Drop it when it’s hot: the Fed’s consequential hint

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Hello and welcome to the Intelligence on Economist Radio. I'm your host Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. In Europe, the early stages of the pandemic led to lower drug consumption and trafficking, but both quickly got back to normal. We look into how both drugs and drug syndicates on the continent are getting more potent. And one thing that didn't seem to change with the pandemic was productivity. Workers got as much done as before. It's now crystal clear, though, that they worked more hours to get there for that drop in efficiency. Blame too many meetings. First up though, Today, Jerome Powell, the chairman of America's Central bank, will be testifying before Congress, one of many officials from the Fed who will be taking the mic this week. They all have to be careful what they say. Last week, Mr. Powell merely hinted that interest rates might be raised a little earlier than previous mere hints had suggested.

You can think of this meeting that we had as the talking about, talking.

About meeting, if you like.

That talking sent markets tumbling. The Dow fell more than 500 points Friday.

People are going to panic if they.

See that the Fed's raising rates.

I think there are a lot of grizzled financial veterans who can't believe their eyes right now.

Before rebounding yesterday, it was a reminder of the fine line that the Fed has to walk as America's economy shakes off the chains of the pandemic.

Last week was a very volatile and rocky week for markets.

Alice Fullwood is the Economist's Wall street correspondent and spoke to us from our New York bureau.

And this was all triggered by a meeting of the Federal reserve on Wednesday, June 16, where they suggested that they might think about tightening policy a little in the future. So they might consider raising interest rates or scaling back the asset purchases that they've been doing at some point in the future, a little bit sooner than perhaps markets expected.

And it's just that mismatch with expectations that caused all those Paroxysms, then.

The policy stance of the Federal Reserve is sort of one of the most important things that investors watch because it has such huge ramifications for share prices, commodity prices, growth and inflation in the American economy and, by extension, the rest of the world. And so investors tend to hang on every word that the Fed says, how it communicates about what it's thinking about the US Economy and how it might change policy. And for the past six or seven months, the message has been very clear. The Fed was going to look through inflation as it climbed. They expected it to climb as the economy reopened and as we sort of recovered from the worst of the pandemic. And a lot of Fed officials had sort of said that they were happy to look through that because they thought it would simply be transitory. And so it came as a bit of a shock on Wednesday when Jerome Powell, the chairman of the Fed, was saying things like, we need to tighten policy slightly sooner than expected. And the Fed also publishes a sort of slew of forecasts. It publishes inflation forecasts and also a sort of expected trajectory for interest rates. And it revised up those inflation forecasts and pulled forward some of the rate hikes into 2023. And that means that interest rates might go up in the States sooner than investors were expecting. So that sort of mismatch between what the Fed had been communicating and then its sort of reaction to inflation actually rising has sort of prompted this rocking of markets.

So the Fed is trying to deliver a gentle signal of what it sees coming down the line and adjust everyone's expectations accordingly. That's fair enough, isn't it?

If you look at what's happened over the past few weeks since the Fed last met, inflation has picked up quite quickly, more quickly than most people expected. Growth seems to be returning quickly as well. And if you go out on the streets of any American city, there are people out shopping in restaurants and bars, doing all the things that the pandemic denied them. And it seems as though growth has returned, and it has returned, and so is inflation a little more quickly than perhaps people were expecting. And so the Fed saying the information has changed, so we've changed our minds is quite a reasonable thing to do.

But as you say, the Fed's policy on interest rates is a huge indicator for the rest of the world. How have those jitters in American markets been spread?

So one of the things that investors have been watching most closely is how other central banks and emerging markets, especially emerging market currencies, have reacted to. Because the last time that the Fed had to tighten policy once more post Crisis was in 2013, where they started winding down asset purchases after the global financial crisis. And that's probably the first step for them to tighten policy again this time. And when they did that in 2013, there was this so called taper tantrum. And it was so called because the Fed was tapering off its asset purchases. And markets threw a complete tantrum in the wake of this. And that resulted in huge volatility in markets. But in particular, a lot of emerging market currencies basically fell through the floor. There were sort of five countries in particular, Brazil, India, Indonesia, South Africa and Turkey, who also their currencies fall extremely sharply against the dollar. So those central banks have been very nervously watching. And indeed the Brazilian central bank raised interest rates, which is the third time they've done that this year, on the same day that the Fed made its announcement, even though their economy has still not really recovered from the pandemic and is doing quite badly.

So why would the central bank in an emerging market like Brazil's actually get ahead of the Fed on this?

So emerging market central banks kind of have this difficult job of trying to balance two different things. So on the one hand, they tend to import a lot of important goods from overseas, and people who live in Brazil like a stable currency because it helps the prices of those things remain quite stable. But at the same time, the central bank is trying to set interest rates to facilitate whatever the local economy needs. So if it's down in the doldrums, you would expect them to keep rates low. Balancing those two things can be very, very tricky at times like this, because if you want your currency to remain stable in the face of the Fed potentially tightening up policy raising rates, then you probably have to get there before the Fed and sort of preemptively act to raise rates to defend the value of your currency. And if you don't, it may fall through the floor like it did in 2013. And that can cause you a lot of problems down the road, particularly inflationary problems, but maybe that's not appropriate for your local economy and you have to make a choice, sort of, which one of those things do you think is more important?

So given that the markets have already gone through this, then expectations have been reset. The Fed is saying what it's seeing. This volatility is now something in the past.

Probably not, that might be a little optimistic. This is the beginning of the Fed's journey to removing the sort of emergency support put in place during the COVID 19 pandemic and returning interest rates to a more normal level. The question is really whether this sort of incremental change in its stance, this sort of slight signaling that things might happen a little sooner than people expected and that it might begin discussing tapering off those asset purchases this time around is sort of whether the market's reaction to that was appropriate. You know, it's possible that the market overdid it. It is an incremental change in the stance. It's not like they raised rates or actually tapered the asset purchases. Now the sort of amount of support being supplied to the economy is still the same. And the reactions were quite extreme. So, you know, it's possible that markets overdid it. So it's very possible this week that things will reverse a little, everyone will calm down, but at the same time, the Fed could double down. There are a lot of Fed speakers this week. If they all communicate sort of very hawkish statements, we may see an extension of what went on. So one way of thinking about it is that, you know, a lot of market investors have been all singing the same song for the past seven months, which was betting on this great reopening and strength in the economy was the right thing to do. Now they're quite divided.

Alice, thanks very much for joining us.

Thank you, Jason.

On the latest episode of Money Talks, our sister show on business, finance and the markets, our experts look at how American companies are preparing for inevitable rises in inflation. Check with your trusted broker for Money Talks every Wednesday. Police forces from 16 countries around the world revealed an enormous very 21st century sting operation earlier this month.

Operation Trojan Shield was a covert law enforcement operation focusing on globally interoperating criminal networks, needs for encrypted communications.

The deputy director of Europol, the European Union's police agency, said that plenty of incriminating evidence was there for the taking. On an encrypted messaging app.

This information lead over the last week, hundreds of law enforcement operations on a global scale with impressive Results. More than 800 arrests, more than 8 tons of cocaine and more.

That evidence included how criminal networks were getting drugs across borders, such as concealing cocaine in shipments of fruit and canned goods. COVID19 ground all kinds of trades to a halt. It changed all kinds of habits. But some lines of work have proved more or less pandemic proof.

So you would expect that drugs that are used during parties would be used less when there is a massive global pandemic that is preventing people from having parties.

Matt Steinglass is a Europe correspondent for the Economist and is based in Amsterdam.

And in fact, that turns out to be partly the case.

And how is it that we know.

That we have two ways of measuring drug use. One of them is to look at samples of wastewater, and another is police records of how many drug seizures they've made in the wastewater samples. What we find is that in the early days of the pandemic in 2020, particularly in a couple of cities, residues of cocaine and mdma, also known as Ecstasy, dropped pretty sharply in Amsterdam especially. But by last summer, they were back up to more or less normal. And in many cases, judging by anecdotal evidence, it seems like people just stopped using drugs in clubs and started using them in their living rooms.

And what about that other measure, the police seizures?

Police seizures have been going up and up for a long time. But partly this might be an artifact of better police surveillance technology. They have cracked some messaging apps and have worked their way into the networks that distribute drugs. So there have been massive seizures of cannabis, cocaine, ecstasy, crystal meth, and what have you. In 2020, inspectors at the Port of Rotterdam, which is the biggest port in Europe and also the biggest drug port in Europe, seized almost 41 tons of cocaine, which was 7 more than they did in 2019. In one week this spring, they discovered 2.7 tons of cocaine hidden among Ecuadorian bananas, Brazilian pumpkins, Malaysian computer parts, and so forth. They find cocaine periodically in crates that are chained underwater to freighters in the port. And the potency of the drugs that they find is going up as well.

Going up by how much?

So, on average, cocaine in Europe was 57% purer in 2019 than it had been 10 years earlier. An ecstasy pill had almost two and a half times as much MDMA in it. Cannabis had 56% more THC, which is the molecule that actually gets you high. And the most used recreational drug is cannabis, which has relatively few harmful effects. But the number two drug, which is rising rapidly in Europe, is cocaine.

And why would that be worrisome?

So, at one level, people are free to consume substances that they want to consume. Morally speaking, if people are aware of the risks, then a lot of people would feel that this isn't something that society should be overly concerned about. But obviously, some forms of drugs have serious health concerns attached to them. So, for example, cocaine, apart from opioids and heroin, is the drug that is most likely to send users to Hospital. In 22% of overdoses, they find cocaine in people's systems. But that's not the only worry. Ecstasy and amphetamines are usually Manufactured in Europe. But cocaine has to be imported, and that means that it contributes to the growth of powerful crime syndicates. Starting in the 2000s, networks that initially brought in hashish from North Africa switched to bringing in cocaine, which was much more profitable, and set up distribution operations to take this stuff from Spain all the way across into Scandinavia. And these groups, they have very colorful names. In the Netherlands are called the Mokro Mafia. In Sweden, there are gangs with names like Death Patrol and they're the source of a lot. The most eye catching and grim violence in Europe these days. Swedish gangs have started using hand grenades to intimidate each other. In Dijon last summer in France, there were running street battles between drug dealers, mainly of North African descent, and hundreds of Chechen immigrants and so forth. This kind of crime, it's very visible, a high profile.

And so that's the real worry then, that with strong drugs comes strong drug crime.

Yeah, the total number of drug related killings is small. If you look at number, you know, there might be a dozen or two dozen in a year in a country like the Netherlands, it doesn't present a major safety risk to average citizens. But they're often very gory and picturesque. So they create the impression of a crime wave. And because those distribution networks tend to be concentrated in poor immigrant communities, they create the impression both of a crime wave and an impression that immigrants are linked to criminality, which is a very divisive political tendency. So overall, murders in Europe have dropped sharply over the last two decades. But according to a project called the Violence Research Initiative at Leiden University, killings linked to the drug economy have not. And criminality has a way of kind of metastasizing into other industries. So at the port of Rotterdam, it used to be that couriers would get their drugs by figuring out how to jump fences, get inside. They'd have the number of the container where the stuff was hidden, they would crack their way into the container and they'd come out with a backpack full of stuff. Nowadays they go to work for a major transport company, they get a truck driver's license, they get certification to work at the port, they drive a truck into the port and they go out with the entire container.

And so in that sense, is this particularly a problem in Europe in the context of other countries where drug use is strong?

In some ways, Europe is better off than, for example, the United States. The massive opioid epidemic which has hit the United States over the last 15 to 20 years, none of that happened in Europe. And another thing that has not really ever hit in Europe are methamphetamines or crystal meth. But there are some worries at this stage that a new form of crystal meth that's made very cheaply in Afghanistan directly from the ephedra plant might be making some inroads in Europe. And another thing that's been disappointing is that in the United States, a lot of states have finally started legalizing cannabis over the last decade, which is a very sensible policy because cannabis is among the least harmful illegal narcotics. And in Europe, where they pioneered that approach in the 1970s and 80s, in countries like the Netherlands and Portugal, they've come to a standstill. There hasn't been any further progress. There's very little movement towards decriminalization of cannabis in Europe. And one of the risks there is that, as you see with the cocaine industry, if you have a network that's set up to distribute one kind of illegal drug, then it's likely to end up being used for another one.

Matt, thank you very much for joining us.

Thank you, Jason.

Over and over as the pandemic played out, one assessment just kept coming up. It was accelerating trends that were already underway. Working from home was is perhaps the most extreme example of that. Suddenly, every office worker bee was doing it. Now, more than a year later, researchers are crunching through the survey data that Grand Experiment generated. And one study from the University of Chicago carries a clear message for managers.

The study looks at the experience of workers of the Nation technology company, and it found something different from the results of previous studies of productivity.

Philip Coggin writes Bartleby, our column on work and management.

Those previous studies tended to ask people whether they felt as productive under the pandemic. And indeed, both employers and employees said they were just as productive working from home during the pandemic as they had been beforehand. And part of the reason why that's true is they did produce as much, which you and I might consider to be the standard definition of being productive. That's not what economists think. They measure productivity as the output per hour. And what this study found was that people were producing as much as they did before, but taking many more hours to do it. And therefore, in productivity terms, they were being less efficient than before.

So how much less efficient and what's the hypothesis for why they are?

Well, the estimate is that they worked 30% more hours than before the pandemic, and that made them 20% less productive. And why that is? Well, it's an interesting question because this is a company which has installed software on the laptops of the employees, which monitors what they're doing websites are on when they're using their mouse or their keyboard. Thank goodness they don't do this at the Economist. And they found that people were working in terms of focus time when they actually set tasks, slightly fewer hours than they were when they were in the office. The problem was those extra hours were entirely taken up by meetings.

And what's wrong with having so many meetings then?

Well, longtime readers and listeners may recall Bartleby's law, which is that 80% of the time of 80% of the people in meetings is wasted. That's as true of zoom meetings as it is of anything else. You've all got to sit there while somebody else speaks. It's actually slightly more uncomfortable to do so in a zoom meeting because the camera's on you all the time. So all these meetings use up an enormous proportion of employees time. And I'm sure our readers and listeners will know people who just go from one meeting to another during the course of the working day.

Why is that, though? Why does working from home involve more meetings than working in the office does?

Well, it may be that they've got to justify their own existence. So if you're managing from home, people may wonder what on earth you're doing. Whereas if you're in the office, you can wander around and say, hello, Jason, hello, Philip, how are you getting on all that kind of stuff? And that's more difficult to have that kind of interaction when you're working remotely.

And so it seems on the basis of this study anyway, that the working from home revolution isn't maybe as guilt edged as we thought.

No, if it requires a lot more meetings, then you lose many of the benefits. Because one of the benefits of working from home is that you save on the commuting hours. But this study suggests that far from that, workers have lost all that commuting saving because these dreaded meetings are using up all their spare time.

So you spend your working hours thinking about the future of working hours. Taking this into account, what do you think the future of work looks like?

Most people tend to think that it's going to be hybrid working. And I think that's right. Employees would like about two days a week at home. Whether employers will let them have that much is an interesting question. But I think employers now recognize that it's possible for employees to be productive at home. The pandemic is a great era of potential freedom for employees. We spent 200 years basically as a slaves to the clock. The 9 to 5 pattern Monday to Friday. And this has shown us that we don't need to do that all the time. And that's a great thing, as long.

As we're not working too many hours at home, I guess.

Yes. And if this study is right, then working too many hours at home is an easy problem to solve. Don't call as many meetings and make them shorter. That's as true in the office as out of the office, but it's especially true out the office.

Thanks very much for joining us, Philip.

Thank you, Jason.

That's all for this episode of the Intelligence. If you like us, leave us a rating and a review and you can subscribe to the economist@examiner.com intelligenceoffer the link is in the show Notes. See you back here tomorrow. Sam.