Fed interest rate rises are back

0:00This episode is brought to you by Hard Lessons, a Morgan Stanley podcast. Iconic investors like Stan Druckenmiller, John Gray and Rick Reader break down calls that worked. I knew that this stock would go up for at least two or three years and go up a lot. One's that didn't. I quite frankly thought the company could have reversed course. They didn't. And what they learned in between. When you buy everything and it goes up, it doesn't train you to be a great investor. It sees hard lessons and make all the difference. Listen to Hard Lessons, wherever you get your podcasts. Good morning from the Financial Times. Today is Thursday, September 17th. And this is your FT news briefing. US interest rates are going up and the EU wants to stop a flood of hybrid cars made in China. Plus, we look at how artificial intelligence is changing warfare. I'm Sonya Hudson in from Arc, Filipino. And here's the news you need to start your day.

1:00The Federal Reserve raised interest rates by a quarter point yesterday for the first time since 2023. At a press conference after the unanimous decision, Fed Chair Kevin Worse said that inflation has been above target for too long. Today's policy action will support a timely return to the committee's 2% goal. This committee will deliver price stability. Worse was up against more than just sticky inflation heading into this meeting. He's also faced a major sell-off in the bond market and US President Donald Trump calling for lower interest rates. The FT's US economic senator Claire Jones is here to talk about it. Hi, Claire. Hi, Sonya. So, what's up with the FT news? I'm going to talk about the FT news. I'm going to talk about the FT news. I'm going to talk about the FT news. I'm going to talk about the FT news. I'm going to talk about the FT news. I'm going to talk about the FT news. So, why did Worse say the Federal Reserve opted to raise rates now? I mean, inflation has been above the 2% target for years.

2:00Well, absolutely more than five years, in fact. So, the rationale for acting now, which Worse gave yesterday at the press conference, was that the recent news on inflation has suggested that the Fed's not be making much progress in terms of lowering it towards its target. The plain fact is that inflation is too high and has been for too long. This summer's inflation readings do not tell me that underlying trends have meaningfully improved. The other aspect of it was that Worse and the rest of the committee were very bullish on the US economy. Given that resilience and the potential for even greater performance, an attitude of optimism is exactly what I heard inside the FOMC these last two days. And the other part of the Fed's dual mandate, which is not about inflation, but about the labor market, is an area in which he thinks quite a lot of progress has been made.

3:05We've seen a very good jobs report for last month. So, the labor side of the Fed's congressional remit is in good shape. So, our predominant focus is on the price stability side of our mandate. And I think that's really convinced Worse and others on the committee that they can afford to raise rates without damage and growth and jobs. Claire, the other thing I'm wondering about is just how effective raising interest rates will be on lowering inflation, given that one of the biggest factors in this recent surge of price pressures has been the war in Iran and Worse doesn't have control over that. I think that's true. The raising interest rates, especially by a quarter point, is not a cure all. But what I think this move does do is address some very real concerns heading into this meeting that the Fed unwars in particular wasn't credible when it came to a commitment to bring inflation back under control.

4:07And it will help reassure investors in those bomb markets that you mentioned earlier. That Fed independence remains and that would do some good, I think. Now, President Donald Trump wanted a very different outcome from this meeting. He's called for lower interest rates and there's been some concern about him eroding the independence of the Fed. What did Worse have to say about Trump? Well, he got the question and he chuckled and then said very little. What is your message here to President Trump who has repeatedly called to cut interest rates, not raise them? I've got nothing for you on a discussion with the president. Worse was savvy enough yesterday to not get drawn in to say in anything that might exacerbate issues that the Fed has with the White House. The mood music around this in recent days has been that, you know, while this isn't a decision that the White House will like, it did after all,

5:10nominate Worse with a view to seeing him cut US borrowing costs, not raise them. He's unlikely to face the sort of insults that his predecessor, Jerome Powell, got from the US president. I wouldn't expect Worse to be labeled a numbschool or a moron anytime soon. Claire Jones is the FT's US economic senator. Thanks Claire. Thanks, Sonia. The EU is asking China to export fewer hybrid cars. Chinese-made vehicles are flooding the European market and that's hurting car makers on the continent. Brussels now wants Beijing to restrict its hybrid vehicle sales from 50% of the EU market to just 15. And if China doesn't, it'll face higher tariffs. That's according to three people familiar with the situation.

6:11It's part of the bloc's effort to lower its soaring trade deficit with the country. Our trade deficit with China is now 1 billion euros a day. That's European Commission President Ursula Von der Leyen in her annual State of the Union speech yesterday. It has reached a tipping point. Some say the second China shock is looming, but it's already here. The EU and China will meet in Beijing for trade talks next month. China's Ministry of Foreign Affairs did not immediately respond to a request for comment, and the European Commission declined to comment. AI is changing the way people fight wars and Ukraine has become a testing ground. The developments there are informing other conflicts like the US war with Iran. But what are the risks as warfare becomes more automated?

7:12Allison Killing is the FT's Senior Visual Investigations Reporter. She's been looking into this. Hi, Allison. Hi. So let's start with drones. Ukraine is known for its drone technology and AI is a part of that. How does that work? So there's a few ways in which this is built into drones. It's used for flight stabilization to try and help when it's very windy, for example, or to help drones fly at high speed around obstacles. But as time goes on, we're also starting to see more advanced functions being built into the drones. So there was one particular kind of drone that we looked at, which is the SAKA Scout. It's quite small. It has the computing power of like a PlayStation 4, but it can recognize different categories of military equipment. So before it launches, the human operator will say like, okay, like we really want you to hit tanks or we really want you to hit missile launchers. And once it's inside the area that the operator has assigned, it will strike any of those objects without waiting for the operator to intervene and confirm.

8:14The problem is though that it's not able to discern whether the tank on the front line is a Russian tank or Ukrainian one or whether a soldier is Ukrainian or Russian. And so the human operator has just had to define a kill box in which everything is considered to be a target. Wow. Okay. So there's still a lot that could go wrong here. But beyond drones, what else are we talking about when we refer to AI use in weapons? I think AI use in warfare is maybe a better way to think about it. One of the key ways that it's being used is to process huge amounts of intelligence and to sort of a mass that, analyze it. So that could be everything from satellite imagery. It could be videos from drone feeds. Could be human intelligence topography. The amount of ammunition you have or the position of your assets and the enemy assets. And what that means is that it can generate targets much more quickly. How quickly are we talking? I mean, Katrina Manson, who recently wrote a book on project Maven in that she was told by one US intelligence official that it had helped US forces to increase the number of targets that they will look at.

9:26From 100 to day to 1000 and now that large language models have been integrated that number has gone up to 5000. And that really helps give context to another number that you mentioned in your reporting, which is that the US and Israel hit 13,000 targets in the first 38 days of the Iran war. Alison, what do you think this change in scale could mean for warfare going forward? I think we're already starting to see some of the limits of what AI can offer. There's limits to computer vision and its ability to recognize different sorts of vehicles and whether they're military vehicles, even if the light changes that can change a model's determination of whether this is should be a target or not. So there's quite a lot of scope forever in there. There's also problems of potential floor days are coming in there. That's something that we saw in Iran when this school was hit. Yeah, this is the girls school in Manab, which had been labeled as a military target.

10:28And the strike ended up killing 150 people, most of whom were children. Yes, what we've also seen what military experts have talked to me about is it's kind of helped to emphasize this idea of strategy where if you can hit lots of the key nodes in your opponents military system that your enemy system will just collapse. And the US has hit these 13,000 targets in the early days of the conflict in Iran, but the Iranian military did not collapse. And it sort of shows that just because you're hitting a lot of things, that isn't the same as winning the war. It's not the same as a strategy that's connected to political outcomes. Alison killing is the FT's senior visual investigations reporter. Thanks, Alison. Thank you so much. You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT news briefing. Check back tomorrow for the latest business news.

11:29The new episode of the next five is all about CFOs in an AI world. Patrick Villanova at Blackline joins me. CFOs are inherently riskabers. We have to be very prudent when we implement AI. As does Oliobrassi at high gate. My rule is no human owner means no go live. And Gina got sight at FTI consulting. There's no excuse. You're the CFO. You're signing the name to the financial statements. Listen to the next five wherever you get your podcasts. Enjoy. If you've got a teenager, it's time to have the talk. You know, about investing. With the new Schwab teen investor account, teens can gain hands-on investing experience and build positive money habits. It's an account co-owned by you and your teen. So you can monitor and engage with the account while your teen learns how to invest and manage money.

12:31Learn more at Schwab.com slash teen.