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Fed announces major policy shift; U.S. investment banks cash in on Ant deal

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Low rates forever

“The Federal Reserve approved a major shift in how it sets interest rates b y dropping its longstanding practice of pre-emptively lifting them to head off higher inflation, a move likely to leave U.S. borrowing costs very low for a long time,” the Wall Street Journal reported. “It won’t lead to a significant change in how the Fed is currently conducting policy because it had already incorporated the changes it formally codified Thursday.”

“But the shift marked a milestone. It amounted to the most ambitious revamp of the central bank’s policy-setting framework since the Fed first approved a formal 2% inflation goal in 2012. By signaling Thursday it wanted inflation to rise modestly above its 2% target, the Fed revealed how the global central-bank principle of inflation targeting, widely adopted over the last quarter century, might have outlived its usefulness in a world of lower interest rates.”

The Fed’s new strategy “means that interest rates are likely to stay exceptionally low for longer — a boon to people looking for work, buying a home or investing in stocks,” the Journal said. “Rates on auto loans, credit cards and mortgages are likely to stay low.” But it “won’t be welcome news to savers relying on interest income.”

The new policy means “low rates forever and a day,” said Diane Swonk, chief economist at Grant Thornton LLP.

(More Fed coverage in the Financial Times, New York Times and Washington Post.)

Wall Street Journal

Piece of the pie

The “biggest initial public offering in history” will be taking place in Hong Kong and Shanghai later this year, but three U.S. investment banks — Citigroup, JPMorgan Chase and Morgan Stanley — will be major beneficiaries of the deal, alongside the state-owned China International Capital. The three American banks will be underwriting the Hong Kong tranche for Ant Group, which is expected to raise as much as $30 billion.

Backup AI

Visa said it has “developed a more advanced artificial intelligence system that can approve or decline credit and debit transactions on behalf of banks whose own networks are down. Visa said its backup system will be available to banks who sign up for the service starting in October.”

The technology is “an incredible first step in helping us reduce the impact of an outage,” said Rajat Taneja, Visa’s president of technology. “The service, Smarter Stand-In Processing, uses a branch of AI called deep learning that roughly mimics neurons in the human brain and is an underlying technology powering self-driving cars, voice-enabled digital assistants and facial recognition.”

AML action

The U.K.’s Financial Conduct Authority “is proposing to expand an annual financial crime reporting requirement to a wider set of companies, including authorized financial services firms that hold client money or assets, electronic money institutions, crypto asset exchange providers, and custodian wallet providers.”

“The additional information provided by a wider range of companies across different sectors and firm sizes would help the FCA focus its resources on companies whose activities may pose potentially higher money-laundering risks, the regulator said. The FCA said it thinks the proposed requirement would also improve companies’ money-laundering systems and controls and help strengthen the U.K. financial system’s integrity.”

Financial Times

Double-edged sword

The chief executive of Klarna, a Swedish buy-now, pay-later lender, said the company is “getting closer” to going public, with a deal possible in “one or two years.” “Europe’s largest privately owned fintech,” according to the FT, was valued at $5.5 billion a year ago.

CEO Sebastian Siemiatkowski told the FT that “volume increased 44% in the first half of 2020 compared with a year ago while revenues rose more than a third to SKr4.5 billion ($517 million). But credit losses at the group — which provides mainly online payment services for the likes of Ikea, Nike, Asos and H&M — almost doubled, causing operating losses to jump almost nine-fold to SKr690 million.”

Quotable

“This change may appear subtle, but it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.” — Federal Reserve Chairman Jerome Powell, announcing a policy change that will keep interest rates low for years even if inflation rises above the Fed’s 2% target.

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