Powell’s points presentation: the Fed raises rates

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Hello and welcome to the Intelligence from the Economist in New York. I'm your host, John Fassman. Every weekday we provide a fresh perspective on the events shaping your world. China has tried to control Covid spread through lockdowns and quarantines rather than mass vaccination. That approach has confined many of Shanghai's 25 million residents to their apartments for more than a month. And they've become increasingly restive and vocal. And few politicians are remembered with as much affection and respect as Nelson Mandela, South Africa's first democratically elected leader. But who do his name and legacy belong to? And should they be used to make money? First up, though, The United States Central bank, the Federal Reserve has faced widespread criticism for letting inflation get out of control. In America, consumer prices rose by 8.5% in March compared with a year earlier, a four decade high. The chairman of the Fed, Jerome Powell, had said the bank was committed to bringing the inflation rate back down to a target of 2%. Yesterday we saw the strength of that commitment.

So the Fed announced that it's increasing interest rates by half a percentage point. It's the first time that it's done a rate increase of this size since the year 2000.

Simon Rabinovich is our US economics editor.

It also announced plans for beginning to shrink the size of its balance sheet. The bigger point is that along with doing all this, Jerome Powell, the Fed chair, tried to impress upon the public and the reporters who were there that the Fed is going to be able to get inflation under control.

Inflation is much too high and we understand the hardship it is causing and we're moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.

Inflation is obviously too high for the Fed's comfort, for pretty much anybody's comfort. Right now it's running at a four decade high. That's causing a lot of pain for Households, uncertainty for businesses, and it's causing stress in financial markets as well. At the same time, the labor market is incredibly tight. The unemployment rate at the height of the pandemic two years ago was 15%. Today it's just about 3.5%. There's nearly two jobs available now in America for every single unemployed person. And the basic point about the Federal Reserve is that when it conducts policy it has two important goals. One is to maintain price stability, the other is to ensure that the economy has full employment. I think any way that you look at it right now, the economy is close to, if not beyond, full employment and clearly prices are not stable. So it's kind of a no brainer at this point that the Fed really has to begin to tighten monetary policy. And raising interest rates is the most important part of that.

I think we should all be reluctant to draw sweeping conclusions from a few hours evidence. But the markets do seem to have liked what Powell did, right?

Yeah.

So indeed we shouldn't read too much in today today market movements. So what Jerome Powell said after the meeting yesterday was that the Fed is very likely to consider raising rate again by a half percentage point both in June and in July.

Assuming that economic and financial conditions evolve in line with expectations. There is a broad sense on the committee that additional 50 basis point increases should be on the table at the next couple of meetings.

As far as investors are concerned, though, that's actually some measure of relief. In recent weeks, expectations had shifted to the idea that the Fed might increase rates by as much as three quarters of a percentage point in one go. And Chair Powell appeared to take that off the table. Ergo you had markets rallying, thinking that there will be aggressive tightening, but maybe not as aggressive as they had feared in a worst case scenario.

I'm also thinking back Simon, to a year ago when the consensus belief was that inflation would probably go away on its own. What happened to that view and why did it fall away?

The basic idea a year ago was that inflation was beginning to run very hot. But the obvious explanation for why that was the case was the pandemic. The basic belief was that as COVID 19 began to fade away, inflation would go away too. In Fed speak, inflation was transitory. It would not be persistent. Towards the end of last year and into the beginning of this year, it became clear that this simple pandemic explanation was really only part of the story. Housing prices soared, rents began to soar, wage growth began to increase really rapidly. At the same time, of course, there's been some bad Luck. You know, Russia's invasion of Ukraine has led to a big increase in commodity prices. China's zero COVID policy is making supply chains that much tighter. But I think the bigger point is that there's this strong sense now that underlying the price rises has been extraordinarily loose policy, both fiscal and monetary policy. And so therefore, the onus is really on the Fed to tighten policy to suppress some of this excessive demand and bring inflation back under control.

So was the Fed's rate hike yesterday essentially an admission of a policy mistake?

Well, I don't think the Fed would say it's a policy mistake, but it's clearly an admission that it's behind the curve and it has to catch up. Look, I think the most charitable way of looking at what the Fed has done over the past year is that it took a gamble. It took a gamble on basically running the economy hot on the assumption that inflation would fade away. It lost that gamble, and now it's effectively looking to make up for that lost time. There is an interesting theoretical discussion to be had about the way in which the Fed conceives of monetary policy. A couple of years ago, in late 2020, they introduced this idea of flexible average inflation targeting. And the basic idea is that they want inflation to average out to 2% over time, which means that when the economy is cold, they'll actually try to run it too hot for a period of time to kind of get that 2% average. There's an argument to be made that this is something that made the Fed a little bit too slow, a little bit too complacent when inflation was perking up. So I think there is going to be a big theoretical debate that will come out of this inflationary problem. But for the time being, it's clear that what the Fed has to do is get inflation under control, and then I think that theoretical debate will heat up.

It's a really fine line the Fed has to walk, right? Figuring out how to dampen demand without tipping the US Into a recession. Do you think that Fed policy currently puts America on the right side of that line, or do you worry that we do risk tipping into a recession?

The omens are not great in the sense that the Fed has never before managed to reduce inflation from as lofty a level as it currently is without inducing a downturn. Chair Powell has talked about that, about the incredible challenge that the Fed now has for itself. Now, I should say he believes that there is a way that the Fed can walk that far. Fine line.

I would say I Think we have a good chance to have a soft or softish landing. Households and businesses are in very strong financial shape. Businesses are in good financial shape. The labor market is, as I mentioned, very, very strong. Therefore, the economy is strong and is well positioned to handle tighter monetary policy.

If things break just perfectly for the Fed, they'll be able to lower inflation because there's so much excess demand in the jobs market right now that will come down without driving a big increase in unemployment. But that would be absolutely threading the needle. There's many ways that things could go wrong, sadly. Number one, the commodity shock because of Russia's invasion of Ukraine is potentially far from over. As we know, things there could still get a lot worse. Number two, global supply chains are still not back to normal. China is still trying to achieve its zero COVID policy. Number three, the pandemic, unfortunately, is still with us. And then I think finally, just the sheer challenge of lowering inflation, of breaking inflation expectations when inflation is running at more than 8% compared with a year earlier, is just a really, really high bar for the Fed. So will they be able to bring that down without causing a recession? I mean, I think everybody hopes they'll be able to do that, but if you look at the general expectations of analysts right now, there's roughly a 50% chance assigned to the idea that within the next two years, America will be in a recession.

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

Thank you, John.

In Beijing, coronavirus restrictions are tightening. Yesterday, the city closed dozens of subway stations, the latest measure to control a potential flare up of the virus. China's approach to the pandemic differs markedly from that of other large economies. Instead of vaccinating most of its population, it's following a dynamic zero Covid strategy, one that relies on strictly enforced quarantines and lockdowns of cities. And the residents of Beijing have only to look at what's happening in Shanghai to see what may well be coming their way. People there have been under a strict COVID lockdown for over a month, and they're becoming increasingly vocal about what's happening to them.

I moved to Shanghai at the beginning of March and have ended up in the largest citywide lockdown in history.

Don Weinland is our China Business and Finance Editor.

I'm locked into a hotel room with my wife. I spend a lot of the day working and looking out the window. I do a COVID test usually once a day. So that means I go downstairs, walk across the street and do a test at a building nearby and then I come back upstairs and that's about it.

And is everyone in Shanghai living more or less this way? I guess. What is the policy that's keeping you there?

Pretty much. So it's really hard to tell exactly how locked down Shanghai is right now. State media has said that half the city has been freed up. I really don't believe that. I think that a lot more of the residents here are still locked in as I am.

And Shanghai is a city of 25 million people, ordinarily quite bustling. When you look out your window, what do you see? Does it look bustling? Does it look empty? Does it look bizarre?

It does look really strange. From my window I have a view of a freeway. In the early days, you know, there were no cars on the freeway. Now the traffic has picked up just a little bit. But you know, it's nothing like normal Shanghai traffic. When I go downstairs for my Covid tests, I can walk, walk around just a little bit in the neighborhood and it's very ghostly. There's nobody on the streets. Often you'll see long lines of people dressed in the white hazmat suits, the health workers kind of strolling along in single file lines. It's bizarre.

And you said, according to state media, about half the city is free. Is there any way of verifying that? And more broadly, how do you get information about what's actually happening?

It's very difficult to verify anything that's going on here. There are various state media reports that say this or that is happening. I have kept up conversations with people around the city on social media or on chatting apps, and it seems like most people are still locked inside. There are a couple people that I know that have been released and can now walk around outside freely. But for the most part, it's really just kind of exchanging information over my phone to figure out what's going on.

And so it sounds like most people in Shanghai, you're extremely dependent on your smartphone. But of course, what people in China can see on their smartphones is heavily restricted, right?

That's correct. People using domestic social media, they may post something that's controversial and other people won't be able to see it or it will disappear very quickly. At one point, you couldn't even search the word Shanghai. On certain Chinese social media, a lot of stuff does break through and will be moved from Chinese social media onto Western social media like Twitter. There's all sorts of videos of people in white hazmat suits beating up Shanghai residents. There's one of a dog Being killed on the street by these people because they think that dogs can potentially spread. Covid One thing that I find particularly interesting is that these people are being referred to as White Guards on Chinese social media. The reference is to the Red guards of the 1960s during China's cultural Revolution when young people rose up and were running amok beating up teachers and authority figures. So to make the comparison between Red guards and these people in white suits calling them white guards is pretty striking to hear. You don't often hear people making these types of comparisons with the culture revolution right now in today's China. Another thing that people have been talking about is this footage of a drone that was circulating around a high rise neighborhood. And it was blasting this message telling people to suppress your soul's urge for freedom. The feeling that I get right now from watching this footage online is that anger is mounting here in Shanghai and people seem a bit fed up with the way that the government has handled this.

And so, John, what might come of that anger?

There definitely could be some blowback for the local Shanghainese government. I think in the eyes of many people around China, they have done a very, very poor job preparing and executing this lockdown for the central government in Beijing. I think the implications are not nearly as severe. They often do a very good job of pushing off responsibility for these things to lower levels of government.

And so what does the rest of China see, do you think, when it looks at Shanghai and what the Shanghainese see and think about when they look out toward the rest of China?

When China is looking at what's going on in Shanghai right now, I think they see a huge local problem that was created by the local government here. Of course, as usual, state media has talked up a lot of the successes of what's going on here. When Shanghainese consider what's going on here, it's been a, you know, a completely different experience. We've had people that have not been able to get access to life saving medical treatment. The government has done its best to capture the narrative, but the locals are putting out their own narrative. A couple weeks ago, a, a rap song by a local rap artist named Astronomy popped up on YouTube and the song is titled New Slave. And it has, you know, very frank lyrics about, you know, his view on, on what's going on here. How, you know, people in uniform don't care about everyday life here. All they care about is their careers. It's quite an angry tune.

So Don, it sounds like people are getting fed up. Do you know how long it's going to go on how long you're going to be locked down for.

So there are signs that it's beginning to ease. But I was on a very short walk outside today. All the shops were closed. There are not that many people on the street. I think this city is really just sitting around and waiting to open up, and nobody has any idea when that's going to happen.

All right. Well, for your sake and everyone else is in Shanghai, I hope it ends soon. Thanks so much for joining us.

Thank you.

In my job, I've stayed at some pretty rough hotels, so it was nice to go to a new boutique hotel in Houghton, a nice part of Johannesburg.

John McDermott is the economist Africa correspondent based in Johannesburg.

It's called Sanctuary Mandela, and it's no ordinary boutique hotel because it used to be the home of South Africa's first democratically elected president. He lived there through much of the 1990s. And there's lots of quite tastefully done tributes to the man. So some of the rooms are named in his honor. There's one called Madiba, which is his land name. Another is called 4,664, which was his prison number at Robben island, where he was incarcerated for most of the time he was in prison under the apartheid government. Even the food is a tribute to Mandela. The chef was his former personal chef, and she's put together a menu featuring things that he loved, like Ethiopian kitvo, he enjoyed on a trip to addis Ababa in 1962, and his beloved oxtail, which he enjoyed throughout his later life.

And who owns the hotel?

Sanctuary Mandela is run by a local tourism company, but it is owned by the Nelson Mandela foundation, which is a charity set up by the former president when he stepped down in 1999. And it's seen by the Nelson Mandela foundation as a way to raise revenues, especially because donations of fund fallen off a cliff in recent years. Before Mandela died in 2013, around 80% of donations to the foundation were coming from rich Americans, including some Rockefellers, Bill Clinton, the Gates Foundation. But when I spoke to Selohtank, who's the foundation's chief executive, he was telling me that American funders have turned inwards towards more domestic causes, social justice campaigns and things like that. Other potential donors have been put off by the broader specter of corruption that has been apparent in South Africa since Mandela stepped down. And the foundation's able to set up something like Sanctuary Mandela because it owns about a dozen valuable trademarks, including 4664. And it sometimes uses them to boost its coffers.

And does the foundation have monopoly on making money from Mandela's name?

No, not at all. The most prominent example is House of Mandela, which is a retail outlet owned by Makaziwe Mandela, who is Madiba's surviving daughter from his first marriage and a couple of her children. It sells a range of products. Some clothes, some jewelry, and also some wine. So you could buy a five dollar Nelson Mandela Sauvignon blanc if you wished.

John, how was Makaziwe Mandela's attempts to make money from her father's legacy seen?

There's a real sense in which some South Africans feel his legacy is overly sanitized and that efforts to commercialize his legacy add to that process of sanitization. If you can buy a kind of $5 Shiraz with Nelson Mandela, what does that actually tell you about his genuinely kind of radical history? And does it undermine that? Often the family is accused of just downright exploiting the legacy. In December, for instance, there was an auction of the key that was used to lock Mandela's cell at night in Robben Island. And while Makaziri Mandela says that this option would have gone towards a charitable garden, it felt odd to South Africans that perhaps Nelson Mandela's cell key would somehow end up on a wall in Cincinnati or Detroit or something like that away from South Africa. In addition to these issues of sanitization and exploitation of Mandela's legacy, it's a reminder that economics, markets, they're about scarcity. And when South Africa has had such a paucity of leaders in the mold of Mandela, there's no wonder that the value of goods related to him remains so high.

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

Thank you, John.

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