A bit Fed up: central banks’ dilemma

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Hello and welcome to the Intelligence from the Economist. In New York, I'm John Fassman. Every weekday we provide a fresh perspective on the events shaping your world. War has, of course, made life difficult for Ukrainians. It's also been hard on the country's animals, once kept as pets or in private zoos. Our correspondent went to Kyiv to meet the woman who has saved at least 600 of them. And four decades ago, Jacqueline Gold hit upon the idea of revamping the Tupperware parties of the 1950s to sell sex toys. Our obituary's editor reflects on the legacy of a woman who changed British attitudes towards sex. First up, though, For the past year, the Federal Reserve has had one job wrangle inflation and stop it from getting out of control.

Record high gas prices at play in these numbers.

8.6% year over year. Inflation year over year, 8.2%. That is hotter than expected.

Again, the Fed saying ongoing rate hikes will be appropriate. The Fed also raising the 2020. Successive rate hikes since March 2022 have made decent headway. American inflation peaked at 6.6% in September 2022 and has been falling steadily since. It seemed things were on track. But in the last fortnight, a destabilizing banking collapse threw the Fed a nasty curveball.

Silicon Valley bank collapsed on Friday, it became the largest US bank failure since the 2008 financial crisis. Regulators also shut down Signature bank, based here in New York.

And it left Chair Jerome Powell and his colleagues with a difficult decision to make. At yesterday's Fed meeting, the Fed had.

Arguably its biggest headache in years.

Simon Rabinovich is the Economist US Economics editor.

The question was, does it prioritize financial stability or does it prioritize dealing with persistently high inflation? If it was going to focus on financial stability, then the argument would have been that maybe they should not raise interest rates, maybe they should even cut them. But if the focus is on inflation, then very clearly the necessity is to keep on raising interest rates and to emphasize that rates will only get higher. So that was the dilemma that the Fed faced.

And what did the Fed decide to do?

Well, in the event they did raise interest rates by one quarter of a.

Percentage point, at today's meeting, the committee raised the target range for the federal funds rate by a quarter percentage point, bringing the target range to four and three quarters to 5%. And we are continuing the process of significantly reducing our securities holdings.

It's been described by many as a dovish hike in the sense that on the one hand, they did raise interest rates, but on the other hand, they suggested that this could be nearing the top of the interest rate cycle. They're well aware of all the stresses in the financial system coming in the wake of the collapse of Silicon Valley Bank. For the time being, they are still raising interest rates. And so Chairman of the Federal Reserve Jay Powell explained the Fed's reasoning for continuing that upward path.

My colleagues and I understand the hardship that high inflation is causing, and we remain strongly committed to bringing inflation back down to our 2% goal. Price stability is the responsibility of the Federal Reserve. Without price stability, the economy does not work for anyone.

So we just heard from Powell. Give us the counterargument. What would the case have been for not raising rates?

So the first thing to say is that argument did not win. They did raise rates. But though that happened today, I think this argument is going to continue to play out in the weeks and the months to come. So it's far from a settled matter right now. The argument for not pushing rates much higher than they already are is really twofold. So, number one, high interest rates are at the root of the financial chaos that America has been experiencing. Silicon Valley bank and a couple of other small banks were uniquely exposed and vulnerable to high interest rates. But all banks, to a varying extent, are feeling the pain from rate increases. It is leading to valuation losses on their very big and substantial bond holdings. The second point, and I think this is really actually the more important one, is that all of the instability that we've seen in the financial market in the banking sector is tantamount to a form of monetary tightening. Financial conditions are tighter. Banks are going to be a lot more cautious about lending. That's a point that Chair Powell himself made during the press conference.

We believe, however, that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes. It is too soon to determine the extent of these effects and therefore too soon to tell how monetary policy should respond.

The basic point there is that the market is already doing some of the Fed's work for it. Financial instability is going to cool the economy. And moreover, the Fed doesn't want to tip the economy and the financial system into a crisis. So given that you already have this slowdown baked in, and given that you have this risk of something much worse than just a slowdown, why not pause at this moment?

And so that argument did not carry the date. Tell us what did. Why ultimately do you think they decided to raise rates?

Well, ultimately, as we all know, for the past year, the Federal Reserve and other central banks have been laser focused on the problem of inflation. Inflation in America is running near its highest in four decades. The labor market has remained incredibly tight, although there has been a lot of interest rate increases, a lot of tightening. In fact, there have been signs of rebounds in some parts of the economy, including the property market, which is seen as being the most rate sensitive part of the overall economy. So you put it all together and the outlook is for inflation remaining too high for comfort. So, you know, a couple of weeks ago, before you began to have this banking chaos, the expectation had been that the Federal Reserve would raise interest rates by as much as half a percentage point. So the fact that they did just one quarter of a percentage point already is an acknowledgement. Acknowledgement that things haven't gone according to plan. But they're still very, very concerned about inflation. And to the extent that they do succeed in calming the financial problems, we could well be back in a situation in a month or two where inflation is once again running high and the Fed is scrambling to do something about it.

So given this very complex interplay between the Fed's efforts to fight inflation, their efforts to maintain stability in the banking sector, and I guess what you might broadly call market psychology, how equipped is the Fed to fight Fires on multiple fronts.

In theory, the Fed would say that it's very well equipped. It has two basic sets of tools. One set is its monetary policy tools, especially its interest rates. It uses those for cooling an overheated economy or stimulating an economy that's fallen into recession. So the other set of tools are the supervisory, the regulatory, the emergency lending tools. It's kind of unusual though, the situation they're in right now, because if you cast your mind back to the global financial crisis or the big Covid slowdown in 2020, everything in the economy was pointing in the same direction. You know, everything was going down. And so it could draw on both its interest rates as well as its different lending tools to basically try to prop up the economy, prop up the financial system. But the Fed is now in a situation where on hand the economy and especially inflation are still overheated. That calls for tighter interest rates. On the other hand, you now have this instability, this turmoil in the financial system, which calls for directed support. The balance does exist, but trying to get it right in practice is extremely difficult.

Let's talk about one seat on that proverbial seesaw. How is the fight against inflation in America coming?

So inflation has been slowing from its heights, but it's not been slowing fast enough. And so I think the key thing to emphasize here is that Jay Powell and the rest of the Fed do not believe that the fight is over yet.

The median unemployment rate projection in the SEP rises to 4.5% at the end of this year and 4.6% at the end of next year. Inflation remains well above our longer run goal of 2%.

So whereas the market has priced in the Fed cutting interest rates before the end of this year several times, the Fed itself thinks that it's not going to start easing rates until next year precisely because it believes that inflation is not going away. It's not going away quickly enough.

So that's what the Fed has to say about inflation. Did it have anything to say yesterday about banking sector stability?

Well, as you would expect, Chair Powell came out and said that he thinks the problems are under control. He said that it was a series of isolated institutions that were really outliers and that they had to step in as heavily as they did to prevent contagion, to prevent the problems and a couple of badly managed banks from spreading to much better managed banks. The banking sector turmoil for now seems to have calmed down, but the underlying issues are still very much there.

And this is one of the meetings at which the Fed issues guidance on how it expects the economy to perform in the coming months. What did it have to say? What are its expectations?

Well, it still sees moderate growth this year. I think that there's a big pinch of salt that we should apply to all of these forecasts. Chair Powell himself says that we will see what the data brings and Fed policy will be dependent on that. But he also said that he still thinks there is a path to a soft landing for the American economy, one in which they're able to bring inflation down, they're able to avoid having any kind of outsized problems in the financial sector. I guess that's a kind of cheery note to end on. But I would also add a less cheerful note, which is that the risks around this narrow path look a lot bigger than they did a couple of months ago. You know, it used to be that the risks were on one side there was high inflation, on the other side there is the potential for recession. I think at this point you have to say that inflation looks a little bit scarier given all of the easing the Fed has had to do to keep the financial system on track. And the downside is no longer just a mild recession. The downside really is a financial crisis. So I think for the sake of the world, we better hope that the Fed does stick to its narrow path because either side of it does look rather frightening.

All right, Simon, thanks so much for your time today.

Thank you.

Foreign.

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Alex is a white tiger in Kiev at this pop up shelter on the outskirts of the city.

Piotr Zalevsky has been in Ukraine for the Economist.

He has gained some weight, started walking since arriving. The bloody welts that covered his body when he arrived are gone, but he still suffers from gastroenteritis and his roar sounds like a chain smoker's cough. But he will live thanks to the Herculean efforts of one woman. Natalia Popova works alongside Ukrainian troops. She says these animals are often found abandoned in deoccupied territories near the front lines of the war. The troops call animal protection agencies who all have her phone number as she travels across the country at war to pick them up. To collect Alex, she drove for about 370 miles to a town called Vovchansk. In her van, She has rescued and looked after lions, tigers, bears, wolves, hedgehogs and many other species. Many of the animals were once kept as pets in homes or private zoos near the front lines, but it's dangerous to collect them. Ms. Popova and the Ukrainian soldiers who accompany her often face live fire from Russian invaders. Recently, while she was preparing to anesthetize a bear in Bakhmut, the bombing became so intense the Ukrainian army ordered her to pull back. She refused. Moments later, a grenade landed meters away. We'll die together, she remembers telling the bear. But the grenade failed to explode. Since then, she says, the soldiers think she's crazy. Ms. Popova aims to rehabilitate any animal that she's able to rescue. She says they often struggle with concussion because of the shelling. She says they remember and get flashbacks to their experiences. So she often has to keep them on sedatives during airstrikes around Kyiv. She says they often have musculoskeletal problems and problems with their digestive system. And one lioness she rescued turned out to have been pregnant. She didn't have time to send the lioness away to a zoo outside Ukraine, and in fact, she gave birth to three cubs. This is something she usually fights against. Some of her rescues end up at the Kiev Zoo, which has its own problems with blackouts and with Russian missile strikes. But most of Ms. Popova's charges are evacuated abroad. The first destination is a zoo in western Poland, where the animals undergo rehabilitation before being sent to zoos elsewhere in Europe. But it's a tricky process for animals with no documents. She ends up having to wait for weeks and sometimes months before being able to transport them to Poland. And in the meantime, as more areas are liberated and the war grinds on, Ms. Popova heads back out for more calls about marooned animals. She says everyone asks how she is not afraid. But I am afraid, she says. Only idiots are not afraid. I am just the only one who is afraid and goes. Others are afraid and don't go. That's the only difference.

Jacqueline God didn't usually go out to parties in Thames Mead, which was a dreary estate out on the Thames estuary. But in 1981, one day, she found herself going with a friend to a Pippardee party, which was an event where women in their own living rooms would sell each other clothes.

Ann Roe is The Economist's obituaries editor.

They were an extension of the Tupperware parties that had taken America by storm in the 1950s, where housewives had sold each other plastic bowls. Pippiti parties went a little bit further in that they were sometimes as daring as to sell lingerie to each other. And this was what this party was like. The men were banished to the shed or to the pub. The women got out the wine and started playing games. One of the things she was asked to do was to see if she could draw her husband's meat and two vegetables off the top of her head. And in the course of the party, someone said to her, you work for Ann Summers, don't you? Which was true. She had started handling the payroll for rather decrepit Ann Summers shops, which her father, David, had recently bought out of receivership. And the woman said to her, wouldn't it be a good idea to have an Ann Summers party like this one? It was plain something had to change in the world of retail sex toys and everything to do with sex generally. At that time in England, even though it was not that long ago, the only place where you could buy remotely sexy clothes and gadgets was seedy sex shops. Their customers were almost uniformly men, who were called the Dirty Raincoat Brigade. Women wouldn't set foot in these shops, so they had to put up with men buying what they thought the women would like, and they were getting increasingly fed up with this. So something had to change. And Jacqueline went away with the notion that she would try a party in Biggin Hill, where she lived, which was a much more select suburb further south. And after the lingerie had gone round, she brought in a bag of sex toys from the Aunt Summers shops and passed those round too. The reaction was extraordinary. The women were giggly and nervous and curious and excited all at once. And she, being the daughter of a very successful entrepreneur, immediately thought, ha, there's a market here. But back in 1981, the Board of Ann Summers took quite a lot of convincing. It was a totally male board, six men in gray suits, who were very scornful of this suggestion that women should hold parties and sell these things to each other. One man threw his pen down on the table and cried, women aren't even interested in sex. How can they possibly be a good idea? But her father cast the important vote and decided that he would let her have the £40,000 she had requested to start this network of party givers. So off she went. She would hold recruiting parties in the Strand Paddis Hotel. She would place adverts in the Evening Standard. She got into trouble for doing that because she was still on the very edge. Legally, this was seen as unlicensed sex work. She went to a trade show in Bristol once and her stall was ordered closed down and she herself was arrested. When she went to Ireland, it was even more difficult. She set up a branch in o' Connell street and opened a shop to. In response, she was sent a bullet in the post. She defused all this opposition by simply being herself. She was a quiet, very shy woman, and she also encouraged the shops to look as bright and welcoming to women as possible. There was all sorts of saucy gear on sale there, all kinds of chocolate willies and penis pasta and anything that made a bit of fun of men's parts. All sorts of aids to blissful sex. A great many vibrators. This was her main line. And in fact, after one particular vibrator called the Rampant Rabbit was featured on Sex and the City, her vibrator sales went up to 2.5 million a year. Entertainment and enjoyment were what were driving her in this industry. But there was also a deeper motive, which was her personal wish to reclaim the years where sex had been nothing but misery to her. She had a very difficult childhood. Although she was brought up in a comfortable home, her mother didn't really love her and found her a difficult child. She was probably not as pretty as her mother would have liked, so she felt unloved. And she also felt threatened by a man who came into her mother's life when she herself was about 12, a man called John. Her mother started having an affair with him, and she and her sister, where they were picked up from school, would be driven by their mother to John's house. They would be dumped in the garden and had to stay in the cold while John and her mother cavorted inside. John then moved in to become her stepfather. He was a terrifying figure, and worse than that. He would trail after Jacqueline. He would watch her as she showered, he would watch her as she slept, and he was clearly grooming her for sex. He did everything he possibly could to her, except fully penetrate her. She was utterly miserable. But by the age of 15, she gathered up the courage to tell him to stop. And to her great surprise, he did. However, it took her a long time to get over this abuse in her childhood, and the setting up of the stores and the teaching of the maxim that sex could be a great deal of fun was her way of getting over the misery she'd suffered. And she felt very sure that there would never really be change until the attitudes laid down across millennia began to alter, so that women were no longer brought up to think they ought to be perfect, and men were no longer brought up feeling that they were the ones who had to be brave. She had certainly proved in her career that women could be brave, too.

Ann Ro on Jacqueline Gold, who has died at the age of 62. That's all for this episode of the Intelligence. Let us know what you think of the show. Drop us a line@podcastseconomist.com or leave us a rating wherever you listen. We'll see you back here tomorrow.