National

Federal Reserve officials last month agreed it would be necessary to continue raising interest rates to battle hot inflation, though they also discussed slowing the pace of hikes "at some point" to assess how the economy is digesting higher borrowing costs, minutes from their last policy meeting show.

Why it matters: The minutes indicate the Fed's resolve to raise interest rates to a level that sufficiently slows the economy — and, officials said, keep it at that level until it's clear inflation is slowing down.

Catch up quick: The minutes are from the Fed's July 26-27 meeting, where officials agreed to raise interest rates by three-quarters of a percentage point after an identical move in June. These were the steepest rate increases since 1994.

The backdrop: Since the Fed gathered last month, there have been new updates on how the economy evolved, including a report that showed plummeting gasoline prices dragged the Consumer Price Index down to zero in July. 

The minutes released Wednesday do provide a clue that alone won't be enough to soothe Fed officials anxious about rising prices. At the meeting, officials agreed that "declines in the prices of oil and some other commodities could not be relied on as providing a basis for sustained lower inflation, as these prices could quickly rebound."

The big picture: The minutes largely reflect the tone of Fed chairman Jerome Powell, who told reporters after the policy meeting the central bank would eventually slow the pace of interest rate hikes. That sparked a stock market rally, with some traders interpreting that comment to mean the Fed would soon ease up its aggressive stance. 

According to the minutes, officials agreed it would "likely become appropriate" to eventually dial back the pace of interest rate hikes as the central bank assesses the effects its policy is having on the economy and inflation. 

Speaking at the press conference, Powell left the door open to another "unusually large" interest rate increase at its upcoming meeting, though he said the decision will depend on incoming economic data. 

Most traders expect the Fed to raise interest rates by a half-percentage point — a bet that firmed up after the release of the minutes. 

The bottom line: The minutes show Fed officials' commitment to bring inflation down and point out the downside of wavering on this stance. The Fed faced a "significant risk" that high inflation could become entrenched if the public started to doubt the Fed's commitment to adjusting interest rates, the minutes say.

But, notably, many officials also pointed out the risk of overdoing interest rate hikes and crimp the economy more than necessary to bring inflation down.

Fed will keep raising rates until inflation cools down, minutes show

Minutes also show officials discussed slowing the pace of hikes "at some point" to assess how the economy is handling its policy moves.

Fed chair Jerome Powell stands at a podium

Fed chair Jerome Powell speaks during a news conference last month. Photo: Mandel Ngan/AFP via Getty Images 

Federal Reserve

Stock market

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

Axios Markets

The Federal Reserve has hit the brakes on the economy, in an attempt to slow inflation. Housing is where the rubber meets the road, 

Why it matters: Since the pandemic, the hot housing market — and associated boomlets in renovations and new construction — have been key contributors to the post-COVID economic recovery. That's changing.  

Driving the news: The number of newly started homes plunged in July. 

Starts of single-family homes fell 10% from the prior month, hitting their lowest point since June 2020 near the depths of COVID-era uncertainty. 

How it works: Fed rate hikes have helped push mortgage rates sharply higher, making purchasing a new home much more expensive. 

The 30-year fixed mortgage rate, which was hovering around 3% last November, exploded to over 6% in June. (It's since eased back to around 5.2%.) 

Since home prices are up over 30% over the last couple of years, the surge in mortgage rates was the perfect cocktail for a collapse in affordability.  

In fact, housing affordability — as measured by an index produced by the National Association of Realtors — is the lowest since 1989 .  

Since fewer people can buy a new house, homebuilders are making fewer.     

National Association of Realtors Housing Affordability Index

Data: National Association of Realtors; Note: An index of 100 means the typical family has exactly enough income to qualify for a mortgage on the median-priced home; Chart: Axios Visuals

The big picture: This might be a bad thing for economic growth and employment, but by slowing housing demand, the Fed hopes that house prices eventually start to edge lower. 

If that happens it should take some of the sting out of a key measure of inflation — the Consumer Price Index — which is heavily skewed toward housing costs. 

But so far there's been little sign of a slowdown in prices. Prices for existing homes — the vast majority of the homes sold — were up 16% since year-end, as of June. 

What we — and everyone else — are watching: Home prices, obviously. And not just on Zillow.  

An update on existing home sales — and prices — is due Thursday at 10am ET.   

Fed's rate hikes hammer housing affordability

The Fed is trying to make home buying more expensive. It's working.

Illustration of nails and a wooden plank, with some nails hammered fully in and other nails laying down unused

Economy

The world's economic engine is sputtering

China's economy has been the largest source of growth for global GDP for much of the last two-plus decades.

Illustration of a car's tailpipe replaced with rolled up 100 Yuan banknotes, sputtering exhaust

Global financial system

Institutional philanthropy, unlike individual charity, tends to focus on influencing governments. One sign of its current importance is the Inflation Reduction Act that is set to get signed into law next week.

Why it matters: Philanthropy is trying to shape the successor to neoliberalism.

The big picture: Neoliberalism, as an intellectual paradigm, replaced Keynesianism in large part thanks to significant philanthropic funding. 

In a 2017 memo, Hewlett Foundation president Larry Kramer identified the William Volker Fund as a key early player, with at least half a dozen later funders, including the Koch family foundations. 

Those foundations helped neoliberalism, with its emphasis on the power of free markets, replace the Keynesian vision of economies controlled by governments.

Where it stands: The Hewlett Foundation and others are now trying to lay the intellectual foundations for whatever comes next — whether it's called productivism, democratic capitalism, supply-side progressivism, or something else. 

The big idea: Something will replace neoliberalism, which is dead. And that something should not be anti-democratic ethno-nationalism. 

What they're saying: "The Inflation Reduction Act is solidly what we’re looking for," says Hewlett president Larry Kramer. "We had nothing directly to do with that bill. But the frameworks that underlie it were all things that were funded directly on the Hewlett side."

Go deeper: Axios' Andrew Freedman unpacks the politics and economics of the act, and explains why it doesn't include neoliberal climate solutions like a carbon tax.

The bottom line: Kramer is fully aware of the irony involved in an unaccountable private foundation trying to save democracy. But, what else can he do?

Philanthropy's post-neoliberal vision for democracy

Philanthropies are laying the intellectual foundation for what comes next.

Illustration of Supreme Court columns, with one replaced with a stack of quarters.

Philanthropy

Pretty much the entire U.S. nonprofit sector is witnessing a move from individually-determined charitable donations to institutionally-determined philanthropic strategies. 

Why it matters: A new report from the Institute for Policy Studies shows megaphilanthropy crowding out individual donations.

By the numbers: 20 years ago, two thirds of American households gave to charity. Today, it's less than half. Meanwhile, households earning more than $1 million per year accounted for 40% of charitable deductions in 2019, up from 10% in 1993.

Some $25 billion was donated by megadonors in 2021. About 80% of that $25 billion went into private foundations and donor-advised funds where the donors retain full control of how (and even whether) the money is spent. 

The bottom line: Charities like to say that "every penny counts." In reality, small-dollar donations have never mattered less. Increasingly, it's a small number of ultra-high net worth individuals, alongside even fewer old money foundations, who determine whether charities thrive or wither away.

The shift from charity to philanthropy

20 years ago, two thirds of American households gave to charity. Today, it's less than half.

Illustration of a hand with scissors cutting a ribbon in the shape of a dollar sign

Effective altruism, or EA, has become an institutionalized arm of Big Philanthropy, complete with billionaire megadonors and six-figure incomes for a slew of Western white-collar professionals. 

Why it matters: That's a big, fast change for a movement that started out about 10 years ago on a much more grassroots level, focused on things like veganism and giving away most of your earnings. 

The big picture: EA in general has come a long way from the early idea that if $4,000 can save a life in Uganda, perhaps by providing a simple tool like mosquito nets, then I have a moral obligation to send that $4,000 to Uganda, rather than, say, spend it on travel or restaurants or art. 

The bed-nets philosophy is exemplified by GiveWell, and is characterized by rigorous quantification of lives saved (or massively improved) per dollar spent.

GiveWell's biggest early donors, Facebook and Asana billionaire Dustin Moskovitz and his wife Cari Tuna, have since expanded into much more conventional philanthropy, like giving millions of dollars to a Washington think tank, or funding "a summer boot camp for PhD students on the economics of innovation", all under the increasingly broad umbrella that is EA. 

Sam Bankman-Fried, or SBF as he's universally known, is possibly an even richer EA, depending on how crypto is doing. SBF's conception of EA has expanded to include old-fashioned political donations, or even buying sports arena naming rights for $135 million. 

The idea is that the naming rights will prove profitable for his crypto company, FTX, and thereby generate more money for important causes, even as the naming-rights money is put towards fighting gun violence and poverty in Miami.

Driving the news: EA's leading thinker, Will MacAskill, has been doing a media tour in advance of the publication on Tuesday of his new book, "What We Owe The Future"; he's written a good précis for the BBC, and a slightly longer version for the NYT. Even though MacAskill's "longtermism" is highly controversial within philanthropy circles, nearly all of the coverage has been positive. 

What they're saying: MacAskill's thesis is provocative, builds on centuries of moral philosophy, and is unafraid to come to unintuitive conclusions. "If you could prevent a genocide in a thousand years, the fact that 'those people don't exist yet' would do nothing to justify inaction," he writes. "The future is just as real as the present or the past."

Go deeper: The New Yorker's Gideon Lewis-Kraus has the best profile of MacAskill, including a short history of EA and explanation of where it has ended up. 

Between the lines: As EA moved from late-night Oxford grad student conversations to Silicon Valley billionaire strategy decks, it inevitably grew in ambition, and flipped from one extreme to the other of the charity-philanthropy spectrum.

Simply saving lives of people living today is no longer enough; the new emphasis is on saving or improving the lives of people who might not even be born for hundreds of thousands of years. That project, naturally, involves funding a lot of academics.

Somehow, the result seems to be, in the words of Lewis-Kraus, that "a group of moral philosophers and computer scientists have happened to conclude that the people most likely to safeguard humanity’s future are moral philosophers and computer scientists."

The bottom line: The funding decisions made at the big EA shops — Open Philanthropy and the FTX Future Fund — undoubtedly have internal logic. They can also look quixotic and driven by the founders' personal whims, just like the decisions made at most other large philanthropies. 

Effective altruism: From grassroots to Big Philanthropy

The movement behind "maximizing good" and longtermism is evolving.

Illustration of a person in a suit holding an umbrella made of money

Billions of dollars formerly held by the Afghan central bank could end up turning American families into multi-millionaires. 

What we did: After the U.S. withdrew from Afghanistan and allowed the Taliban to take over, the Biden Administration froze some $7 billion of central bank funds. President Biden then allowed half of that money to potentially get redirected to rich Americans — including about 150 families who stand to receive eight-figure payouts. 

The intrigue: A group of families of 9/11 victims sued the Taliban after the attack, and won a summary (and seemingly symbolic) judgment when the defendants failed to show up. Now, they claim that Afghanistan's central bank reserves belong to the Taliban, and can therefore be seized in payment of those obligations.

The other side: There's a strong case to be made that the funds belonged to Afghanistan, not to the Taliban, and therefore can't be seized. That might yet be the final verdict in the case. 

Driving the news: A group of 70 international economists, including Joe Stiglitz of Columbia and Heidi Shierholz of the Economic Policy Institute, is urging the U.S. government to give the Afghan central bank its money back — but there's no indication that anyone at Treasury is sympathetic. 

What they're saying: "Without access to its foreign reserves, the central bank of Afghanistan cannot carry out its normal, essential functions. Without a functioning central bank, the economy of Afghanistan has, predictably, collapsed. The people of Afghanistan have been made to suffer doubly for a government they did not choose."

The bottom line: At the government level, political considerations often overrule humanitarian ones. 

Taking from Afghanistan's poor

At the government level, political considerations often overrule humanitarian ones.

Photo illustration of a man holding Afghani banknotes below a photo os a Manhattan skyline

Photo illustration: Sarah Grillo/Axios. Photos: Gary Hershorn, Javed Tanveer/AFP via Getty Images

Afghanistan

The current pivot to profitability in the world of venture-backed companies is far from unprecedented. What's new is the degree to which the gory details of corporate finances at former unicorns like Coinbase and Robinhood are now public.

Why it matters: A private company can quietly battle on without its investors having to take any kind of write-down until the very end. When your financials are public, however, your struggles become public, too.

Last year’s permissive IPO market showered listings — and the associated public scrutiny — onto hundreds of unprofitable companies.

How it works: When interest rates were low and liquidity was abundant, young companies realized that they could raise large sums of money at multi-billion-dollar valuations if they invested as much as possible in future growth — a very expensive strategy sometimes known as blitzscaling.

That strategy burns enormous amounts of cash, and it tends to end in disaster if the money stops flowing before the company achieves profitability. (Exhibit A: WeWork.)

Now that money is more expensive and less abundant, it has stopped flowing to almost all such companies.

An IPO doesn't mean you're home free. Robinhood, which raised $2.1 billion in its 2021 IPO, is a good example. 

This week, the millennial-focused broker-dealer announced losses of $295 million in the second quarter and laid off 23% of its workforce — just months after cutting 9%. So far in 2022, more than 1,000 of its employees have lost their jobs.

Or see yesterday's WSJ and NYT stories on Coinbase. 

The other side: Slightly earlier IPOs found themselves with enough time, before the music stopped, to start generating cash.

Airbnb this week announced it has become so profitable that it can afford to spend $2 billion buying back its own stock.

Even the famously cash-burning Uber announced it was cashflow positive in the second quarter — although it still made a loss after accounting for things like stock compensation and its equity investments in other companies.

“This marks a new phase for Uber, self-funding future growth," said Uber CFO Nelson Chai in a release. 

The bottom line: All the formerly high-flying tech stocks have seen their valuations cut. Those cuts are much smaller for the likes of Airbnb and Uber, however — down 19% and 36% respectively since the date of Robinhood's IPO — than they are for companies like Robinhood, which has lost more than 70% of its value in its time as a public company. 

Unprofitable unicorns' public pain

Last year’s IPOs give market-watchers a front-row seat to all the gory details.

Illustration of a unicorn with a bandaid.

An obscure company started trading on July 15, at $7.80 per share. By August 3 it traded, at one point, for $2,555.30 per share. It's a pattern that looks very familiar — but don't be fooled. AMTD Digital isn't a meme stock.

Why it matters: Sometimes markets act in inexplicable ways; this was one of those cases. But there's no retail frenzy behind HKD, the ticker symbol of AMTD Digital, and there's no Discord server or Reddit thread full of teens investing their entire net worth in this crazy bet and trying to drive it to the moon.

Between the lines: Consider Wednesday, the most frenzied day of trading. If you look at the minute-by-minute tape of that top tick, however, "frenzied" hardly describes what was happening. 

There was one trade at 1:08pm at $1,800 per share, then a gap of six minutes where nothing happened, then another trade at $2,090, then a five-minute gap, one more trade at $2,200, another six-minute gap, and then the single $2,555.30 trade at 1:25pm. 

By Thursday afternoon, more than an hour passed without a single share trading hands. 

Be smart: AMTD Digital is a small Hong Kong company that has a separate listing in New York. In no way should the company as a whole ever be valued by extrapolation from a single weird trade in its American depositary shares.

The bottom line: Meme stocks act in weird but real ways — companies like AMC movie theaters can raise real money from their meme status, and hedge funds like Melvin Capital can lose money if they find themselves on the wrong side of a meme trade.

AMTD Digital, by contrast, is just odd. It saw a few bizarre trades, for reasons we can only guess. It's unlikely that any great fortunes were made or lost. Either way, don't blame the kids.

AMTD Digital isn't a meme stock

Sometimes markets act in inexplicable ways; this was one of those cases.

Minimum value of The Currency NFTs

Data: NFT Price Floor; Chart: Axios Visuals

When given the choice between physical and digital art, people prefer the physical. That's the verdict from one of the more interesting NFT experiments, which came to its major inflection point last week.

How it works: UK artist Damien Hirst made 10,000 small (letter-sized) paintings on paper, in a series called The Currency. He then minted 10,000 NFTs, each one corresponding to one of the paintings, and sold 9,000 of them for $2,000 each.

The catch: The NFTs were freely tradable immediately, but after a year, the owners had to make a choice. Either "burn" the NFT in exchange for the physical artwork — or keep the NFT, in which case Hirst would set fire to the corresponding painting.

The verdict: Hirst decided to keep his NFTs and burn the corresponding paper works. After all, he already owns a huge amount of physical art by himself and others.

Of the other 9,000 NFTs, however, only 3,851 now remain. The rest were burned, exchanged for physical art. That's a 57% to 43% vote in favor of reality.

Why it matters: The NFTs are much easier to sell than the physical works — and, while they have fallen in value over the past year, they are still worth a lot more than the original $2,000 sale price.

Burning an NFT worth roughly $10,000 in order to get a physical painting is tantamount to buying the painting for $10,000. That's a lot of money for a small work on paper that's functionally identical to 5,148 other works, even if the piece of paper is signed by Damien Hirst. 

The bottom line: The Currency seemed at first glance to be a kind of conceptual game, where participants were trying to anticipate whether the physical or digital artworks would be more valuable. In the end, however, I think people just chose whichever one they personally preferred to own. For most of them, that was something they could hang on their wall.

Digital or physical art? Artist Damien Hirst experiments with NFTs

An experiment ignites a debate over the value of owning Hirst’s work digitally or physically.

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.

Business

If Trump's presidency is about to end, an unprecedented golden era for big businesses could end with it.

Why it matters: Thanks to support from the president, Congress, the Supreme Court and the Federal Reserve reaching levels not seen in recent history — if ever — large companies have done a lot of winning.

What we're hearing: Trump's policies have "created a favorable business environment," U.S. Chamber of Commerce president Suzanne Clark tells Axios in an email. 

"We’ve seen some promising economic and fiscal policy developments over the last few years." 

Between the lines: Businesses have benefited most from the people Trump put in charge. 

The Fed: The success of big corporations is perhaps best evidenced by the stratospheric level of U.S. companies' stock value relative to GDP, and that's been thanks in large part to Trump's handpicked Federal Reserve chairman Jerome Powell.

The market capitalization of U.S. publicly traded companies has grown from around 200% of U.S. GDP in 2016 to a record high 266% of GDP this year — meaning corporations are worth roughly two-and-a-half times the value of everything produced and consumed by the U.S. in a year.

In 1995, the number was about 80% of GDP.

"Big businesses are outperforming the broader economy," Julia Coronado, president of MacroPolicy Perspectives, tells Axios. 

"One of the things that's interesting is that market capitalization didn't get knocked on its ass in the current recession. It's at an all-time high." 

The Supreme Court: With Trump's first Supreme Court nominee, Neil Gorsuch, in place the Chamber of Commerce went 9-1 in cases where it supported business interests in the 2017-2018 term, its most lopsided record in six years. 

With Brett Kavanaugh on the Court in the 2018-2019 and 2019-2020 terms, the Chamber's victory rate declined to around 65% but included a historically high number of cases involving big business and many more where businesses had lost in the lower court.

"Only twice did the Court agree  to review decisions favoring business interests—and in both cases the  Court affirmed those pro-business rulings," notes the Constitutional Accountability Center, in reference to the 2018-2019 period. 

The Court's recent pro-business rulings included pushing employees into arbitration over job complaints, making it harder for employees to join class action lawsuits, limiting protections for whistleblowers and striking down the ban against sports gambling.

Don't forget: The 2017 Tax Cut and Jobs Act passed by a GOP-led Senate and House reduced corporate taxes from 35% to 21%, but it also eliminated the graduated corporate tax rate schedule and the corporate alternative minimum tax, disproportionately benefiting big companies which downsized their tax bills to record low levels.

Trump also cut funding for the IRS by $239 million in 2017 — the combination led to business taxes in 2019 accounting for the lowest portion of federal revenue on record, dating back to 1929. 

Business tax revenue as a proportion of GDP dropped by the most of any industrialized country in 2018, reaching just 1.1%.


Reproduced from Haver Analytics via MacroPolicy Perspectives; Chart: Axios Visuals

State of play: Trump's trade wars and tariffs have hurt small businesses and manufacturers but big companies managed to largely pass the costs of tariffs onto smaller suppliers. 

And since the coronavirus pandemic hit, large U.S. companies have boosted their cash holdings and many have increased their market share as smaller competitors have fallen by the wayside.

Even some of the companies specifically targeted by Trump have seen their fortunes rise. 

Amazon CEO Jeff Bezos has seen his personal fortune swell by $121 billion since Trump became president, despite a divorce. 

Chinese tech companies have seen their valuations surge on public markets and Trump's most recent target, TikTok owner ByteDance, is reportedly in fundraising talks that will value it at $180 billion, up $102 billion from its last funding round in 2018.

The bottom line: Joe Biden could potentially turn the whole place over in a first term.

He can replace Powell in 2022 and nominate at least three more Fed governors, add more Supreme Court justices by expanding the size of the court (perhaps after the 2022 midterms) and refang the IRS and Consumer Financial Protection Bureau to boost the government's revenue collection and business regulation without changing tax law.

Big businesses' corporate paradise may be coming to an end

Illustration of a beach chair and palm tree made out of money.

The decline of ExxonMobil has been remarkable in its magnitude and unexpectedness.

Why it matters: While all major oil companies are facing troubles, Exxon has fallen the farthest, in large part because it has made the biggest bets on oil and gas — and the smallest bets on renewable energy. 

While rival BP has recently promised to get to zero net emissions by 2050, Exxon has been doubling down on fossil fuels with moves like a spectacularly ill-timed $41 billion acquisition of XTO energy in 2009 and its major expansion in the Permian Basin in 2017.

Driving the news: Exxon reported a loss of $680 million in the third quarter of this year, bringing its losses for 2020 as a whole up to $2.37 billion. (In 2008, by contrast, it made a profit of $46 billion.)

The fall of an empire

All major oil companies are facing trouble. But Exxon has fallen the farthest, making the biggest bets on oil and gas — and the smallest bets on renewable energy.

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