Getting more interesting: the Fed raises rates

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Hello and welcome to the Intelligence from the Economist. In New York, I'm John Fassman and.

In London, I'm Jason Palme. Every weekday we provide a fresh perspective on the events shaping your world.

Sixteen years ago, a scientific journal published a landmark paper on the causes of Alzheimer's disease. Recently, however, a neurologist analyzed images from that paper and found signs suggesting its results may have been fabricated.

And it's just a quirk of biology that women have a higher tendency toward obesity than men do, and global numbers show it. But in one region, the difference between the two is noticeably larger.

First up, though, after having been accused for months of failing to counter inflation, America's Federal Reserve has been aggressively raising interest rates through the spring and summer. It did so again Yesterday with a 3/4% rise as data for June showed inflation continues to rise above expectations. The central bank's chair, Jerome Powell, wants to engineer a soft landing for the economy.

We're trying not to make a mistake. We do see that there are two sided risks. There would be the risk of doing too much and imposing more of a downturn on the economy than was necessary.

But the risk of doing too little.

Would and leaving the economy with this entrenched inflation, it only raises the cost.

Some signs of a coming slowdown are starting to emerge in some sectors. But could the bank now be at risk of overdoing its policy tightening and tipping America into recession?

It's really quite a remarkable tightening of monetary policy. They've gone from interest rates effectively of 0% back in March to nearly 2.5% today.

Simon Rabinovitch is our U.S. economics editor.

So in the space of four months, a 2.5 percentage point increase. That's the sharpest dose of monetary tightening in America since the early 1980s.

How did the size of the rate hike compare to expectations? And what did Jerome Powell, the Fed chairman, say about it?

It was the same size of rate increase as last month. The difference though is that last month that really came as a surprise relative to what people were expecting this time. Markets were got it exactly right. In fact, if you look at the market reaction, the initial reaction is extremely positive. American stocks rose by more than 2% in the wake of the Fed announcement. And the reason for that was that after announcing the rate increase, Jerome Powell, the chairman of the Federal Reserve, came out and said that rates were more or less getting into the range of what the Fed sees as neutral.

We've been saying we would move expeditiously to get to the range of neutral. And I think we've done that.

Now we're at 225 to two and a half.

And that's right in the range of what we think is neutral.

So the question what that means in Fed speak is that there's less and less scope for further rate increases. They will continue to raise rates. They need to see inflation come down for the incredibly high levels where it currently is right now. But the Fed may be closer to the high point and its rate rise cycle than it is from the very, very beginning point.

You mentioned the high inflation rate and that's what's caused the Fed to raise rates, of course. I wonder if you could dig a little deeper on that. What does inflation look like in America right now?

Well, it still looks remarkably high if you look at the most recent figures for the Consumer Price Index, which is the one that the public focuses on most of all. It was up 9.1% in June compared with a year earlier. And that was higher than expectations. It was a four decade high. So obviously that is very worrying. A significant portion of it has been driven by the incredibly high food and energy costs right now. Now, as far as central bankers are concerned, you look through that to a certain extent because food prices, energy prices are always extremely volatile. What does concern central banks and economists more generally is that when you drill down to what's known as core inflation, so stripping out volatile food and energy prices, it's still very, very high. Core inflation was up 0.7% month on month from May. If you annualized it out, that gets to an 8% inflation rate. And it means that just about everything is getting more expensive. That's why the Fed had to raise rates as much as they did yesterday. And they'll keep going until they're confident that inflation has been properly contained.

So containing inflation means cooling the economy. And the risk there is that they overstep and cool the economy into recession. How do you rate that risk right now?

Well, it's a real risk, and the risk is clearly getting higher. The more that they have to tighten monetary policy, the more of an impact that's going to have on economic growth. You've had this really sharp increase in rates over the last couple of months. Theory and also precedent would suggest that it'll still be some time, potentially three to six months longer, before you really see that having a serious impact on the economy. And as it stands, you know, if you look at recent growth indicators, it's been softening. There's a lot of discussion about whether or not, in fact, America already is in a recession. Later today, America will be releasing its second quarter GDP data. Just to refresh your memories, in the first quarter, GDP shrank slightly. Some people think it might have shrunk again in the second quarter. Technically, at least in terms of kind of the popular definition, two consecutive quarters of negative growth is understood by many people to be a recession. Now, officially, that's not actually right. If you look at the way that officially a recession is declared to be taking place, you look at a broad range of indicators, not just gdp. One of the key things is that the job market has to be assessed. And the job market these days in America has remained incredibly strong. So Chairman Powell himself, as well as many others have, have said that even were GDP growth to be negative in the second quarter, that would not necessarily equate to a recession today. Nevertheless, the more that you pile on these interest rate increases, the odds of a recession, if not happening right now, happening later this year into next year, the risk of that is only increasing.

And what do you think a recession would look like in America under these conditions? I mean, as you noted, Chairman Powell said, the labor market is very tight. A lot of households are still sitting on a lot of savings from the pandemic. Would a recession be less painful under these conditions than it otherwise would?

Well, I think you've hit on the crux of the analysis, which is just how incredibly tight the labor market is right now in America. And this is why the Federal Reserve believes that there's still a path, albeit as they've said, a narrow path, to avoiding recession altogether. If you look at the tightness in the labor market right now, there's roughly two jobs open for every one unemployed person in America. So the optimistic case is that you can basically cool some of that excessive demand for labor without actually having loads and loads of people ending up on the dole. That's the optimistic case. So the hope is that a recession can be avoided and that if it can't be avoided, that hopefully it will be a relatively mild one.

And that's a future risk. What about the present? What sort of impact are the rate rises having so far?

Well, the most immediate impact of the rate rises is on financial markets. Mortgage rates were less than 3% through much of last year. They've reached nearly 6% today. If you look at the 30 year fixed mortgage rate, the stock market has obviously fallen quite Sharply, down by 20% in the first half of this year. If you're looking at The S&P 500, spending is softer. Overall production is softer as well. The mortgage rates mean that fewer people are buying homes. It means that fewer homes are being built as well. So there is, you know, an impact on the real economy. Of course, this is partly what the Fed wants to see, because all of this slowdown in activity also then translates into a slowdown in inflation. Although the slowdown in inflation has not yet been seen. What has been seen is that the belief is increasingly certain that the Fed will be able to bring inflation to heel.

What would that look like for businesses? I'm just thinking that since 2008, the tech businesses that have been built that could get money easily without having to show a profit. Is the era of easy money over? And if it is, should we expect to see more sluggish business cycles and less entrepreneurship in the coming years?

Well, in the short run, kind of a one to two year time horizon, I think it is definitive that the era of easy money is over. And for businesses that have been fueled by high leverage because the cost of funding was so incredibly cheap, they will be exposed. I think, for a lot of private equity firms, it's going to put a lot of pressure on their models. Will that have knock on negative consequences for innovation? And you can even make an argument that some of the easy money really distorted incentives. So not to tar the entire crypto asset market with a negative brush, but you know, if you look at crypto assets, one of the reasons that so much money was poured into them was that money was so incredibly easy and they weren't necessarily the kinds of places that an economy should be concentrating its innovation. So perhaps some slightly tighter money will actually lead to more sober thinking amongst investors about how to allocate their resources and so perhaps it won't be so negative for innovation when we look back at it.

Simon, I expect this is not the last rate rise that Chairman Powell has in store for us. What do you expect to see at the next one or two Fed meetings?

There is a lively debate that I think will get livelier about whether or not the Fed will come up with another 3/4 point rise or whether they're going to begin to slow the pace of increases starting in September. Chairman Powell said that basically he's done with trying to do forward guidance at this point in the cycle, which means basically telling investors more or less what to expect. Instead, he said the Fed, like everybody out there, is going to be watching the data very closely and we'll have to see what that means for the September meeting.

All right, Simon, thanks so much for joining us today.

My pleasure, John.

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Alzheimer's disease is by far the most common cause of dementia, a progressive decline in brain function most common among the elderly in America. More than 6 million people live with the disease at a cost of over $300 billion a year. Despite such vast spending, no single cause for Alzheimer's has yet been identified. For more than a decade, researchers have been studying whether the disease might be caused by the buildup of certain proteins in the brain, in particular amyloid beta peptides, and whether removing such proteins might be the key to a cure. But now the journal Science is raising questions about whether a growing body of research could be built on shaky foundations.

Understanding the connection between amyloid proteins in the brain and Alzheimer's disease has been the dominant research area in the field.

Gillet Amit is our science correspondent.

And the worry is that if the foundations of the field are off years of drug development, billions of dollars of funding have been spent on the dead end.

What are the allegations, Gillette, and where did they come from?

They come from new reporting in the journal Science. They claim that a landmark paper in the field of Alzheimer's research, and specifically in what's called the amyloid Hypothesis, dating from 2006, used fabricated data in its published form.

And tell us the backstory about this paper. What sort of impact has it had on the field?

I'll start by talking about this amyloid hypothesis and what that claims is that there are these molecules, these amyloid beta peptides, which consist of chains of amino acids and they're almost always found in clumps, also called in a plaque, in the brains of individuals with Alzheimer's. And the obvious research question for a long time has been does Alzheimer's produce these plaques of amyloid or is it the other way around? Could the presence of these protein molecules trigger the kind of neurological breakdown that we see in people with Alzheimer's? And if so, could we stop their formation and thereby stop the progression of the disease? That idea that there is this causal link that could stop Alzheimer's forming is called the amyloid hypothesis, and it's a dominant one and has been dominant for some time. One of the papers that's thought to have reignited interest was in the high profile journal Nature has been cited thousands of times since. One of the most widely cited papers in the field. And that's the paper that's come under scrutiny. It describes the work of a team that includes Sylvain Lanay, a neuroscientist at the University of Minnesota Medical School, which claimed to find really solid evidence, which at the time was rare.

And how did the paper establish that evidence and what did the evidence imply?

So the researchers claim to have injected rats with an amyloid beta peptide called amyloid beta 56. And rats so injected displayed a dramatic decline in cognitive ability. And this was a much needed shot in the arm for the amyloid hypothesis back in 2006. And the claim in the Science reporting on it this past week is that this new paper reignited interest and attracted funding to a field that was languishing at the time. Now, researchers have spent the past 16 years learning from this paper, trying to translate its findings into therapies. But this paper isn't alone. It's not the only brick on which the amyloid hypothesis is built. And so some have been skeptical about its conclusions before. Some have struggled to replicate its findings before, but this is all the way science works. Papers come out, others struggle to replicate them, Sometimes they succeed. But there are now questions that go deeper than that as to whether the paper contained deliberately fabricated data, whether it was deliberately attempting to mislead.

Why now? And what are those questions? What has raised those questions?

So I should stress these are very early days and the accusations have only just been made public. And to some extent we're all waiting for answers and to hear the researchers side of the story. The alarm was raised by Matthew Schrag, who is a neurologist at Vanderbilt University. He was analyzing Images from this 2006 paper, the raw data, and he identified some signs that suggested fabrication. The most egregious were images of blot tests which are basically they're sheets of membrane on which blots, similar to ink blots on paper, are used to indicate which proteins are present in a sample. And in the same way that you wouldn't expect two ink blots on a sheet of paper to have identical edges and size and color distribution, you wouldn't expect two blots in one of these blot tests to be identical. And yet that is what Dr. Schrag found. And further reporting by Science leads them at least in the direction that very few explanations other than direct fabrication are plausible. It should be stressed that the time Science published the story, the authors hadn't responded to a request for comment. And so far, spokespeople for the University of Minnesota have told them that complaints are being reviewed. Also, Nature, the journal where this work was originally published, has uploaded a comment to its website urging those who might use this paper to be cautious.

So what exactly are the implications of Dr. Schrag's finding? Is it that researchers could have been following the wrong path for 16 years, or could the overall approach still be correct even without the support of this paper?

So, again, it is early days, but I would say that a lot of the commentary that I've seen about this story, and obviously it's a very tantalizing story to spread because so many people are affected by Alzheimer's disease, I would say that a lot of the commentary appears to be undue catastrophising. When I reached out to the charity Alzheimer's Research uk, their head of research said that the allegations were concerning, as any case of scientific misconduct would be. But they stressed that the particular molecule in question, the amyloid in question, is only one of many that are being investigated. And she said that the allegations don't compromise the vast majority of knowledge that have been built up over decades of research into the field. Other scientists agree that the amyloid hypothesis is built on sturdier foundations. But they also say that now there is an increased understanding, even before these allegations came out, that a more complex model of the disease might be needed. Alzheimer's is very complex. It's very widespread. It exists in. In the brains of very many people. And so different factors are very likely to coexist and to be responsible together in combination for Alzheimer's. Inflammation, other proteins, they may play a role as well.

And so what about research into Alzheimer's more broadly? Are there other possibilities being explored beyond the amyloid hypothesis?

So there have been for some time, and it's likely that this new incident will incentivize them to work even harder and may even attract, you know, more funding and more interest into some of these other horses in the race. One particularly interesting avenue concerns tau proteins, which, alongside amyloids, are also found in the brains of those with Alzheimer's. And drugs designed to target tau, as opposed to amyloid, are in development. They've only recently been investigated seriously because they're very difficult to design. But there are some major trials now in progress, and so I would say things are not as catastrophically bad as some of the reporting in recent days has suggested.

All right, Gillette, thanks so much for joining us today.

Thank you, John.

Obesity is a health concern the world over and one that's like so much of the population getting Bigger. According to the World health organization, since 1975, the global tally of obese people has tripled. But it's not at all an even rise. Rates vary nationally, regionally, and demographically. On average, women tend more to obesity than men do. But there's one part of the world where that disparity is sharpest.

The Middle east. And North Africa, out of any region, has the biggest gap between men and women when it comes to obesity rates.

Elise Burr writes for the Economist.

So in the region, 26% of women are obese, compared with just 16% of men. And this has health consequences. In 2019, of the 11 countries with the highest share of deaths attributed to obesity rates, eight of those countries were Arab. And many of those dying are women.

So why is that? Why is there this disparity in the Middle east and North Africa in terms of obesity rates?

A lot of it comes down to social pressures. Not a lot of women are in the labor force. So according to the World bank, only one in five Arab women have paid jobs. And in Iraq, it's even worse. It's 1 in 10. So that means a lot of Arab women are missing out on this passive exercise that comes with work, such as commuting to work. And women in other regions might be bustling around hospitals, classrooms, and restaurants, but in Arab countries, a lot of those jobs are done by men.

So just that difference in the labor market accounts for that disparity.

It's definitely not just jobs. Another big factor is that it's really hard for women to exercise in Arab countries. So young girls and boys will often play football together on the streets. But once a girl hits puberty, it's not really acceptable to do that anymore. So teenage girls become more sedentary. Their playdates start happening indoors. A lot of this comes down to sexism. One man I spoke to in Baghdad said that as a society, Iraqis don't really like women being outside. This same guy, he plays football four times a week outside, but his sister doesn't really have the same chance. How long have you been playing, playing soccer?

12 years.

12 years. Do you have any sisters?

Yes.

Yeah, yeah. Do they play?

Just one. Single? She is.

Okay.

She has a treadmill at home.

Okay.

But she doesn't run outside.

No, no, no.

Conservative clothing can also make public exercise quite burdensome. You know, it's really hard to ride a bike, for example, if you're wearing a long robe. And street harassment can make jogging unpleasant. One Iraqi woman told me that when she walks her dog, she puts in music to Block out the catcalls. You can get around these problems. There are gyms that cater exclusively to women, but they're usually found only in big cities and tend to be quite expensive.

So in that regard, there's also kind of a class element to this, for sure.

So in Egypt, poor women, on average, are much fatter than rich ones, but that same correlation doesn't really exist for men. That might be because rich families tend to be more relaxed in letting their daughters outside, perhaps because they live in safer places.

And all of this so far has been on the question of exercise. Does diet not play a role?

Diet definitely plays a role. In the last 50 years, junk food has proliferated, and at the same time, Arab women have grown fatter at a much faster pace than Arab men. And food probably plays a big role in that. A lot of meals in the region are really heavy on carbohydrates. For example, on average, Egyptians get 30% of their calories from bread. It's a cheap way to feed your family. It's subsidized by the government. And women are also around food more than men because they tend to be in charge of cooking for their families. I spoke with one housewife in Baghdad who's trying to lose weight, and she told me that she's actually trying to get her mom to take over her cooking duties so she can distance herself from the kitchen. She also told me that the problem with the Iraqi diet is carbohydrates, and her family eats rice and bread at almost every meal. But for all the talk of diet and exercise, I think also that beauty standards might play a small role.

What do you mean by that?

A lot of Arab women prefer being curvy. I spoke with one Iraqi woman who's trying to lose a little bit of weight, but not very much. She told me that when you're skinny, you lose your femininity, which is a fairly widespread view, especially among older Arabs. Her husband doesn't want her to lose any weight at all. She told me that he is worried that she will feel like a piece of wood in bed. It's also fairly common for Iraqi women to take pills to gain weight to look more beautiful. But I also wouldn't want to overstate the role of beauty standards in the Arab world. People tend to prefer curvier bodies, but not necessarily obese ones. So I would say the gender gap in obesity rates mostly comes down to locking women out of public life.

Thanks very much for joining us, Elise.

Thanks for having me, Jason.

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