Source: Barron's Chinese Author: Nicholas Jaskinski Evan Greenberg, CEO of Chubb Ltd, has a highly influential fan - Warren Buffet, CEO of Berkshire Hathaway. Berkshire Hathaway disclosed last month that it held 6% of the shares in Chubb, one of the world's largest insurance companies, by the end of 2023. Berkshire itself is a major participant in the insurance industry, but it is not the only buyer. In the past year, Chubb's stock return, including dividends, was about 40%, surpassing the S&P 500 index's total return of 25%, and making the company's market capitalization reach $110 billion. This increase in market capitalization reflects Chubb's outstanding performance, which is attributed to its prudent underwriting practices and conservative management of its investment portfolio of about $140 billion. The company's earnings per share increased by 48% in 2023 and its book value per share increased by 21%. Greenberg is the son of Maurice "Hank" Greenberg, the former CEO of American International Group (AIG). Greenberg worked at AIG for 25 years, rising through the ranks. He left the insurance company in 2000 and took over Ace Limited in 2004. The company merged with Chubb in 2016, the largest M&A in the property and casualty insurance industry at the time. Today, Chubb is the largest commercial insurance provider in the United States, and the company is also known for its high-end homeowner insurance for the wealthy. However, about half of the company's premiums last year came from outside the United States. Asia has always been a growth area where the company is bullish: Although Asia accounts for 40% of global GDP, the insurance industry accounts for only 26% of the global insurance market share. This gap is expected to narrow over time. Greenberg sits on the board of several nonprofits that focus on international and Asian affairs. Barron's recently interviewed Greenberg about his underwriting philosophy, the challenges of dealing with increasingly frequent climate disasters, and US-China relations. Following are the edited excerpts of the conversation.
Authors: Ed Yardeni, Eric Waldstein.

The Fed is almost certain to cut interest rates this Wednesday, but it needs to make an important decision: is it going to cut by 50 basis points or 25 basis points?

A 50 basis point cut is a common size for starting an easing cycle, but the economic environment for this rate cut is different: there are no clear signs of an impending recession in the US economy. Therefore, a 25 basis point cut might be a better choice, but we don't know if the Fed will do that.

In every monetary policy easing cycle related to financial crises and economic recessions, the Fed has started the cycle with a cut of at least 50 basis points. However, this time it is more like the easing cycle of 1995, when the Fed started the cycle with a 25 basis point cut to rejuvenate the slowing US economy.

In fact, this time is different from the start of most easing cycles. In the past, the Fed initiated easing cycles because financial crises led to credit tightening and pushed the economy into recession. This time, the situation is not the same.

However, the federal funds rate futures market believes that the probability of a 50 basis point rate cut on Wednesday is greater than that of a 25 basis point cut. Those who are betting on a significant rate cut by the Fed must have the idea that "everything in the past was just a prologue". In fact, in the past 10 easing cycles, the federal funds rate has averaged a decline of 418 basis points from peak to trough. Therefore, past experience indicates that the Fed still has a long way to go before ending its accommodative monetary policy, so it should accelerate its pace and cut rates by 50 basis points instead of 25 basis points, especially if the Fed is trying to reduce the risk of an economic recession.

"All past events are prologues" is a quote from Shakespeare's play "The Tempest." The problem with this quote is that the actual situation is not always the case (in fact, it is not even the case in the play itself). I prefer Mark Twain's quote, "History doesn't repeat itself, but it often rhymes." Since the middle of 2022, I have always believed that the stubborn economic "hard landing" has been exaggerated, and they are still doing so now.

However, concerns about a recession are undoubtedly having a greater impact on Fed officials because their concerns about inflation have already eased a lot. After the CPI data for July and August showed that inflation continues to slow down, this has become very obvious, and at the same time, data shows that the labor market is cooling down.

This indicates that the labor market is normalizing, rather than weakening as feared by Fed Chairman Powell and others. Powell's recent major change of position - from hawk to dove on the issue of inflation - was evident in his speech on August 23 at Jackson Hole, Wyoming.

Powell said, "The time for policy adjustments has come, the direction of action is clear, and the timing and magnitude of interest rate cuts will depend on the balance between future data, evolving outlooks, and various risks. We will make every effort to support the labor market and further stabilize prices. As the constraints of monetary policy appropriately ease, there is good reason to believe that inflation will return to the 2% level, while the labor market can maintain its strong momentum. The current level of policy rates gives us enough room to address any potential risks we may face, including the risk of further deterioration in the labor market."

Powell's meaning is that he does not want to see a further weakening of the labor market. Some may argue that to avoid this, wouldn't it be better to cut interest rates by 50 basis points instead of 25 basis points? Here are the pros and cons of a 50 basis point cut:

Benefits of a 50 basis point interest rate cut:

1. Provides stimulus to sectors of the economy that need it. A larger interest rate cut helps to revive the sectors of the economy that have been most affected by tight monetary policy. Both residential and commercial real estate will receive a boost, with CRE loans becoming easier to refinance, thereby reducing the risk of financial crisis in the industry. The recovery in housing starts will provide a boost to the manufacturing sector, which has been in decline, and the rebound in existing home sales will benefit retailers in the housing sector.

2. Boosts consumer and business confidence. The performance of consumer sentiment has been relatively low, and at the same time, after the Small Business Optimism Index rose in July, it declined in August and remained at a relatively low level. It may need the stimulus of an interest rate cut.

3. Bullish labor market. All of the above factors will bring more job opportunities and more recruitment. Various indicators measuring layoffs show that the current unemployment rate in the United States is still low, but the unemployment rate in August has risen from 3.8% a year ago to 4.2%, which is due to a decrease in job opportunities for the unemployed. Loose monetary policy helps increase job opportunities and control the unemployment rate.

Disadvantages of a 50 basis point interest rate cut:

1. It is too early to announce the completion of the anti-inflation task. Although inflation has slowed significantly, it has not yet dropped to the level of 2%. The recent overall decline in inflation in recent months is mainly due to a decrease in durable goods prices, and given the continuous decline in the U.S. import price index, prices for durable goods may continue to decline.

Due to the pressure on crude oil prices, the pressure on energy prices in the CPI has also eased. If the decline in gasoline prices and prices of durable consumer goods can boost consumer confidence, increase their real purchasing power and spending, then a significant interest rate cut may not be necessary.

At the same time, the inflation stickiness in the service sector of the CPI is still strong. Rent accounts for a large weight in the CPI, and it is currently slowing down, but considering the increase in rent in August, this is not so certain. Excluding housing, service sector inflation in August rose 4.3% year-on-year, which indicates that it is too early for the Fed to declare the completion of the anti-inflation task.

2. Skilled labor may face shortages. The reason for the continuous increase in unemployment is young people who have not received high school education. If the Fed cuts rates too quickly, it may result in two outcomes: an increase in demand for goods and services, and an increase in job vacancies.

This is a good phenomenon. However, what if unemployed workers do not have the skills to meet the increasing job vacancies? The NFIB survey of small business owners in August found that 56% of the owners said they could not find qualified workers to fill vacant positions, which is higher than the 49% in July and the highest level since September 2023.

Federal Reserve officials will certainly be concerned that stimulating demand for goods and services in a tight labor market could result in a wage-price spiral.

3. The actual federal funds rate is not real. The Fed stopped raising interest rates 14 months ago, presumably because the Fed believed that rates were sufficient to bring inflation down to the target of 2.0%. Powell often says that this target can be achieved without causing an economic recession. So far, there haven't been any troubles.

However, officials like Powell seem to be concerned that as inflation declines, the actual federal funds rate is rising, so the Fed's monetary policy will automatically become more restrictive. In my opinion, the actual federal funds rate is a fictitious concept, and it is meaningless to adjust the overnight loan rate based on the percentage change in CPI each year.

Since the Fed started raising interest rates in March 2022, real GDP has grown by 5.5%. Since the Fed stopped raising interest rates, the economy has remained resilient and has shown little sign of loosening at the current level of interest rates.

4. Stock prices may experience a "melt-up". If the Fed significantly cuts interest rates, stock prices may once again rise significantly, potentially creating a market bubble reminiscent of the late 1990s dot-com bubble.

The most important point is that there is no recession on the horizon. If the Fed only cuts interest rates by 25 basis points, the "hard landing camp" will undoubtedly say that the rate cut is too small and too late. In my opinion, the current 25 basis point rate cut is sufficient until the next batch of data is released, and I expect the next batch of data to once again demonstrate the resilience of the U.S. economy.

If the Fed cuts interest rates by 50 basis points, the probability of an economic recession will further decrease, but the probability of consumer price increases and/or asset inflation will increase.

The author of this article, Ed Yardeni and Eric Wallerstein, are respectively the President and Chief Market Strategist of Yardeni Research Inc., a global investment strategy and asset allocation analysis and advisory provider.

Editor/rice