A cast of hawkish central bankers

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1:08From American public media, this is Marketplace. In Los Angeles, I'm Kyle Rizzole. 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. 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. 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.

2:10I mean, policy is 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 a war in Iran, if he was too irresponsible with tariffs. And I think you're seeing some glitches and 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.

3:12I hate to be hung up on your vocabulary here, but your use of the word discipline 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% to 30 years 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 just to get them down to game of basis points that he's playing. Right. A hundred and seven percentage point for lay people. Yes. Hundreds of a percentage points, 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

4:15or 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 a point who appointed him if he does raise rates, what do you suppose is going through his mind right now? Who I mean, yes, he is 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 as he was talking about how he thought interest rates generally should be lower given structural things happen in the economy.

5:18He 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. Well, keep going. Make it for me because really how it's going to be amazing if that happens. Yeah, I mean, 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 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. And the FOMC is good, all of us in the economy. We're going to get data at the end of September, which I know Kevin Moore's 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,

6:22core 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 I can see an inflation argument for standing pad. And I think, and we're also probably going to get some revisions to show weaker employment data than what we have in hand. The data from the states is suggesting that. And so there are going to be some folks at the FOMC 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.

7:24I learned something every single time we have you on this program. And you just made that meeting all the way to the website. That's why we have you back. Wendy Edoberg 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 Worsh 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.

8:24Best 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 economists 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 Joe Busuela 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 Americas, Europe and Asia. They're broadly being exposed to the same risks.

9:24The 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 US 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 US, 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 Joborswellis. We've been above the inflation target of 2% for over five years now. We're well into our sixth year.

10:26The longer we wait to rip off the bandaid, 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,

11:26like 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 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, Cornell's E-SWR presod points out, it's not like the dollar is looking the fittest it's ever been. This is the least worth of all the teens playing in a tournament. presod 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.

12:27The 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. Jonas Golderman is chief markets economist at Capital Economics. The hawkish Fed is good for the dollar. The problem the dollar has with the Fed is, even if they're hawkish in the short term, are they going to be hawkish six or 12 months from now? Golderman says he gets real ambivalent vibes from this Fed around interest rates. And he says, like with anything in life, you could do something half-heartedly, and tends not to work out as well, as when. They're all in. I'm Stephanie Hughes from R&P. We have historically high levels of debt in this economy. I'm not talking the federal debt here,

13:27historically high though it is. Household 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. Sonja Joseph grew up on a tree line 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.

14:31And 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 buy 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 mean, I'm in a lifetime subscription for the phone ownership. I think 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.

15:32Just 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. Aka, 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.

16:32Use a bike share. Barrow 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. And 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 history in Lewis, Hymen 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. That 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.

17:36Instead 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. Sonia 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. I'm Kristen Schwab. 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.

18:36Downdust goes down 152 today. 310 to 1% 52,421. The NASDAQ dropped 146 points about 610% 26,186. The S&P 500 down 37 points about a half percent. 76 and 19. Today's slide was in part the result of a selloff of a whole lot of heavyweight AI stocks. You've seen the news. Yes, Nvidia sank 3 and 310%. Micron technology gave up 5 and a quarter percent. Intel created about 5.6%. Kristen was talking about the subscription economy. Here's one Netflix. The subscription model giant climbed 3 and 810 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. Running a business is hard enough. So why make it harder with a dozen different apps that don't talk to each other? Introducing O2. The only business software you'll ever need. It's an all-to-one fully integrated platform that makes your work easier.

19:36From CRM, accounting, inventory, e-commerce, and more. And the best part O2 replaces multiple expensive platforms for a fraction of the cost. This is why over thousands of businesses have made the switch. So why not you? Try O2 for free at O2.com. That's O-D-O-O.com. This Marketplace podcast is supported by the University of Illinois Geese College of Business. Earn a world-class MBA degree completely online at your own pace. Through their online MBA program, you'll learn from amazing faculty and network with classmates on a global scale without having to put your career on hold. Take your career to the next level by applying what you learn in real time. Get started at onlinemba.illinois.edu. That's onlinemba.illinois.edu. When you're at work, you never know when you'll be interrupted. But with the Dell Pro powered by Intel Core Ultra with VPro, no matter what distracts you, your laptop won't.

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21:40With Capital One, get a full suite of financial products and services tailored to meet your needs today and goals for tomorrow. Learn more at capital.1 slash commercial member FDIC. This is Marketplace. I'm Kai Rizdal. 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's Elizabeth Trollball reports.

22:41Once 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 limitations. 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.

23:45Because diesel doesn't have great alternatives, Susan Bell with RiceStat Energy says we'll all be paying for it. You'll be paying in everything. Banana, oranges, strawberries. She says diesel acts as an inflationary factor for consumers. They reduce consumption because their household budgets don't go as far. And 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 Closet 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 Provaugh for Marketplace. There are a lot of reasons that people choose to downsize their home.

25:01Maybe 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 Dreabharker 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 an old country 1920s farmhouse. 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 farmhouse was 15 minutes away from mom, right? But I wanted to be like five minutes of driving or even walking distance.

26:01I 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 bones 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

27:12through the winter. She had forgotten to turn off the water pipes in the greenhouse and they burst. So 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 telling her, tonight I need to have me time tonight. 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 edit 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 staying put, write to us would you about your housing journey

28:14at Marketplace.org slash 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 biggest technology companies have nearly $3 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.

29:19I'm everybody, Caitlin Ash, John Gordon, Noia Carr, Steve Mullis, and Stephanie Seek are the Marketplace editing staff. Kelly Silverat is the news director, and I'm Kai Rizdal, we will see you tomorrow, everybody. This is APM. I'm Lee Hawkins, host of Must Be the Money, a podcast for Marketplace. Each week I speak with inspiring entrepreneurs and business leaders about their lived experiences, and they share tangible insights to help guide your path to success. Here from icons like Angelica Nwandu, Van Lathen, Angela Yee, Matt Farns, and more about how to seize opportunity, manage money, and meet challenges with resilience. Listen to Must Be the Money wherever you get your podcasts.