Rate hikes are still a ways out: that was the message from Janet Yellen and the Fed yesterday after the Federal Open Market Committee’s statement came out. However, Yellen also hinted that once interest rates do start to rise, they could go up faster than many currently expect. Rates are currently lower — and have stayed low for longer — than in any recovery in recent memory. Here’s what interest rates have looked like in every recovery since 1982:
And here’s a breakdown of how long it has taken the Fed historically to raise rates:
For the economically nerdy among us (probably you, if you’re reading Counterparties) the key question in Thursday’s Scottish referendum is the economic viability of an independent Scotland. That’s probably not what most Scots are thinking about this week, but it’s an important question for the nation’s future, should they decide to go it alone.
Scale is a big deal for Scotland, with its 5.2 million people (out of the UK’s 64 million). Politically, “the creation of the EU created a safe space for small independent countries, especially after the Cold War ended,” say Felix Salmon. However, he writes, “in terms of economics, bigger is nearly always better.”
Finally, the U.S. poverty rate is moving in the right direction.
For the first time since 2006, the poverty rate declined last year — to 14.5 percent from 15 percent in 2012 — according to a new report out by the Census Bureau. “Last year’s decrease appeared driven by fewer people relying on part-time work, as the survey found an additional 2.8 million Americans were working full-time during the year,” writes Jason Lange.
While that’s good news, the report also says that median household income increased by less than $200, to $51,939 — a gain that isn’t deemed statistically significant. Americans still earn about $5,000 less at the median than they did in 2007. Nor is the new rate reason for unequivocal celebration: Lange notes that the poverty rate was still 2 percentage points higher than it was seven years earlier.
The campaign to raise the U.S. minimum wage is gaining traction this election cycle. There are six statewide initiatives — four of them in Republican-controlled states — to raise the state wage floor above the federally mandated $7.25 per hour. “Activists on both sides of the issue say the proposals stand a good chance of passing,” writes Andy Sullivan.
This is where the initiatives are on the ballot:
The movement to raise the minimum wage has been a traditional policy initiative of the Democrats, with President Obama’s proposal to raise the minimum wage blocked by congressional Republicans. If multiple measures pass in heavily Republican states, however, Congress might feel pressure to reconsider the federal issue, says Sullivan. The ballot questions could also boost Democrats’ chances of retaining Senate control in the November midterms, adds Sullivan, by encouraging low-wage workers to come to the polls.
“Is there something going on with Olive Garden?” a friend asked me on gchat earlier today. There is, indeed, something going on with Olive Garden. Last week, hedge fund Starboard Value — which owns almost 9 percent of Olive Garden — released a 294-page slide deck on what’s wrong with the chain restaurant’s operations (it’s “the mother of all food reviews,” says Jordan Weissman). Matt Levine helpfully indexed the good slides: “The breadsticks are slides 104 and 105, the pasta water is slide 164, and don’t miss slides 142 to 149, on alcohol, or slides 167 to 169, comparing dishes on Olive Garden’s website to pictures in the actual restaurants.”
One of the sticking points that got the most attention was Olive Garden’s signature unlimited breadstick deal. It isn’t that Starboard wants Olive Garden to ditch its deal, as many (including us, originally) reported, but just that the company would save money by waiting for customers to ask for more breadsticks, rather than bringing extra out that will just go to waste. “Starboard likes the unlimited breadsticks marketing, it just doesn’t like the way they’re delivered,” says Joe Weisenthal.
Radio Shack is considering bankruptcy. The electronics retailer has struggled in the digital age, and announced today that its CFO, John Feray, resigned last week. He will be replaced by Holly Etlin, a managing director at AlixPartners, which has been advising Radio Shack financially since 2013. Even with outside help, the company’s share price has tumbled since 2010:
Bankruptcy isn’t quite as helpful for a company as it used to be. While retailers used to be able to use Chapter 11 as a shelter to devise new business plans, with around half emerging from bankruptcy, a 2005 law has changed all of that. Reuters reports that if Radio Shack files for Chapter 11, it isn’t likely to recover, thanks to the nine-year-old law that only gives companies 210 days to turn things around. Now, only 12 percent of companies emerge from bankruptcy without going out of business. ”Circuit City Stores, Borders Group, Filene’s Basement, Linens ‘n’ Things, Coldwater Creek and plenty of smaller chains have gone out of business after filing for Chapter 11,” write Tom Hals and Nick Brown.
After months of treating the Scottish independence movement as a sideshow, Britain got something of a shock last week when the Yes campaign surprisingly came out ahead in the polls. The vote is set for September 18. The pound took a hit today, closing at $1.61 — 1 percent lower than at the open.
What happens if Scotland votes for independence? Well, nothing immediately. “None of the details are settled today and everything you hear from either side is a campaigning and negotiating stance,” writes Guan Yang. Of course, he also adds that “the alternative, to pre-negotiate all the terms, is unworkable, because the British government has already demonstrated a willingness to be excessively inflexible in the hopes that Scots will vote no.” Basically, only if Scotland votes yes will the two sides actually come to the negotiating table.
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The economy added 142,000 jobs in August. It was a pretty big disappointment, considering the consensus estimate was around 225,000. The unemployment rate ticked down to 6.1% from 6.2% — bad news, since the decline comes from people dropping out of the labor force, rather than people getting jobs. Nick Bunker and Heather Boushey sum it up: “The U.S. economy is steadily if slowly expanding but not enough to spark sustained growth in jobs and wages and a commensurate decline in unemployment.”
Cardiff Garcia writes that “the report is hard to reconcile not only [with] other recent indicators [ISM data was great, auto sales are up, initial jobless claims were unchanged in August] but also with the obviously stronger momentum in prior jobs reports this year.” However, he continues, “if the acceleration in the recovery since the end of the first quarter has slowed, it wouldn’t be the first time that the US economy has head-faked observers.”
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The European Central Bank has started the march toward quantitative easing. At today’s ECB press conference, president Mario Draghi announced that “the Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs).” In the words of the WSJ’s Alen Mattich, Draghi “pulled out the long bow, notched the biggest monetary arrow he was allowed, gave a mighty pull and let fly…”
Technically, the news this morning was the surprise cut in interest rates, to 0.05 percent from 0.15 percent, but the fact that ABS purchases will begin in October was really what people got excited about. About those purchases: should they be considered QE, a policy that Draghi hinted that the ECB might finally be getting around to at a speech last month at Jackson Hole? It’s unclear. It really depends on how you define QE.
No longer bringing in a government salary, Eric Cantor has decided to try his hand at investment banking. The former House majority leader will become a vice chairman and managing director at the investment banking boutique Moelis. His compensation will be around $3.4 million through the end of next year (plus “the reasonable cost of a New York City apartment”).
What will Cantor do at an investment bank? Probably not a lot of Excel. Dennis Kelleher, the head of the public-interest group Better Markets (which opposes the banking lobby in Washington), says he’ll likely be lobbying for Wall Street among his former colleagues after his mandatory one-year ban expires next August. Kelleher tells Annie Lowrey, “Wall Street is after what it’s always buying in Washington: access, influence, and unfair advantage.” He also gets into specifics: