Fed-letter day: at last, a rate cut

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The Economist.

Hello and welcome to the Intelligence from the Economist. I'm your host Rosie Bloor. Every weekday we provide a fresh perspective on the events shaping your world. Ukraine's president has spent much months asking his country's allies to supply long range missiles. But what difference would these weapons actually make in the war with Russia? And we've had biopics of historical figures, Hollywood icons and pop stars. The latest trend is designers. Why, our correspondent asks, is showing fashionistas on screen now so well, fashionable? First up though.

Today the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by a half percentage point.

Markets and pundits had been anticipating the move for weeks. And yesterday Jerome Powell, chair of America's central bank, the Federal Reserve, revealed the decision. The Fed cut its benchmark interest rate by half a percentage point to between 4.75 and 5%. It's the first cut since the pandemic when rates were slashed. Since then, they've been on an upward path to combat raging inflation. This latest move suggests the Fed thinks it has tamed inflation without plunging America into recession, achieving the soft landing that everyone wants. But it could also indicate worries about a different part of America's economy.

The Fed's decision to cut rates by half a percentage point is quite momentous.

Simon Rabinovitch is our US Economics editor.

Over the last couple of years, they've been on the warpath against inflation, jacking up interest rates. They're now beginning to go into reverse. So it really reflects the Fed's view that inflation is, is not that big of a problem anymore. But there is quite serious concerns about the state of the labour market.

Simon, we've been waiting for a cut for a really long time. Did you know this was coming? Did we see this coming?

Jerome Powell, the chair of the Fed, made quite explicit last month that interest rate cuts were indeed in the pipeline. Where there was uncertainty was how big the rate cut was going to be. If we had spoken one week ago, I could have told you that just about everybody in markets were at that point expecting a cut of one quarter of a percentage point. But over the past couple of days, that view changed. Markets began to expect a half point cut and indeed that is what the Fed delivered.

So what does this cut say about how America's economy's doing?

Well, I think if you looked at the cut in isolation, without hearing what Jerome Powell had to say about it, you might perceive it as a sign of concern about the state of the labor market. They could easily have done a quarter point cut. The fact they went for a bigger one suggests that they really think the bottom is beginning to fall out of the employment market. But the way that Chair Powell explained it is that this is really about recalibrating monetary policy, trying to get it to a place where effectively it's neutral, where you don't have too much risk on either side of the picture, and that from here on forward we may actually see smaller moves. This was just a way to catch up to where monetary policy ought to be.

As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased. We now see the risks to achieving our employment and inflation goals as roughly in balance.

He said at several points that he was quite satisfied with the state of the US economy, that there was no recession in the offing.

The US Economy is in good shape. It's growing at a solid pace. Inflation is coming down. The labor market is in a strong pace. We're want to keep it there.

This really was intended to ensure that what is a pretty good economy stays that way.

And how will the Fed's rate cut help keep the American economy strong?

At the most general level, high interest rates slow an economy. They make it more expensive for businesses to invest money. They make it More expensive for consumers to borrow money. They slow down the property market. By beginning to lower interest rates, The Fed is basically taking its foot off, off the brakes somewhat, is beginning to ease a lot of those restraints now. It takes months and months for a rate decision to feed through. The economy is not going to look fundamentally different in a couple of days from what it looks like now. But it is a signal of the direction where the Fed is taking monetary policy. The Fed believes inflation is coming under control, and therefore it is time to begin to ease the restraints on the economy and hopefully ensure that the labor market does, doesn't weaken any further from where it is right now.

And there was one dissenting voice, as I understand it, in that decision. How important is that?

Yeah, that's right. There was one of 12 voting members on the rate committee who voted against the decision. It's symbolically interesting because this is the first time since 2005 that a member of the Rate setting committee at the Fed has voted against the decision. Typically, there's utter unanimity in the grand scheme. It's an 11 to 1 vote. That's still an overwhelming decision to cut by half a percentage point. But I think what that reflects is that behind the scenes, there really was quite an active debate within the Fed about whether to cut by a quarter point or by a half point, just as there was a big debate within markets about what the right size of the cut was going to be.

So do you think we'll see more interest rate cuts? And when would we see these?

By virtually any metric, interest rates in America are still relatively tight. I mean, the Fed believes that in the long run, interest rates should be closer to 3%, and right now they're sitting on 5%. So in the coming years we will see more rate cuts. The question is, how quickly will those rate cuts come? How aggressive will the Fed be in the coming months? What the Fed laid out with its projections for the economy is that you will see inflation continuing to tick down in small increments and the labor market weakening a little bit further. And if those two basic goals are hit, then they're basically setting things up for a step by step, small incremental reduction in interest rates to hit that 3% level. The point with that picture, though, is that there's two basic parameters for the Fed when it makes its decisions. One is inflation, and the other is the unemployment picture. Mr. Powell was at pains to stress that if the unemployment rate goes up quite sharply and inflation actually looks like it's really slowing much more than People had been expecting we could well see another half point cut at the next Fed meeting, which is going to be in early November, two days after America's presidential election. If, however, inflation proves to be persistent and we get a series of really strong job market reports, then it's entirely possible that the Fed will just keep rates where they are right now. You know, if I were a betting person, I would say, yeah, probably next meeting they'll cut by a quarter point. But as Mr. Powell himself said, that is not decided at this point in time.

Simon, I'm delighted you reminded me that it's an election year. How might this decision to cut rates affect either presidential campaign?

Well, the Fed was in a damned if you do, damned if you don't position. If they had opted for the smaller cut, the quarter point, a lot of Democrats would have been furious, believing that the Fed was taking undue risks with the economy in the lead up to the election. Having gone for the bigger rate cut, though, a lot of Republicans, including Donald Trump, will not be pleased. They'll believe the Fed is playing politics, that this is trying to deliver a boost to the markets, and that therefore, this is something that's being done to boost Kamala Harris's chances. Mr. Powell stressed yesterday, as he is stressed on many occasions, that the Fed is an independent institution.

We do our work to serve all Americans. We're not serving any politician, any political figure, any cause, any issue, nothing. It's just maximum employment and price stability on behalf of all Americans.

But, of course, inevitably, any Fed decision would have been a lightning rod or political criticism, given where America is right now in the election cycle.

Simon, thank you so much for talking to me.

My pleasure, Rosie.

And if you want to hear more about the election, and let's face it, who doesn't? We've made our US Politics show, Checks and Balance, free to all listeners until October 6th. Every Friday, John Priddo and his co hosts take on one big theme in American politics tomorrow. Could Trump contest the election result?

Last week, I visited RAF Northolt. It's an air base in northwest London, and I was there to mark the 84th Battle of Britain Day.

Shashank Joshi is the Economist Defence editor.

It's the country's annual commemoration of the Royal Air Force's successful resistance to the biggest ever Nazi raid on London, and it was a really poignant moment. A Lancaster bomber circled ahead, an RAF band played, and the Chief of Air Staff took the salute. The memorial seemed oddly resonant to what we're seeing today. Of course, on the Other side of Europe.

Foreign.

Cities throughout Ukraine. This vicious Russian bombing campaign involving missiles, bombers, glide bombs, is wreaking havoc. Ukraine is firing back with its own drones and missiles, but because it's getting most of its weapons from the west, it can't fight fire with fire. America and its allies won't let it. And in the past few weeks, there has been an intense public debate over whether Western countries ought to allow Ukraine to use their longer range weapons inside Russia. And we may well soon see a change in that policy.

So, Shashank, can you lay out this intense public debate for me? What are the arguments here?

On the one side are concerns about escalation. Vladimir Putin, Russia's president, has said that Western arms landing deep inside Russia would cross a red line. He said that that would mean the west was at war with Russia. The Biden administration is cautious. It says that Russia has already moved a number of its fighter jets further east so that the air bases are not as valuable as targets anymore. It's worried about escalation in a way that might drag America into a conflict with Russia. And also, there simply aren't a huge number of these long range missiles, whether that's American ones or European ones. They are scarce, they are expensive. Ukraine has to be very, very careful with, with how it uses them. On the other side of the argument is Ukraine and many of its allies saying if you can't hold Russian air bases, ammunition depots, command posts at risk, Russia is enjoying sanctuary and that you simply won't be able to blunt Russia's offensive without taking the fight onto Russian soil.

So who's right, Shashank, what do you think?

I think that as so many times in this conflict, Rosie, we've obsessed over one game changing weapon, and one weapon is never game changing. You know, F16s are not game changing. Long range rockets are not game changing. Long range missiles won't be game changing. And it is true, I think, as the Americans argue, that Russian aircraft have been probably moved out of range. However, I think it is also clear to me there are still a lot of Russian targets that would be within range. And to give you a sense of the range of an American ATACMS ballistic missile, which is one of the weapons we're discussing here, that's about 300 kilometers. So to be clear, you know, we're not talking about striking Moscow, we're talking about striking Russian command posts and barracks and depots within a couple of hundred kilometers of the Ukrainian border. And I think that would undoubtedly have some military benefit and it would Undoubtedly ease some of the pressure on Ukraine's beleaguered forces inside Eastern Ukraine.

So Shashank, just explain to me exactly what missiles we're talking about here then.

We're really talking about two types of missiles. One of them is called ATACMs. That's an American ballistic missile. Ballistic means it goes up and down in a kind of ballistic arc. And the other one is called Storm Shadow. This is an Anglo French cruise missile. The French call it Scalp. That is a very advanced cruise missile. Unlike a ballistic missile, it flies a bit like an aircraft, quite low, quite flat, it doesn't go out of the atmosphere, it has an air breathing engine. It's very stealthy, equally very devastating. So those, those are the weapons we're talking about. But ultimately the difficulty here is that America has a substantial say over how many of these weapons can actually be used in practice.

And why does America have a substantial say on European missiles?

It's a little bit complicated and no one knows for sure because this is all so classified. But basically it's a couple of things. One is the construction of the missiles. There are some older batches of Storm Shadow that have American components in them. We don't know if the ones in Ukraine do or not, but in the past that's been a challenge because it means America has a say over whether they can be exported and presumably could also impose other conditions. I don't think that's really the big problem here though. The bigger problem I think is that if you look at how Storm Shadow navigates, it doesn't just rely on gps, which a lot of other munitions do. It relies on a couple of other things. One of them is called inertial navigation, which is systems that tell the missile how far it's gone, the direction it's gone in, and it can kind of course correct. But the other one is something called terrain reference navigation. And what that means is the missile looks down at the ground and it compares what it sees to a library of images it has on board. And by doing that, it can navigate to its target incredibly accurately, even in the face of intense Russian jamming. So that's obviously hugely important. But where does that data come from? Well, in some cases we think it comes from American satellites and sensors. That means it's usually very tightly held within the Five Eyes alliance, which is America, Australia, Britain, Canada, New Zealand. Now, Rosie, the missile's still going to fly without that up to date data. But if you want it to be maximally accurate and you want it to really be sure of Overcoming Russian defences. You need that American data in many cases. And I think that is really what these ongoing discussions and debates are about.

So if the ultimate decision about whether these missiles can be provided both the hardware and the software comes down to the U.S. do you think that American concerns about escalation can be overcome?

I think they can be. We've already seen America give permission to Ukraine to use some of its more basic short range weapon systems on Russian soil to repel a recent invasion of Kharkiv in the north northeast of Ukraine. And American military equipment has also been used in Kursk Province during Ukraine's recent offensive. I also think the concern here, Rosie, it's not really about direct retaliation. It would be pretty stupid for Putin to attack NATO directly unless he's totally desperate because it would end very badly for him. I think what people are more concerned about is other kinds of retaliation. That could be an intensification of the Russian sabotage campaigns that we've been seeing in Europe that have been going up and up. But it could also be be what experts call horizontal escalation, which is to say the same thing done somewhere else. And in particular, we know that Russia has had military intelligence officers inside Yemen working alongside the Houthis, who are a armed group that has been firing Iranian made missiles at shipping in the Red Sea in solidarity with Palestinians in Gaza. And the concern is they could provide the Houthis with more advanced missiles. I think another concern is that Russia could also transfer knowledge that might help with Iran's missile or nuclear weapons program. And we know that the US and the UK have been discussing intelligence suggesting troubling elements of that in recent days. I think that that would be a pretty drastic step by the Russians, but obviously you can't rule out that they would be willing to take some fairly risky steps in response.

Shashank, there's a clock on this. With winter coming, Ukraine in a tight spot and the presidential election. When are we going to get any kind of result?

Well, Zelenskyy's going to the United States this week. We've just seen Keir Starmer, the UK Prime Minister, talking to Joe Biden. Discussions are clearly at a very advanced stage. Some people think that really a decision has been made already. What I think is clear though is that we shouldn't expect a big public announcement. There's already a concern that all this public debate has allowed the Kremlin to seize the narrat to get its threats into the public domain before anything's happened. I suspect that if a decision is made. And I think we probably are eventually going to see permission granted for these weapons to be used. If that happens, I think the first we are going to know about it is going to be a big bad explosion on Russian soil.

Shashank, thank you very much. Out with a boom.

That's right. Yeah. Thank you so much for having me again.

From Tokyo to Seoul onto New York, London, Milan and Paris, there are more fashion weeks in September than there are weeks in the month.

Rachel Lloyd is our deputy culture editor.

Recently, haute couture has also been starring in some of television's most viewed and talked about shows. Dramas have been trendy. To start with, at the beginning of the year, we had Crispel Balenciaga, which looks at the Spanish dressmaker, and 30 years of his career, He was called the master of us all by his pair, Christian Dior. Then there was the New look, which looked at Dior and Coco Chanel during the Second World War. And lastly we had Becoming Karl Lagerfeld, which followed the German director before he took over as Chanel's creative director. But it's not just drama that's strutting across screens. There's also been several documentaries. There was one about John Galliano, a British designer.

Yeah, I'm going to tell you everything.

There was another about Diane von Furstenberg, a Belgian designer of the famous wrap dress. And there's more to come as well. Netflix recently announced a docuseries focusing on Victoria Beckham's fashion house. There are a couple of reasons why fashion is so chic among television and film producers at the moment. One of them is just a pure storytelling perspective. This is an industry populated by creative, talented people, people who often rub up against their fellow designers, against their financiers, against their colleagues. And these are all things that make for good stories. At the same time, fashion is very visual, and so it lends itself to an on screen depiction. You can see a dress come to life in a very visually appealing and beautiful way. But there's another reason, which is that Hollywood is obsessed with brands. At the moment, studios are interested in making stories about popular products that people will recognize, be it Barbies or Ferraris. And content about couturiers at the same time is a safe bet, as people will know the names Chanel, Dior, Balenciaga, even if they don't know about the people behind the brands. A crucial part of why these stories are making it to the screen is that fashion houses themselves are getting more involved in the storytelling process. If we think back to the Devil Wears Prada, which was released almost 20 years ago. Lots of fashion brands were unwilling to begin with to lend their clothes for the film because they were slightly worried about incurring the wrath of Anna Wintour, who inspires Meryl Streep's character. But that's not the case today. Balenciaga and Dior both gave their blessing for Christabel Balenciaga and the New look, respectively. They opened up their archives to the storytellers, and as a result, you can see the clothes represented a lot more accurately. And as one author told me, it's a way of them controlling their image and controlling the way that their brand is being presented on screen. And television offers an opportunity as well for these brands. Dior, for example, released a new fragrance around the time of the show's release. Dior is not the only fashion brand spotting the opportunities available on television. Some have gone even further in blurring those boundaries between branding and entertainment. Balmain, for instance, in 2021 developed a series to showcase its latest collection. Chanel has also helped to finance films that star Kristen Stewart, one of its brand ambassadors. If you saw Spencer, the recent film about Princess Diana, you'll notice that Ms. Stewart is wearing rather a lot of Chanel in that film. And searches for Chanel products, particularly bags and sunglasses and blazers, really spiked in the wake of that film's release. And some agree even further than that. Saint Laurent has set up its own production company. It's kitting out characters in its clothes and providing stars with its gowns and things for red carpet events. This trend and the wealth of entertainment about fashion brands reflects the changed media landscape. Luxury fashion is expected to make 116 billion this year, up from 86 billion in 2020. But the old ways of reaching consumers are not really working in the same way. One person I spoke to told me that you're just not going to reach your whole audience in vogue anymore. And so entertainment has become a new advertising platform for these fashion brands. It's a way for them to show off their wonderful creations. And for now, it seems to be working. Audiences are watching these shows, and fashion bosses will be pleased and smiling, unlike the models on their catwalks. But fashion brands going into entertainment should beware, because what can seem a la mo today can very easily become passe tomorrow.

That's all for this episode of the Intelligence. Let us know what you think of the show. You can get in touch@podcastconomist.com we'll see you back here to tomorrow.