Federal Reserve delays the inevitable

In terms of market sentiment yesterday was a good time for the Federal Reserve to cut US interest rates. The macroeconomic news over the past couple of weeks has been moderately encouraging, implying that there may be a modest recovery in growth during the second half of the year. Had the Fed moved in the wake of some poor numbers, Wall Street would have probably assumed that Alan Greenspan had picked up early warning of a bank or hedge fund collapse, and would have marked share prices down. As it was, both the Dow and the Nasdaq rose sharply. Too sharply, in all probability.

In the short term, this view may be hard to justify. There is a risk - a real risk - that the action of the Fed this year will simply reinflate the stock market bubble of 1999 and early 2000.

The likelihood of US rates coming down to 3% over the summer coupled with the determination of the White House to press ahead with its package of backdated tax cuts increases the chances of this happening, but it would almost certainly be followed by a resumption of the bear market some time over the next year to 18 months.

But a more likely - and, in the end, more optimistic - scenario is one in which Wall Street starts to unpick the reasons for the rapid easing of monetary policy since January, which is that the news from the titans of corporate America has been poor.

Many of the companies who were at the forefront of the US economic renaissance in the 1990s have failed to live up to the expectations of analysts and investors. This is hardly surprising, given that the expectations were utterly unrealistic in the first place, but even cheaper money will not be enough to deliver the sort of earnings that would justify the price put on US shares.

Bonus excess


It can almost become a little wearing grinding on about executive excess. There have been a steady stream of questionable bonus payments in recent months - from the £10m Vodafone's Chris Gent was awarded for pulling off the Mannesmann acquisition to the £2.5m pat on the back shared out among four directors of the Royal Bank of Scotland for snaffling control of NatWest. Institutional investors are always quick to criticise such payments - along the lines of why directors deserve such payments when they have long-term incentives and share options which will pay out if the acquisitions prove successful - but they rarely have the required backbone to actually vote against them at annual general meetings. After all the kerfuffle of the Royal Bank bonuses, how much fuss was there at the AGM? None, aside from a couple of small shareholders. Abstaining in such votes is normally the most muscle they can muster.

So it is worthy of a round of applause that, aside from family shareholders, 40% of Schroders' shareholders put a cross in the box to register their disapproval at the £5m thank you payment awarded to Schroders' chairman Sir Win Bischoff for successfully managing to sell the investment bank to Citigroup.

Never before have normally reticent institutional investors blown such a big raspberry at a company.

But the fund managers' decision to choose Schroders to show their disapproval of the current big wad culture is a tad puzzling. It may have been an excessive payment - although Schroders insisted yesterday it was fully deserved and indeed could have been more - but at least this was a payment for achieving a sale, rather than an acquisition. The deal is done, the value to shareholders crystallised. There is no chance of the benefits disappearing down the drain. Investors are to be encouraged to be bold more often - but surely on different deals to this one?

Slippery ground


Some think that the role of non-executive chairman is a cushy number, especially as pay levels appear to regularly breach the £150,000 a year mark. But one chairman who will be earning his corn today will be Peter Sutherland at BP (whose pay is more than £160,000).

It will be his job to defend his chief executive Sir John Browne and the rest of the board at BP's annual general meeting.

On previous form he can expect criticism from Tunbridge Wells pensioners wanting to know why Mr Browne earned £5m last year. There will also be trouble from green activists and from Tibetan monks wanting BP to disinvest from PetroChina.

Sutherland handled the crowd superbly last year in tough circumstances. No doubt he will do the same today.

Ironically he will not possibly have to answer the most crucial question: How can BP keep up its growth strategy when oil output is slowing?