Fed Slows for Economy's Yellow Light

Updated April 29, 2015 5:31 p.m. ET

The economy will probably rebound from the first quarter, and inflation will probably see a bit of a pickup, which will probably allow the Federal Reserve to start raising interest rates before the year is up. That is too many probabilities to have much certainty on where the Fed is actually headed.

The economy barely grew in the first quarter, the Commerce Department reported Wednesday, with gross domestic product expanding at just an annual rate of just 0.2%. Nor was there any one thing to blame the softness on. Consumer spending, business investment and exports all gave off weak readings. Inflation was low as well; overall consumer prices were up 0.3% from a year earlier, and core prices, which exclude food and energy, were up just 1.3%

The Fed, in its statement following its two-day policy meeting ended Wednesday, said the economy's recent bout of weakness partly reflected "transitory factors," and that the low inflation readings were the result of the "transitory effects" of low oil prices and the strong dollar.

Most economists would agree. Tough winter weather seems to have weighed on the economy in the first quarter, as did port problems on the West Coast. Moreover, some economists believe there is a problem with the adjustments government statisticians use to smooth seasonal swings in the economy, leading to a tendency for first-quarter readings to be too low. And eventually, the effects of lower gasoline and import prices, which also are feeding through into prices of other items, will have work their way through the system.

Forecasting something is going to happen and seeing it happen aren't the same, though. That is why the Fed, which at the beginning of the year was inclined to start tightening policy in June, isn't likely to raise rates until its September meeting at the earliest. And a September increase is predicated on the economy showing some clear signs of improvement, and inflation warming up a bit.

Those signs may have to come quickly. As they do four times a year, Fed policy makers at their June meeting will offer up economic projections, including forecasts for where the midpoint of their federal-funds rate target will be at year end. The Fed would prefer to move at meetings where Chairwoman Janet Yellen holds a press conference, although it is testing systems for communicating any moves following other meetings.

Unless fresh data clearly shows the first-quarter weakness was fleeting, the Fed's intent to raise rates may be what starts looking transitory.

Write to Justin Lahart at justin.lahart@wsj.com


GE to Cash Out of Banking Business

Updated April 10, 2015 8:59 p.m. ET

General Electric Co. GE 10.80 % made one of the biggest strategic shifts in its 123-year history by announcing plans to get out of the banking business and refocus on the conglomerate's sprawling industrial operations.

Friday's move to shed almost all of GE Capital also marked the boldest attempt yet by Chief Executive Jeff Immelt to confront the moribund stock price that has marred his 13-year career at the top.

Mr. Immelt is veering even further away from the strategy he inherited from predecessor Jack Welch. While Mr. Immelt has bolstered GE's industrial operations with huge deals in power, oil and gas, he already had sold off 65% of the company that Mr. Welch created, including NBC and consumer appliances.

GE shares jumped nearly 11%, or $2.78, to $28.51 in New York Stock Exchange composite trading, their biggest one-day percentage gain in about six years. It was only the eighth time since 2011 that a Dow Jones Industrial Average component gained more than 10% in a day. GE's stock-price surge added $28 billion to the company's market value.

Despite the leap, GE shares are down 20% in the past decade, compared with a 73% gain by the Dow.

The giant finance business long churned out about half of the company's profits but hammered GE during the financial crisis.

Getting rid of GE Capital likely makes its parent company less of a target for activist investors who are routinely rattling the boardrooms at companies viewed as laggards.

Some of those investors had been intrigued by the possibility of going after GE, but Mr. Immelt's move will unlock $90 billion for shareholders in the form of dividends, stock buybacks and proceeds from spinning off GE's private-label credit cards and retail-finance businesses.

Mr. Immelt had been pruning GE Capital since soon after the crisis hit in 2008, but the finance arm's $500 billion in assets rank it as the seventh-largest U.S. bank. After the exit, which will occur during the next 24 months, GE aims to get 90% of its earnings from industrial businesses, up from 58% in 2014.

The remaining 10% will come from the small number of financial businesses that GE is keeping, such as aircraft leasing and energy finance, which support its industrial operations.

"Every shareholder wants us to do this," one person familiar with the matter said. "No one wants us in this business."

GE is betting that the shake-up will be worth it because industrial companies usually trade at higher stock-market valuations than financial businesses.

Big banks often are wound down when they are in trouble. GE Capital is healthy and profitable, but executives said new, postcrisis regulations make it too hard to earn a sufficient return on investment. Long-grumbling shareholders complain that lending isn't worth the risks.

GE Capital is one of four non-banks designated as "systemically important financial institutions" by U.S. regulators, subjecting it to closer oversight and tougher standards on capital buffers against losses.

GE said it plans to apply with regulators to be "de-designated" as a SIFI next year.

No such financial institution has been allowed to escape the new designation, but a spokeswoman for the Treasury Department said the regulatory group that decides which lenders are systemically important welcomes the chance to reconsider a SIFI designation.

"It was never our intention to create a 'Hotel California' situation," Sen. Mark Warner (D., Va.) said, referring to the Eagles song about a place guests could check out from but never leave.

Some lawmakers and other supporters of the toughened rules have hoped that financial firms will slim down to a size that could pose a smaller threat if they get into trouble. GE decided to make a much more dramatic move.

"There was a little bittersweetness," said GE Chief Financial Officer Jeff Bornstein, who spent more than a decade at GE Capital and helped steer it through the crisis. But staying in the business "doesn't make any sense," he said in an interview.

Finance was a big business for GE under Messrs. Immelt and Welch, who plowed billions of dollars into everything from office buildings in Southern California to consumer loans in Japan.

GE's banking activities started modestly in 1905, when it set up a business to provide financing to utilities. In the Great Depression, GE started financing the sale of appliances to consumers.

The business grew quickly as GE exploited a quirk in the financial markets. Instead of collecting deposits to raise the money needed to make loans like a traditional bank, GE Capital funded itself largely by leaning on GE's stellar credit rating to sell bonds and short-term debt called commercial paper.

The strategy worked until the financial crisis, when GE was forced to turn to the U.S. for support and slashed its dividend.

At the time, GE was the largest issuer of commercial paper. In his book "On the Brink," former Treasury Secretary Henry Paulson wrote that he knew the crisis had reached a dangerous peak when Mr. Immelt showed up at his office and said GE Capital was having trouble getting anyone to lend it money for longer than overnight.

Mr. Immelt has expressed regret about expanding GE Capital before the crisis. "Clearly in retrospect, you know, I didn't get that right," he said in an interview in September.

Mr. Bornstein said the exit will cost GE a total of $23 billion. Part of that will come from an expected tax bill of $6 billion on $36 billion in cash that GE will bring back from overseas as it reshuffles its balance sheets.

The company's effective tax rate will double to about 20%, and GE agreed to guarantee $210 billion of GE Capital's debt.

GE's top executives and board of directors had examined possible exits from GE Capital since the crisis, Mr. Immelt said Friday in an interview.

Then came "Project Hubble," the code name for the calculations and evaluation that culminated in Friday's announcement.

Earlier this year, the company began meeting almost daily with a roughly 50-person team of investment bankers at J.P. Morgan Chase JPM 0.37 % Co. and consulting with advisers at Centerview Partners LLC to consider options for an exit, a person familiar with the matter said. Mr. Immelt first told GE directors in February that he wanted to look in earnest at ways to shed GE Capital, another person said.

"We are going to move a mountain here in the next couple of weeks," Mr. Immelt said, according to this person. GE told regulators of its plans to announce a restructuring during a meeting at Treasury within the last week or so, other people familiar with the matter said.

The plans include selling off $165 billion of loans to borrowers like Wendy's WEN -0.19 % franchisees, overseas consumers and private-equity firms. GE also said Friday that it will sell a $26.5 billion portfolio of investments in office buildings and other commercial property to buyers that include Blackstone Group BX 2.09 % LP and Wells Fargo WFC 0.24 % Co.

The dramatic shake-up caused some analysts to ask an old question anew: When will Mr. Immelt, 59 years old, decide to retire?

He didn't address the subject in a conference call Friday but has said he remains passionate about his job and has no plans to go anywhere.

Even analysts and investors who have sharply criticized Mr. Immelt praised his move.

"I know we have all given you a lot of crap over the years, but this is pretty good stuff for redemption," Barclays Capital analyst Scott Davis told the CEO during GE's conference call.

Mr. Davis had raised speculation in a recent note to clients that Mr. Immelt might soon step down. "You can keep your job a little longer, I guess," Mr. Davis said Friday.

--Joann S. Lublin and David Benoit contributed to this article.

Write to Ted Mann at ted.mann@wsj.com and Victoria McGrane at victoria.mcgrane@wsj.com


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