A cast of hawkish central bankers

Well, ladies and gentlemen, let me just say it is going to be a week. From American public media, this is Marketplace. In Los Angeles, I'm Kai Rizdali. It is Monday today. This one is the 14th day of September. If you can believe it, good as always, to have you along, everybody. All right, well, let's see. Shall we wear things stand as we roll toward the last quarter of this year? Borrowing costs are up. Energy costs are up and related as we learned last week. Inflation is still up. The stock market is a little bit deceptic. Consumers, the same. So as we tee up, what is going to be a big week in this economy, we've called Wendy Edelberg for some insight. She's a senior fellow at the Brookings Institution. Hey, Wendy. Hey, there, Kai. So let's get a little ground truth here just as a way to get going. Your general thoughts on the state of this economy as we sit here in mid-September. I mean, policy's doing its best to derail it. That's for sure, but it has remained resilient. You say resilient like it's a dirty word? I mean, I think markets have been -- and businesses have been assuming that surely President Trump will be disciplined by what he knows would be the economic effects if he was too irresponsible with Iran, if he was too irresponsible with tariffs. And I think you're seeing some glitches in market prices as that theory is being tested. And so resilient, yes, but I think the trade war with Canada, I think the stepped up hostilities with Iran with no sense of how that ends. Yeah, I think he's testing the resilience. I hate to be hung up on your vocabulary here, but your use of the word "disciplined" is interesting in regards to the President. Because you and I have literally had the conversation before about how the bond market was going to discipline the President and keep him sort of within the lines as it were of a productive and functioning economy. And clearly that's not the case. We've got the tenure this morning, topping 5 percent, the 30-year, was it like 5.3 or something. So the bond market is having none of it. I mean, I think they are paying -- I know they are paying very close attention to the Trump administration is paying very close attention to the level of interest rates. I think that explains why Besson is trying so hard to get them down to game of basis points that he's playing. Right. A hundred percent is point for lay people. Yes. A hundred percent is point. Yes, sorry. You know, so they are paying close attention, which suggests that it's affecting their decisions in some way, but I don't think that actions by the Trump administration or by Congress are the sole reason that interest rates are where they are. I think that there's a whole lot of borrowing going on by tech firms. Yeah. Yeah. So we're going to get to that a little later in the program. Do me a favor, Woodgett, and with an eye toward the calendar, which is to say that the Federal Reserve meets tomorrow and Wednesday, channel your inner Kevin Worsh for me. And as he heads into this meeting where he's either going to have to disappoint the market if he doesn't raise rates, and he has the choice of disappointing the president that appointed him if he does raise rates, what do you suppose is going through his mind right now? I mean, yes, he's in a tough spot. His Jackson whole speech was quite hawkish, but my guess is that he would like to avoid a hike. I mean, he talked about my sense before he got the job, is that he was talking about how he thought interest rates generally should be lower given structural things happen in the economy. He said he wanted tighter financial conditions and he's gotten them. So I think he could make an argument for markets having done the job that the Fed might have had to do and that they don't need to raise rates. I think there's an argument to be made there. Keep going. Make it for me because it's going to be amazing if that happens. So markets are now putting 90% probability on a rate height. I put it more like a coin flip, which is to say if they hike, I won't fall off my chair and in an amazement, but I won't be shocked if they stand pad. So the inflation story I think looks better than some of the headlines suggest. Core CPI is basically at the rate consistent with target inflation. The FOMC is good, you know, all of us in the economy, we're going to get data at the end of September, which I know Kevin Worsh knows about just because he must because the staff is so good. They're going to get data at the end of September where PCE inflation, core PCE inflation, the measure that the Fed really cares about, it's going to get revised down by a few tens. And my guess is that that's going to be a big discussion at the meeting. They won't have that exact data in hand, but they will know that it's coming. And it could be that what they what we get for core PCE inflation from May to August is around 2.4. That's within spitting distance of two. So they're targets. So, you know, I can see an inflation argument for standing pad. And I think and I were also probably going to get some revisions to show weaker employment data. And so they're going to have in hand, the data from the states is suggesting that. And so there are going to be some folks at the FMC who are worried about the weakness in the labor market. That's, you know, I'm not, but shockable shocks, not everyone agrees with me. And so I think that there might be a labor market argument for standing pad as well. I learned something every single time we have you on this program. And you just made that. You are so nice. That's why we have you back. Wendy Edelberg at Brookings, thanks Wendy. You're so welcome. Wall Street today, as I said, some mild indigestion AI related technology. Not so great. Details numbers when we get there. All right. So Wendy and I talked about the Fed a bit, but the fact is that despite what you might hear here at elsewhere, Kevin Warsh and the gang are not the only central bank game in town. The European Central Bank raised its benchmark rate last week. The Bank of Japan is expected to follow suit with a rate hike this week Friday, I think. The Bank of England might be the outlier. Best guesses are it'll hold rates steady when it meets later this week. But this is broadly speaking, a hawkish moment, inflation fighting through higher interest rates globally. Market police is Mitchell Harmon explains what's going on. A large group of hawks all flying together is called a kettle or a cast. That could also describe a whole bunch of central bankers right now. Here's economist Jennifer Lee at BMO Capital Markets. Almost everyone leaning towards some kind of hawkishness. It amounts to a kind of regime change for the international economy says driver Swella said consulting firm RSM. That means that long period of low inflation and low interest rates has come to an end. And that central banks are going to have to address the risks around inflation with higher interest rates. Luis Alvarado at the Wells Fargo Investment Institute says central bankers in the America's Europe and Asia, they're broadly being exposed to the same risks. The Middle East War, the price of energy. And then you have the threat of inflation just being more sticky. Inflation pressures also differ from one economy to another. Europe and Asia are more dependent than the U.S. on imported oil and natural gas from the Middle East. So energy driven inflation can be a more potent threat to consumers and businesses there. Europe also has major elections next year. In France, Italy, Spain, Poland, and Germany, Jacob Kirchegard at the Peterson Institute for International Economics says central bankers face political pressure because voters do not like inflation. So the ECB looking at this calendar is very focused on avoiding an upside risk to inflation. In the U.S. with midterm elections in November, the Fed may pause rate hiking until its December meeting, but it can't delay too long, says RSM's Jobor Swellis. We've been above the inflation target of two percent for over five years now. We're well into our six-year. The longer we wait to rip off the band-aid. The more painful, he says, the adjustment to higher rates for the long term is going to be. I'm Mitchell Hartman for Marketplace. For definitely not the first time, I will point out here that nothing in this economy of ours happens in isolation, not with prices. not with supply chains, and not with foreign exchange. The US dollar has been on the rise the past couple of days as currency traders look forward to an interest rate hike from the Fed following that report on August inflation. And while yes, there has been a lot of ink and audio tape spilled, if you will, over the future of the greenback, as Marketplace's Stephanie Hughes reports, the dollar is still pretty attractive, if the Fed hikes interest rates this week, like everybody seems to think it's going to do, that will drive up the yields on certain assets, including short term government treasury bills. That means that investors can earn more by investing in those assets, and so they are more interested in holding them. But says Brandeis Professor Carol Osler, in order to invest in those assets, you need to have American currency. You've got to get the dollars, which means they're going to go into the very active market for dollars. They're going to be selling euros, selling yen, selling Brazilian rail, and when there's more people trying to buy our currency, the value goes up. Still, if you think of currencies as competing against each other, Cornel's Eschar Prasad points out, it's not like the dollar is looking the fittest it's ever been. This is the least worth of all the teams playing in a tournament. Osler Prasad says despite the blows the US economy has been hit with recently, tariffs, the war in the Middle East, it still looks less beat up than many other economies, including the EU, which hiked its own interest rate last week. The Eurozone, Japan, the United Kingdom, are all in a pretty deep economic and institutional funk. But the effects of a Fed interest rate hike on the dollar could be short-lived. The Eurozone is Goldtermin, its chief market economist at capital economics. Goldtermin says he gets real ambivalent vibes from this Fed around interest rates. And he says, like with anything in life, if you do something half-heartedly, it tends not to work out as well as when. I'm Stephanie Hughes, Cornel Prasad. We have historically high levels of debt in this economy. I'm not talking the federal debt here, historically high though it is. This whole debt is ballooning auto loans and credit cards by now pay later bills. That is increasingly the tool people are using to live their lives. Another tool that is debt adjacent to the subscription economy, people are renting everything from the navigation system of their cars to their homes. So Marketplaces Kristen Schwab looks at what it means when people don't outright own much anymore. Sonya Joseph grew up on a tree-lined street in Brooklyn. Around the block we had like nice small mom and pop stores that I would frequent, I knew my neighbors and we all pretty much went to school together so it was pretty communal. Joseph's parents owned their home. So she figured one day she'd own a home too. Being a home owner can provide me with a sense of peace of mind and security and a sense of community that I feel like I deeply desire. That's kind of like the dream that was sold to us. Joseph is 34, lives in Washington DC and works as a community organizer. And she was this close to purchasing a home through a first time home buyer program until the organization looked through her bank statements. I was unable to move forward in that program because of after pay, carna as well as student loans. Joseph keeps a balance of around 600 bucks on those by now pay later apps, which she's used to buy furniture, groceries and toiletries. She says it's starting to feel like everything in her life is on a payment plan. Even her phone, it's $26 a month. Not only I don't fully own the phone, but by the time I do own the phone, I probably need to get a new phone. I'm in a lifetime subscription for the phone ownership. That makes sense. A lifetime subscription for ownership is becoming a hallmark of middle class life. You go into debt to buy a $60,000 car. Only to learn, you have to pay to use its remote start feature. Turn on your PlayStation to play a game you don't own. Just purchase a license to access. The idea of financing life this way seems kind of newfangled, but it's kind of not. Lewis Hyman is a history professor at Johns Hopkins University. Picture it, the roaring 20s. It's a great moment of cars, and photographs, and vacuum cleaners, and refrigerators, and all the wonders of the electrical age, and it's all very expensive. A.K.A. all very much reserved for the rich, until installment credit comes along. A sort of precursor to the credit card. Suddenly, your average Joe could afford a washing machine, or even a car. Certainly, in the 1920s and '30s, installment credit was seen as a great leveler, so that ordinary folks had access to expensive things. Access is good, right? So maybe a debt-driven, don't own anything, subscription economy is good. Kate Lamberton is a marketing professor at Wharton. She says, "You can rent maternity clothes. Use a bike share. borrow a drill from a tool library for that random home repair." This is reducing waste. This is offering access. This is democratizing the opportunity to take part in something. Thing is, accessing life via subscriptions and debt can quickly tornado into a habit, which is honestly what a lot of these companies are looking for, a member for life. It can offer access to things that are necessary. It can also create a hamster wheel that leads us to more spending and less actual wealth. Less wealth means less equity. When we talk about equity, we usually focus on the biggest version of this, renting versus owning a home. But the small things matter, too. Here's historian Lewis Heimen again. So a video game can't be passed around like the Nintendo cartridge of my youth. I can't give Legend of Zelda to my friend down the street. It is a quite different economy if it sort of makes sure that we pay full price for everything. These subscriptions and leases and buy now pay later apps, instead of being tools for people's economies to grow, like they were a hundred years ago. They've become tools people use to get by. If incomes are stagnating or falling, then it's not quite a leveler. Then it's just attacks, it's attacks on your future. Exhibit a? It's on you Joseph, the woman in DC who's making monthly payments for her phone. She says by the time it's paid off, she'll have spent more than if she'd paid for it in cash. I'm Kristen Schwab for Marketplace. Coming up. I need to just be by myself, I'll see you tomorrow. Well, all right then. First though, let's do the numbers. Down, dust rolls down, 152 today, 3/10 to 1% 52,421, the NASDAQ dropped the 146 points about 6/10% 26,186 the S&P 537 points, about a half percent, 76 and 19. Today's slide was, in part, the result of the sell-off of a whole lot of heavyweight AI stocks. You've seen the news, yes, in video, saying 3 and 3/10% micron technology gave up 5 and a quarter percent Intel cratered about 5.6%. Kristen was talking about the subscription economy. Here's one Netflix, the subscription model giant climbed 3 and 8/10 to 1% on the day. Bonds down, you'll now in the 10-year T-note 4.98% is where it closed. You're listening to Marketplace. This is Marketplace, I'm Kyle Rizzo. The macroeconomic concept of the day today is price elasticity of demand and it comes to us courtesy of American agriculture. It's getting on to be fall harvest time out there. Corn and soybeans and all the rest are going to have to be picked and transported in trucks and in combines that run on a whole lot of diesel fuel, diesel that hit its highest ever average price today, $6.23 a gallon triple A says, "For reasons with which I hope we are all very familiar." So price elasticity of demand. Is there a point at which people just stop buying diesel? Marketplace is a little bit trove all reports. Once gas prices hit a certain high number, consumers respond. At hers is with University of Houston. We can consolidate our trips to the grocery. We can carpool. We can purchase more economical vehicles. But diesel is different. With diesel there's less flexibility on the demand side to respond to higher prices and so typically the higher price of diesel is passed along to the consumer very quickly. Crops still need to be harvested and widgets still need to be shipped. Will O'Neill is with S&P Global Energy. 70% of that diesel is consumed in transportation and there really aren't any significant scalable substitutes outside of rail which has its limitation. He says even in other segments like agriculture and heating oil, it's difficult to get a snap ability to shift those to non diesel consumption. Because diesel doesn't have great alternatives, Susan Bell with RiceStab Energy says we'll all be paying for it. We'll be paying in everything bananas, oranges, strawberries, she says diesel nacks as an inflationary factor for consumers. They reduce consumption because their household budgets don't go as far and you know if you have to buy your groceries you may reduce consumption elsewhere. That could mean cutting demand for any number of things. Gulf oil analyst Tom Kloza calls the diesel situation an inflation problem that can't be cured by higher interest rates. Though there is something that could bring down diesel demand. The one thing that will alter the demand considerably is a recession. Which is something we probably don't want to be rooting for. I'm Elizabeth Troval for Marketplace. There are a lot of reasons that people choose to downsize their home. Maybe the kids are all grown and those extra bedrooms are just collecting dust or finances of change maybe and monthly payments are too much. Maybe though it's to be closer to family as you and they enter a new stage of life. Here's today's installment of our series Adventures in Housing. My name is Dreia Parker and I live in a tiny home on the property I grew up on in Kernersville, North Carolina. So before I came into this tiny home I was living as a caretaker of a old country 1920s farm house. At that time my mother was 71 and she had had totally surgery essentially while I was there with mom for those two months still working full time and taking care of her. I realized that she had some mild dementia. The farm house was 15 minutes away from mom right but I wanted to be like five minutes driving or even walking distance. I started doing research and I spent about six months researching and all of this while I'm staying at mom so that I could build a plan of action as to what I was going to do more permanently. So I started scouting shed companies and this one company had a cottage model that I fell in love with. My father would take me hunting with him when I was a kid and I remember this bear bounce cabin that we stayed in one time right and so this for me it's I'm a minimalist and so for me this cabin this cottage kind of emulates that cabin. All in all I spent a total of about $27,000 for the entire process to get my tiny home set up in the backyard. The fact that my tiny home is paying off is amazing. It has meant a lot that I could be here to help mom. There was one year where we had a deep freeze through the winter. She had forgotten to turn off the water pipes in the greenhouse and they burst. So you know the little things like that over the years it's definitely helped me to feel better that I'm able to be so accessible while also you know telling her you know tonight I need to have me time tonight you know I need to just be by myself I'll see you tomorrow. At one point I sat down with mom and had a conversation with her about all the work that I am doing myself to keep up the maintenance on the property, the yard, caretaking her and requested to see if we could have me add it as co-owner to the title of the property and she was all for it so we are now co-owners. Dre a parker living in a tiny home on the property that she grew up on in Kernersville, North Carolina. Whether you are making a big move or stay in put right to us would you about your housing journey at Marketplace.org/adventures in housing. This final note on the way out today in which we try to inject a note of business model reality into the current artificial intelligence news cycle. According to Goldman Sachs there has been just this year so far nearly 500 billion dollars worth of AI related debt issued by the big AI companies. Debt of course is another word for borrowing. The Wall Street Journal reports the nine biggest technology companies have nearly three trillion dollars in debt most of it AI related that does not appear on their balance sheets. All of which is to say that while coherent regulation and AI companies perhaps taking a second or two to think things over there might be prudence maybe. Market forces are powerful, powerful things. I'm everybody, Caitlin Ash, John Gordon, Noia Carr, Steve Mullis, and Stephanie Seek are the Marketplace editing staff. Kelly Silvera is the news director and I'm Kyle Rizdal, we will see you tomorrow, everybody. This is APM.