The Fed could use an assist

Make Me Smart July 26, 2022 transcript

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Samantha Fields: I’m ready.

Kai Ryssdal: Hey, everybody, I’m Kai Ryssdal. Welcome back. Welcome back to most of you, I hope. If it’s first time – why? What took you so long? Anyway. None of us is as smart as all of us, that’s what we do on this pod.

Samantha Fields: Hey, everyone, I’m Samantha Fields, I’m in for Kimberly Adams today. It is Tuesday, which means it’s deep dive day. And today’s topic is inflation. The Fed is expected to raise interest rates again tomorrow, and it’s pushed to fight inflation. That, of course, is the Feds main tool. But it is also a pretty blunt one.

Kai Ryssdal: And so what we’re going to talk about today is what else can be done about inflation without Jerome Powell and the gang at the Federal Reserve. Because powerful though they are, they cannot do the whole smash. Here to help us out with what that might look like is Claudia Sahm. She’s the founder of Sahm Consulting, also a former economist at the Federal Reserve, by the way, and at the White House, and you can find her on substack. Their newsletter is Stay-At-Home Macro, which Claudia I have to tell you, it wasn’t until yesterday on Twitter where I saw somebody point this out, Stay-At-Home Macro, spelled SAHM, which I love. I think that’s brilliant. Thank you so much for coming on.

Claudia Sahm: Yeah, thank you for having me.

Kai Ryssdal: So we should be clear here. It is the law of the land that the Federal Reserve is in charge of inflation, right, just to get that out there.

Claudia Sahm: Right. Well, it’s part of the Fed’s mandate, so it is part of their job along with maximum employment. But that does not mean that they are the only game in town when it comes to fighting inflation.

Samantha Fields: And so Claudia – hey it’s Sam – I’m curious, you know, what can the White House and or Congress do? What role can they play here? I feel like we don’t talk about that nearly as much.

Claudia Sahm: Right well, stepping back, big picture. Inflation is largely about too little supply and too much demand. And as you said, the Federal Reserve has a very blunt tool, it can raise interest rates, which discourages demand, it basically makes us a little bit poor, so we don’t spend as much. That is one way to get inflation down. A much better, much less painful way is to get supply up. The Fed can’t do that. Jerome Powell cannot drill for oil, he cannot unload the docks in LA. So. But Congress can make investments that help all of those and more things in our economy be more resilient and function better. And what COVID and the war in Ukraine have showed us is that our economy is not resilient. Congress needs to do, do a lot more. And they can do it in a much more targeted way that the Fed simply can’t.

Kai Ryssdal: The thing that Congress can’t do though, Claudia, is act with any kind of alacrity whatsoever. And granted that while the Fed’s interest rate moves, do take some time to work their way through the economy. I wonder how much of a hindrance it would be to rely on Congress too much, just because they’re so freakin slow.

Claudia Sahm: Right. This, the past two and a half years have been a rolling emergency. And inflation is just one of the latest issues that we face. And it should be a real wake up call. So there are some things that Congress can do really quickly, we have some changes in health insurance premiums coming up, that they need to not have happened, because those will push up inflation. But there’s also things – like this should be a reminder, people hate inflation, we’re not ready for crises. Crises will come again. So Congress, they can play the like, next two years, next ten years game, but I agree we shouldn’t rely on that. And the Fed is – they will do it if they have to, on their own, but it’s not going to be pretty.

Samantha Fields: So if we don’t want the Fed to do this on their own, like you’re talking about, what are some of the things in addition to the health care legislation that you just mentioned that Congress could do now, could do quickly? That would help tamp down inflation?

Claudia Sahm: Right. Well, there’s absolutely issues in the energy sector, right? Like gas prices, they’ve come down some now, but as of last month, they basically doubled since the pandemic began. This is, this is a big problem on lots of dimensions. But there are some steps that we can take right now. Today the White House announced a program that has been really pushed for a while by some outside economists and analysts to – basically, we’ve been pumping a lot of oil out of the Strategic Petroleum Reserve, we’re going to have to refill that. And their Department of Energy is going to do some contracts that guarantee the price at which oil producers, that they’ll purchase that oil back. I mean, there’s a lot of disruption in energy markets, there is no plan about how we move forward with energy production. Congress needs to do that for a lot of reasons, including most of all planet Earth and our survival. But, you know, the reality is that we’re not at a place yet where American families and businesses can function fully on renewables. We have to meet this reality and stop having to rely on countries that we really don’t want to rely on for our energy and keeping prices in a place where it’s, you know, that people can just make it, make ends meet at this point.

Kai Ryssdal: Yeah. Okay, same topic, different lens. One of the things you have heard the White House talking about, and also Senator Manchin as he was busy laying waste to much of the Democratic agenda, is deficit reduction. The White House has said it wants to reduce the deficit to help with inflation. Senator Manchin has said he wants to reduce the deficit to help with inflation. Can you help me understand how that works?

Claudia Sahm: Personally, I think it’s the wrong way to think about economic policy, what we should be thinking about is what are we spending our money on, and are they good investments? And the legislation that he just put on ice had a lot of good investments, health insurance, energy, you name it. But if you want to have that lens on the economy, well, we have another problem that could be addressed, called Tax Equity, in terms of like, if you want to close the deficit, or you want to make sure that whatever programs get passed this year by Congress have no effect on the deficit, there are some people that have got some money to spare, that you could – you know, the package they were talking about had an increase on corporations, which would affect their shareholders. And frankly, that’s also one that would pretty quickly kick in to inflation, because it will push down demand. And believe it or not, rich people spend a lot of money. Right? So I think there’s that piece. But a lot of people, and a lot of members of Congress, frame the programs in terms of the deficit, but it really matters what you do with the money, not how you – like how much the total dollar amount is.

Samantha Fields: I’m curious, when we are talking about sort of handling inflation, slowing inflation, I think a lot of people might think – or maybe not think but hope that that might mean prices might come down, right? But in reality, is that what we’re talking about? It seems to me like a lot of things that we read about, like rent increases, home price increases, these things are sticky, it’s hard to actually get them to come down. So what are we actually talking about here, in terms of what that would look like if any of this was to happen and actually sort of start to come into effect?

Claudia Sahm: Right. So inflation is an increase in prices, right? So it’s about how fast your price is going up. It is not about the level of prices, right? So there are some areas like gasoline and food, they tend to be very go-up-go-down, like those prices probably will go down, maybe used cars, which are very overpriced right now. But most of the other things that we buy, those are the price we’re gonna pay, and they’ll keep rising, but hopefully, not as much. So housing, the cost of housing in general, are what economists refer to as procyclical. Just a fancy term for when times are good, rent prices go up. Right? It is a very sad statement on our economy that when people start getting paid, when they have a chance to move out and start a family, they pay really high prices, because there just aren’t enough housing. Again, the federal government can spend money to build affordable housing, get builders, where it really isn’t profitable for them to build those kinds of houses. Like, get the money out, get the homes built, so when people get ahead, they can actually get out there and kind of start their lives. And right now, those prices without more supply are not coming down. And again, the Fed can’t do anything about that. And they might actually make it worse. High interest rates don’t exactly encourage building homes or apartment buildings.

Kai Ryssdal: I don’t want to ask you to put a timeframe on this, but I’m going to ask you to put a timeframe on it. I heard the other day, an analysts say, you know, inflation could be high, not 9% high, but 5%-ish maybe for three to five years. Do you buy that?

Claudia Sahm: I’m not gonna hazard a guess three to five years out… but I think, one thing that is very different now than, say, the 1970s, right. And there’s been a lot of comparisons, they had high inflation then, many years of high inflation. The Federal Reserve is not trying to cause a recession now, in the 70s they really were trying, because there had been this inflationary mindset. And it was a really bad situation. The Fed now, the Jay Powell Fed, is not trying to cause a recession. And one of the things that means is, they’re gonna give it some time, right, we’re not going back to their target.

Kai Ryssdal: Which is 2%. Let’s just remind folks that target is 2%…

Claudia Sahm: Which is 2%. Month over month, kind of the annualized pace, we are making some slow progress. Like, we don’t need a recession, they are not trying to cause a recession. We might get there, but they don’t want us to be there. And part of that means we’re going to have – we will need to be a little bit patient.

Kai Ryssdal: The catch, of course, Claudia, is that the American body politic, let alone the white hot center of American politics in Washington, DC, is not the most patient crowd, especially when you’re dealing with something like inflation, right? And that becomes – and I don’t want to get into the politics of this – but that becomes a different kind of problem.

Claudia Sahm: There are tradeoffs to everything. I mean, it’s a little bit like, be careful what you wish for. Recession is worse than inflation. And it’s not just worse for the unemployed. It’s “Do you want to raise? Do you want to be able to move to a better job? Do you want to keep your hours?” I mean, a recession is really bad. I get it. Inflation is a hardship – is the hardship we’re living with right now. But there is – for many families, a recession is a disaster, and it lasts for a long time. So that’s, I mean, that’s really important to keep in mind. One thing that is important now, is that the Federal Reserve is independent. They aren’t there to get reelected, right? And so and they will always get blamed and they’re, you know, trying to be the best stewards of the task that they have. And, and yeah, I get it. I mean, people really, really dislike inflation. But a recession is not the way out of this.

Samantha Fields: One last question, Claudia, for me. And that is, as you’ve said, as Kai has said, as basically all of our listeners I’m sure know, Congress is pretty stuck on a lot of things, it’s hard to get much to move there. I’m curious, is there anything else that the White House, the executive branch, can do on this that they’re not already doing that you would like to see them do in terms of inflation?

Claudia Sahm: I think one, I mean, first of all, they and all of us should be full court press on Congress, like Congress should not be able to do the “oh, the Feds got this” spiel…

Kai Ryssdal: Although, to be clear and fair, right, Joe Biden himself has basically said these words. The Feds got it. I’ve got confidence in the Federal Reserve. It’s their job.

Claudia Sahm: Yeah. And I cried. Watch that. I mean, like, it’s just, yeah, so there’s a lot of misconceptions about the Fed. And I had a chance to talk with some lawmakers in March after Ukraine was invaded. And you’ve just got to do everything. Like there is no one solution. It’s time to be creative. It’s time to do what you can. The one thing the administration could help themselves out on, is really focusing on programs that would work, in terms of increasing supply and lowering demand. Some of the angles they’ve taken, particularly in tweets or you know, scolding gas station owners, they’re really not productive. So, you know, we’ve only got so much energy, use it well, I guess would be my advice to them.

Samantha Fields: That’s Claudia Sahm. She is the founder of Sahm Consulting and a former economist at the Federal Reserve and the White House. You can find her on substack. Her newsletter is Stay-At-Home Macro. Claudia, thank you so much for joining us.

Claudia Sahm: Yep. Thank you.

Kai Ryssdal: That was great. Really appreciate it. Yeah, she’s great. I really enjoy. I enjoy listening to her. She’s very good. And she’s right on basically everything. So anyway, there you go. Let us know what you think. What surprised you about that conversation with Claudia Sahm? Are you feeling inflation? If so, how? And more to the point, what changes are you making? Because we have come to that point in inflation where everybody’s like, oh yeah, this is real, and now I have to buy this other thing that’s cheaper because the thing I want to buy I can’t afford it anymore. And let us know, and we’ll get you on the pod. Our number is 508-827-6278, 508-U-B-SMART. Or you can send us a voice memo, makemesmart@marketplace.org. Right back, is what we’re going to do.

Kai Ryssdal: News, let’s do it. Sam, you’re up. Go.

Samantha Fields: It’s time. All right. I read this article over the weekend – actually two articles over the weekend. One I got that alert that everyone probably got on their phone that the WHO has now declared monkeypox a global public health emergency, second time in what, a little over two years? It feels a little bit disconcerting to hear things like that. I also read this piece in The New Yorker that was excellent, highly recommend to everyone. We will link it of course, as we always do. And it was just about one man’s effort to get tested for and treated for monkey pox in New York City last month, kind of early-ish on in the outbreak, although not that early, considering how hard it was for him. And it just harken back to the early days of COVID in terms of how much he had to push, how much he struggled to get a test at all. He went to three different emergency rooms, I believe? Three different doctors trying to get a test for monkeypox, no one would test him, because he didn’t have visible lesions on his skin, which was at the time a requirement from the CDC to get a test. And he had to go – just jump through all these hoops, reach out to connections. He had a friend who was a virologist, or an epidemiologist, which not everybody has, I don’t. And he, through that connection, he was finally able to meet with a doctor, who gave him a test. Found he did have monkey pox. And then he basically had to go through all of those similar kinds of hoops again to get treated, even though, unlike with COVID, of course, in the early days there are treatments for monkey pox. And it was just really sort of harrowing to read and just made me think, it’s kind of shocking how little we seem to have learned or the federal government, the public health systems in this country, seem to have learned from COVID.

Kai Ryssdal: It is stunning how little we seem to learn, it is absolutely just incomprehensible.

Samantha Fields: There are about 18,000 cases worldwide, probably more, let’s be honest, and about 3,800 here in the US. We have a vaccine. And even so there’s just not, you know, it seems like we should be able to get ahead of this in a way we couldn’t with COVID, because of course there was no vaccine, there was no treatment, we knew nothing. And yet, and yet, and yet, we’re not.

Kai Ryssdal: You know, it’s funny because you really, you want and expect the government in the United States omniscient and omnipotent, as it is, to be able to do more than one thing at once. And it increasingly seems like it can’t, which is just very distressing.

Samantha Fields: Can’t it even do one thing?

Kai Ryssdal: Right. Can it do one thing? Okay, quickie for me. A piece in The Wall Street Journal about a report out from the Republican side of the Senate Oversight and Government Committee, on Chinese infiltration of the Federal Reserve. Of the Chinese taking active measures, including soliciting people who work at the Fed, to staff economists with job offers and academic appointments and Research Institute appointments and all kinds of other things, to figure out what the Fed knows about the American economy and what might be happening with it. It’s really interesting. Jay Powell is clearly [beep] tough at Congress, which is saying something, with Powell prides himself on maintaining really good relationships on both sides of the aisle up on the hill. Powell’s clearly [beep] at this report, is a little bit insulted. But it only stands to reason that the Chinese government is going after the Fed, much as it’s going after technology, and much after as it’s going after private companies, and it’s just an initialing piece and it’s time to probably stop screwing around with the Chinese. That’s all I’m saying.

Samantha Fields: What in that – in the report or in that piece, what are they saying about why? It may seem obvious, but for people who aren’t sort of super in this world, why? Why is the Chinese government trying to infiltrate the Fed?

Kai Ryssdal: I’m being facetious here, but world domination. Right? I mean, look, the Chinese have been explicit in what they want to do in terms of their global power. And they realize and have realized for many years way back to Deng Xiaoping saying it doesn’t matter whether the cat’s black or white as long as it catches mice. Speaking about the economy, right? We don’t care what kind of economy we have. We don’t care if it’s capitalist or communist as long as it makes people money and gets them rich. Right? That’s, that’s basically what he said. They’ve been doing this for, what was that? 1979. Right, so going on 50 years. That’s why.

Samantha Fields: It’ll be interesting to see what happens next.

Kai Ryssdal: Alright, let’s do a little mailbag, Juan Carlos, shall we? All right, voicemail, Megan, go.

Megan: Hi, Make Me Smart team. This is Megan from Kalamazoo, Michigan. There was a question recently about what we can do to help inflation, and Kai said stop buying things. And I am sorry to say that for my part, I have not been able to help with the inflation, we just had to replace our furnace and our AC unit in our house, and we’re about to go on a trip. So we just got some, you know, new clothes, and it’s just been nonstop spending on our end. And I, every time I ring up the charge card, I was like, I’m not helping the inflation project at all. So anyway, I appreciate you guys making me smart because I’ve never really put two and two together on that before. So. Love the show. Hope you’re having a good day. Bye.

Kai Ryssdal: Thanks, Megan. Sorry about all the spending, hope the trips are good. But yeah, that’s the way, but that’s the thing, right? I mean, you can’t not spend money in this society. You just, you can’t, because there’s stuff that happened, you need a car repaired or your AC or you got to buy a new jacket or whatever. And look, I get it. I get it.

Samantha Fields: Sometimes you just want to have a little fun these days.

Kai Ryssdal: Right. That’s right.

Samantha Fields: All right. We got this other one. Listener Paul in Alexandria, Virginia, alerted us to this new trend on Tiktok of people parodying their favorite public radio voices, then well, here you go.

Unknown: From American Public Media. I’m Kai Ryssdal. This. Is marketplace.

Kai Ryssdal: Oh my God, Kill me. Kill me.

Samantha Fields: Yeah, I don’t know, I think we could get some better ones out there, Tiktok?

Kai Ryssdal: Oh, good. Let’s encourage them, Sam, let’s do that. Let’s do that. Let’s do that.

Samantha Fields: I think we have to.

Kai Ryssdal: Yeah. All right. Before we go, which we are going to do in a minute. This week’s answer to make me smart question, which is – here we are, five years into this podcast. I’m still screwing it up. What is something you thought you knew, but later found out you were wrong about? Today’s answer comes to us from National Youth poet laureate, Alyssa Gaines.

Alyssa Gaines: When I was younger, I thought that knowing what I wanted to do in the most specific and concrete way was, was what was going to help me become successful. And I thought it was better to have this like, solid outlined path to follow. And I think now I’m realizing that that unknown is super exciting, because there’s so many different options and opportunities, and I have so much time to study what I’m really passionate about and then make a life for myself that is doing something meaningful to me.

Samantha Fields: I love that.

Kai Ryssdal: Yeah, that’s great. That’s great. And even if you do have like an – this is the voice of experience here, right – even if you have a career or two, not being afraid to chuck it in search for something else. It can be really helpful too. Let me just throw that out there. You know?

Samantha Fields: For sure, it’s a scary thing to do, but…

Kai Ryssdal: I know. Keep sending us your answers by voice memo to our email at makemesmart@marketplace.org. Or leave us message at 508-827-6278, 508-U-B-SMART is how you do that. I’m gonna say this one more time, so that everybody remembers, including me: summer break next week. So you know, if you want to think up a good answer to that make me smart question, you got some time.

Samantha Fields: Make Me Smart is directed and produced by Marissa Cabrera, today with help from Tony Wagner and Marque Greene. Our intern is Olivia Zhao, Ellen Rolfes writes our newsletter.

Kai Ryssdal: Juan Carlos Torrado was on the other side of the glass here in downtown Los Angeles. Drew Jostad’s gonna mix it down later. Ben Tolliday and Daniel Ramirez composed our theme music. The Senior Producer is Bridget Bodnar, although she didn’t do any work today except maybe set things up, I don’t know. Donna Tam is Director of On Demand and actually doing the producing today. Our Vice President and General Manager is Neil Scarborough.