Tuesday morning — it simply didn't have client assets on hand. 

The big picture: SBF's moral priorities don't actually matter here. With FTX in bankruptcy, customers will have to fight for recovery against all of the company's other creditors. 

The bottom line: As SBF tweeted on Thursday, "I f*cked up, and should have done better." 

Sam Bankman-Fried's altruism failed

By pledging to give away his wealth, Bankman-Fried created a world where he didn't fear losing money.

Illustration of a shadow of a hand hovering over a large pile of money. 

The stock market boomed after Thursday's softer-than-expected inflation report: the S&P 500 closed up over 5%, while the tech-heavy Nasdaq Composite jumped 7% — the biggest rally in more than two years.

Why it matters: Signs of easing price pressures are helping to feed a powerful recovery for a stock market battered by the Federal Reserve's sharp rate hikes and fears of a hard landing. 

The bond market rallied, too. The yield on the 10-year Treasury note dropped more than 30 basis points to 3.81%, the biggest single-day drop since 2009.

Where it stands: Financial markets have endured a brutal sell-off in recent months. Even with Thursday's big gains, the S&P 500 is still down 17% so far this year.

The selloff has been welcomed by the Fed. So-called tightening financial conditions is how the Fed slows demand. The opposite, loosening financial conditions, may put the Fed in a potentially tricky spot — particularly if it persists.

The inflation report gives Fed policymakers cover to dial back rate hikes to a (still huge) half-point move. But chair Jerome Powell went to great lengths last week to signal to markets that slowing doesn't mean the central bank is backing down from its inflation fight.

A parade of Fed officials welcomed Thursday's softer inflation reading, but warned the battle against inflation is far from over. Speaking at a conference in Houston, Dallas Fed president Lorie Logan said: "This morning's [Consumer Price Index] data were a welcome relief, but there is still a long way to go."

Go deeper: Inflation cools more than expected in October

Stocks soar after the cooler inflation report

It's the best day for stocks in more than two years.

Pedestrians pass in front of the New York Stock Exchange earlier this week. Photo: Michael Nagle/Bloomberg via Getty Images

Year-over-year change in Consumer Price Index

Data: Bureau of Labor Statistics; Chart: Axios Visuals

After months of worrying inflation readings, there's finally some good news: Consumer prices cooled in October, and there are encouraging clues they will cool further in the coming months. 

Why it matters: The nation's price pressures are by no means resolved; they remain painfully high. But last month's moderation is a hopeful sign of easing inflation alongside a still healthy economy.

What they're saying: "The October CPI report renews some hope that a soft-ish landing might be achievable," Evercore ISI's Krishna Guha wrote in a note.

By the numbers: The Consumer Price Index cooled more than expected in October: it rose 7.7% from a year earlier, down from 8.2% the prior month, the Labor Department said on Thursday.

There was a sharp deceleration in core inflation, a key gauge that strips out food and energy costs. It rose 0.3% last month, after rising 0.6% in September.

On an annualized basis, core prices rose 3.3%. That's still much too high for the Federal Reserve's comfort, but it's an improvement from previous months.

What's going on: Economists had been bracing for a significant slowdown in goods inflation as supply chain issues ease and consumers shift spending patterns. Finally, that slowdown happened in a notable way last month. 

A measure of goods inflation that excludes food and energy turned negative, for only the second time since February 2021. It fell 0.4%, helped by falling prices for apparel and used vehicles.

The concern in recent months has been inflation building on the other side of the economy — the services sector, where costs can be stickier. Prices overall rose more slowly there, too, thanks to the anticipated decline in health insurance costs, along with cheaper airfare. 

Shelter is still the inflationary boogeyman, but private sector data offers encouraging results that rent and home prices are on the decline. That will be slow to feed through to official government data.

Yes, but: This is just one month's data, and there is no guarantee there won't be other shocks that push prices back up.  

The Fed has said it wants to see consistent signs inflation is slowing down to be sure this month's report isn't a blip.

This summer, there were hopes inflation was turning the corner. That optimism was crushed after subsequent high readings proved that was not the case.

Inflation cools more than expected in October

A bigger-than-expected easing in price pressures for items like used cars and apparel helped pull the overall index down.

Inflation

Data: YCharts; Reproduced from Razum Capital; Chart: Axios Visuals

Tesla is now more valuable than the combination of the world’s top seven traditional auto makers, despite only delivering half a million cars this year. 

Why it matters: Anyone searching for evidence that the stock market and the real economy are not the same thing, should look no further.

Tesla’s frenzied ride in the capital markets culminated on Monday in the company being the largest entrant ever be included in the S&P 500, the main benchmark stock index.  

Tesla’s true believers are not paying for actual performance, but they are betting on Elon Musk as a visionary and the potential upside in the still nascent electric vehicle market.

The merits of that investment thesis diverge greatly from the current state of affairs in the automotive industry, and the broader economy. 

Reality check: The overall equity market’s meteoric rise in the face of a U.S. economy that will end 2020 3% smaller than it started the year, is just the latest example of the economic reality decoupling from stocks.

The equity market backdrop is a simple case of buyers needing to “invest in the market you have, and not the one that you want,” says  Quincy Krosby, chief market strategist for Prudential Financial. 

“It is a market that has been engineered by the liquidity of central banks. ... It is surprising how far we've come, and that includes Tesla," Krosby says.

Driving the news: While Tesla mania was once limited just to those who back Musk, after today anyone invested in an S&P index fund is essentially being forced along for the ride.  

After months of anticipation and active buying, technical pressure pushed the stock down about 6% after its S&P 500 debut.

That's happening alongside a broader market decline tied to a new wave of coronavirus concerns in the UK.

What they’re saying: “Tesla shares are in our view and by virtually every conventional metric not only overvalued, but dramatically so,” wrote Ryan Brinkman, a JPMorgan analyst, in a research note. 

In the past two years, Tesla’s shares have risen more than 800% as analysts have increased average 12-month price targets more than fourfold and simultaneously lowered earnings per share estimates annually through 2024, Brinkman notes. 

Yes, but: Tesla makes cars, but they could also be categorized alongside pure tech or electric vehicle companies. It is early in the "golden age of EV playing out globally," says Dan Ives, an analyst at Wedbush Securities.  

Ives estimates that EV sales will grow from 3% of overall auto sales to 10% by 2025. "Many of the naysayers are probably the same individuals that thought LeBron wasn't going to be a good basketball player 15 years ago.” 

Tesla mania vs. economic reality

Evidence that the stock market and the real economy are not the same thing.

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