Marketplace - Is the Fed getting closer?

Episode Date: July 11, 2024

Inflation cooled for the third straight month in June, and borrowers hope rate cuts come soon. But will enough “good data” show up to ease the risks of a flare-up in prices? We break down the Fed’s decision-making process — and explain why shelter prices are one thing holding the central bank back. Also in this episode: Workers at the Port of Baltimore are full steam ahead as the region recovers from the Key Bridge collapse, and a SCOTUS decision opens the door to changes in tribal nation health care management.

Hey, it's Kai. My minivan and I, as I've said on the radio, have logged a lot of miles with Marketplace. Luckily, it's still running, you know, pretty well. But if your car doesn't drive as well as it used to, listen up. It can still help drive Marketplace. When you donate your old car or truck, we'll use the proceeds to support the great programs you hear every day. Start your vehicle donation at marketplace.org slash vehicle. Some good news on inflation, but when will it be good enough?

From American Public Media, this is Marketplace. In Baltimore, I'm Amy Scott in for Kai Rizdal. It's Thursday, July 11th. Good to have you with us. Around here, there are certain days of the month that we get pretty excited about, and today was one of them, Inflation Day, or the day when the Bureau of Labor Statistics publishes its latest consumer price index. And this one was pretty good.

On a year-over-year basis, the inflation rate fell for the third straight month. Prices were up 3 percent compared to last June. That's down from more than 9 percent inflation just two years ago. The Fed has been saying repeatedly it wants to see more good data before officials feel comfortable cutting interest rates. So how does this stack up? Marketplace's Daniel Ackerman gets us started. Economists were happy with today's inflation news. So this certainly qualifies as good data. But Paul Ashworth with Capital Economics can't really say whether this data is good enough

that maybe, just maybe, we'll see some interest rate cuts soon. The Federal Reserve is obviously a bit vague about exactly what he's looking for. But he says we do have some clues. For months now, annual inflation has been inching closer to the Fed's target of 2%. And then there's the labor market. Stephen Friedman with McKay Shields says it's finally starting to soften a bit. I would describe it as strong, but not tight. And that's a subtle difference. But what it means is that the labor market is no longer a source of meaningful inflationary pressure.

And when you zoom way out to the entire economy, there are signs that it's cooling down, says Lauren Seidel Baker with ITR Economics. GDP today is at an all time high, so it's critical to note that our economy is still growing. However, the pace of growth has really come down. So what more does the Fed need to see? You can never have enough data, is the short answer. Ken Kutner is a professor of economics at Williams College.

He says the Fed was caught by surprise when inflation took off a couple of years ago, and it was slow to raise rates. He says the Fed was caught by surprise when inflation took off a couple years ago, and it was slow to raise rates. They were definitely way behind the curve for, I would say, the better part of a year. And that experience could make the Fed wary of cutting rates until it is extra, extra confident that inflation is under control. Kutner says a couple more months of good data leading up to the Fed September meeting could do the trick.

If the data we see between now and then confirm the trends we've been seeing in terms of moderating growth and cruelly inflation, then a rate cut in September may well be on the table. Kuttner puts those odds at 50-50. I'm Danielle Ackerman for Marketplace. Wall Street today, surprisingly unimpressed. We'll have the details when we do the numbers. Another positive sign in that inflation report, housing or shelter as it's called in the CPI, registered its lowest monthly increase in almost three years.

The shelter index includes rents, the equivalent for homeowners, and lodging away from home. And overall, it rose two-tenths of a percent in June, down from four-tenths percent several months in a row. Compared to a year ago, though, shelter prices are more than five percent higher. And that's a big reason the Fed's 2% overall inflation target has remained elusive. Marketplace's Stephanie Hughes has that story. In your pie chart of household expenses, shelter costs, that's rent or what it costs to live in your home, likely take up a big old chunk. That's reflected in the consumer price index.

They're about a third of the whole CPI. Steve Reed is an economist with the Bureau of Labor Statistics, which puts out the CPI. One reason shelter inflation has stayed persistently high in the past couple of years, says Jessica Loutz, an economist with the National Association of Realtors, is that a lot of young adults want their own space. There are a lot of people who don't want to double up anymore. That's double up with their parents, which Loutz says happened a lot during the pandemic. Now these grownup kids are competing in the housing market, where inventory is low, partly because lots of older people are staying put. That's putting pressure on both the rental market and homes for purchase.

So if shelter inflation continues apace, will the Fed be able to reach its goal of 2% for overall inflation? Well, sure, it's mathematically possible. Again, Steve Reed of the Bureau of Labor Statistics. Remember, shelter makes up about a third of the consumer price index. The other two thirds are clothing, medical care, food, basically everything else. And so if the two thirds everything else is low enough, that's going to get us below 2%.

So mathematically possible, but not likely, says Van Ayers, a senior economist at Nationwide. It's going to be very difficult. He says if shelter inflation cools to the 3% range, that could help get inflation overall closer to 2%. But Ayers says this housing piece going down is not necessarily a requirement to get the Fed to lower interest rates. I think if they see enough cooling on medical care costs, transportation costs, I think that will be enough for the Fed. However, Harris warns just because the Fed starts to lower rates doesn't mean they'll

plummet. They're gonna come down but not nearly as quickly as they normally have. Harris says typically the Fed raises rates like a staircase and lowers them like an elevator. He thinks this time we'll see the reverse, where rates went up pretty dang fast and will go down nice and slow. I'm Stephanie Hughes from RK Plus. It's been almost a month since the governor of Maryland announced the full reopening of the Port of Baltimore after the collapse of the Francis Scott Key Bridge, which killed six people and blocked the port's main shipping channel.

The port's closure affected thousands of workers in the shipping and warehouse industry, including the folks at Baltimore International Warehousing and Transportation. Not long after the accident, I talked with President and CEO Sue Monahan. At the time, her drivers were spending long hours to pick up cargo at different ports, but she'd been able to retain them through a state grant program. With the port back in business, we decided to give her a call. Sue, good to talk with you again.

Sue Monahan Thank you. Nice to talk to you. So last time we talked, the port was still closed. You were finding ways to keep working, but how are things now? Well, the port is reopened. We haven't seen the level of container movement yet. We are still picking up cargo out of Norfolk and Philadelphia and Baltimore now. So you had expected it would take a while before your customers started booking, you know, cargo space into Baltimore. Are you starting to see those shipments come back? Yes, we're starting to see them come back, but customers who have booked cargo to Norfolk

and to Philadelphia have not been able to divert all of that to Baltimore. So it's still coming into those ports. And so your drivers are still driving long days to and from Norfolk and Philadelphia? Yes, yes, they are. What's that been like for them? These are folks who were used to working locally, right? Some of the drivers don't mind driving, having a long day, and just making one move. In Baltimore, you can make three or four moves a day. Out of Norfolk, you're making one move. So some of them don't want to go. We've had drivers that said, no, I'm not going. A lot of them have to get up very early in the morning, 12, 1 o'clock in the morning.

It's difficult to get down to Norfolk and back, especially with all the traffic. You don't have to keep bridge open, so everybody's coming through the tunnels. So the drivers can get stuck, you know, during rush hour traffic. We don't have a terminal in Norfolk, so they have to go down and come back in the same night. AMT – So when I visited you back in April, your daughter was there learning the ropes, planning to take over the business one day. Is she still wanting to do that after what your business has been through the past couple of months?

KS – Yes, she's been an instrumental part of moving this cargo, of keeping track of the drivers and the drivers' time and making the arrangements. I think it's kind of a daunting task when you have to book appointments in different ports and make sure the drivers are going to meet those times because if they don't, then they have to wait three, four, five hours and then they have to spend the night, which is just added expense. And then they're out of rotation. She'll say to me, you know, I've got everything scheduled if it all goes perfectly and somebody doesn't call out or blow a tire. So it's just it's

interesting. She's doing a great job with it. And she's still committed. What are you hearing from your customers, folks that had depended on the port of Baltimore and had to pivot? Are they excited to be shipping to Baltimore again? Yes. I just had one customer, you know, just email me, we're finally coming back to Baltimore. They had moved everything to Charleston. But it makes more sense for them to be in Baltimore.

So they are excited to come back to Baltimore. COLLEEN O'BRIEN When the port first reopened, can you tell me what it felt like to send a driver to pick up that first container? KATE BOWEN Just a very happy experience. We did have freight coming into Baltimore throughout that some of the steamship lines railed into Baltimore. So we had a couple things happening. But then it just opened up recently. And yes, very good feeling. Feeling like you're home again. I mean, were you guys like popping champagne?

Not yet. Not yet. We feel like, you know, this is a little in between stage here while you're still trying to operate out of Norfolk and Baltimore and Philly. It's still a little bit daunting for us. And we don't want the customers to have to suffer if we can't handle all of that cargo at one time. So it's just a little touchy right now. Sue Monahan is President and CEO of Baltimore International Warehousing and Transportation, BIWT in Baltimore. Thank you so much. Thank you. It's a pleasure. Coming up. Indian Health Service is just embarrassingly and shamefully underfunded.

And more costs are coming. But first, let's do the numbers. The Dow Jones Industrial Average ticked up 32 points, just under 1 10th percent, to finish at 39,753. The tech-heavy Nasdaq shrank 364 points, just under 2 percent, to close at 18,283, and the S&P 500 fell 49 points, 9 tenths percent, to end at 5584. Tech companies had a rough day. Microsoft lost 2.5 percent, Meta retreated 4.1 percent, and Nvidia plunged more than 5.5%. Checking on how some retailers are doing in the wake of today's inflation news, Walmart

dropped 0.9%, Target gained 0.3% and 0.6%, Macy's expanded 0.3% and 0.9%, and Lowe's ascended 0.4% and 0.1%. Bonds rose, the yield on the 10-year T-note fell to 4.20 percent. You're listening to Marketplace. This is Marketplace. I'm Amy Scott. We started the show with an inflation update. Consumer prices by and large are rising more gradually as the Fed's efforts to cool demand pay off. But there's another inflationary force the Fed has less influence on, climate change, and its effects are already showing up in

the grocery aisle. Sarah Kaplan is a climate and science reporter at the Washington Post. And she recently wrote about climate change's effect on prices. Sarah, thanks for joining us. Thanks for having me. All right. So let's talk about olive oil, an essential food item, in my opinion. What's happening with the price and how is that related to climate change? Yeah. So this year, the global price of olive oil hit an all time high. And that is very much connected to climate change because in 2023, Europe experienced an exceptionally hot and dry summer.

Those hot conditions that scientists show, or studies show were made worse by climate change, cut the region's olive oil production almost in half. So it's just an example of how climate change we know is contributing to increased heat waves, more severe weather globally, and that is having all kinds of ripple effects on our ability to grow food that we need to eat. And you talk about how this is only going to get worse. A study showed that rising temperatures could add as much as 1.2 percentage points to annual global inflation by 2035. Talk about that study and what these researchers found.

Yeah. So this was research from the European Central Bank and the Potsdam Institute for Climate Impact Research. And they basically looked at the correlation between high temperatures and prices in a bunch of different countries. And they found that there is this very strong link that when you have higher temperatures, there tend to be price spikes. All of that really can add up to cause not just price spikes for individual items, but inflation for everything it is that people need to buy. And it's not just food, right? I mean, I've done a lot of reporting on the rising cost of homeowners' insurance, but

you also talk about auto insurance. I imagine businesses will face higher premiums that they will pass on to customers. How is that affecting the overall cost of living? Yeah, I mean, insurance is one of the main contributors. The cost of insurance is one of the main contributors to the high inflation that we've been seeing in recent years. And experts say that that is very much connected to the increased occurrence of weather disasters. I think one of the things that is really important about climate change is the way that it is

creating weather that is not just more extreme, but it's more unpredictable. Insurance is all about sort of weighing the risk of something and trying to price it accordingly. But if you don't know what the risk is because it keeps changing, that makes the entire endeavor much more difficult. So this kind of inflation is not something the Fed can address by raising interest rates. What can be done? I mean, aside from limiting the damage of climate change, are there adaptations that can help, say, protect crops and the workers who are growing them as extreme heat increases?

Yeah. I mean, you know, the adaptation will be specific to whatever product you're talking about, right? So for food products and particularly commodity crops, maybe it is research into more heat and drought tolerant varieties of wheat and corn and rice. I think for insurance, again, it's going to be more research into understanding what the specific risks of climate change are and some experts say that there might also need to be real hard discussions about are there some places where homes are simply too high risk to ensure. That is obviously a very thorny subject. What climate change is doing is just, again, like increasing unpredictability, right?

And the kinds of things that people have expected, you know, whether it's in the price they pay at the grocery store or the ease of getting insurance for their home or their car, it's just not going to be the way it is in the future. People are going to need to prepare for the unexpected and probably for higher prices overall. Yep. Climate change is expensive. Yes. Sarah Kaplan is a climate and science reporter at the Washington Post. Thanks so much for sharing your reporting.

Thanks for having me. If you want to learn more about climate solutions, check out How We Survive's new series Burning Questions where we share a ton of tips from climate friendly ways to eat to finding the safest places to live. It's on our YouTube channel at Marketplace APM or wherever you listen to podcasts. Just search for how we survive Now that the U.S. Supreme Court has wrapped up its term, here's some news you might have missed in the wake of some of the more headline-grabbing decisions. The justices delivered a win to tribal nations that operate their own clinics and hospitals. Tribes are entitled to health care provided directly by the Indian Health Service, or IHS, but more than half choose

instead to take federal money and manage health services locally. Now, the High Court says those tribes need to be reimbursed for more overhead costs. Marketplace's Savannah Marr has more on what the ruling means for tribes and for the already stretched IHS budget. Back in 2019, the Eastern Shoshone tribe in central Wyoming started gearing up to take over management of its health clinic, which was managed by the Indian Health Service. Chairman John St. Clair of the tribe's business council says those plans got held up by the pandemic, which was also a stark reminder of why the tribe

wanted control of the clinic to begin with. We had run into problems. Problems rolling out COVID-19 testing and vaccines, hiring and retaining healthcare workers and getting sick tribal members the care they needed. The biggest obstacle was Indian Health Service. The IHS didn't respond to a request for comment about that. It wasn't necessarily the management, it was just the red tape that they have to go through.

Red tape that the tribe could bypass if it was running the clinic on its own. So the business council got its application together and it was approved. As of July 1st, the Eastern Shoshone tribe calls its own shots on things like clinic staffing, specialty care, and which patients to accept. The former IHS clinic only served tribal citizens. We're going to make our clinic so that anyone can use it. It doesn't matter whether they're enrolled or not enrolled or even a native person. St. Clair says the clinic will bill more Medicaid and Medicare and private insurance, which

will help the bottom line and help expand and improve services. W. Ron Allen is chairman of the Jamestown's Glawam Tribe and an expert on tribal self-governance. He says local control can help a tribe like the Eastern Shoshone fare better during the next public health crisis. Ron Allen, Chairman, W. Ron Allen Tribes When we're in control, we seem to be able to respond faster. We're able to make decisions faster. But until the Supreme Court's recent decision, Allen says assuming management of a clinic could be expensive. Tribes had to just absorb certain overhead costs, like the administrative

expenses of billing non-IHS insurance. And it's a big number. Tribes spend between $800 million and $2 billion a year on that overhead, according to the federal government's math. So when the Supreme Court ordered the feds to reimburse those costs. So that was a very big encouragement for tribes. And a very big financial headache for the Indian Health Service, which now has to come up with that extra money.

The bill that's coming due is going to be large. On top of a massive existing shortfall, says Elizabeth Reese, a law professor at Stanford. Indian Health Service is just embarrassingly and shamefully underfunded. The agency got a little less than $7 billion in 2024. The agency got a little less than $7 billion in 2024. Advocates estimate it would take $51 billion for the IHS to actually meet Native people's healthcare needs. Reese says Congress could just give the IHS that that is where we will end up. Reece says it's more likely other parts of the IHS budget will get cut. Because unlike

most federal health care programs, the agency runs on discretionary funding. Which means that every year, its funding is on the chopping block. In a statement, the IHS urged Congress to move its funding over to the mandatory side of the federal budget to insulate it from painful cuts. For now, Chairman John St. Clair says proper reimbursement will help tribes like his improve health care offerings. We can look at expanding our services right off. We can look at having an ambulance.

The county and the tribes have been talking about that for a long time. Plus new facilities and transportation assistance and specialist positions, improvements the Eastern Shoshone Tribe has been waiting for. I'm Savannah Marr for Marketplace. This final note on the way out today. A boost in hiring at the IRS is paying off. Today, the federal agency, along with the Treasury Department, said it's collected more than $1 billion in unpaid taxes from a handful of individuals with past due bills. It's part of a campaign funded by the Inflation Reduction Act to go after wealthy tax cheats. The IRS has identified 1,600 of

those households that owe at least $250,000 each, and the agency expects more money to roll in from those collection efforts. It's also going after 125,000 high-income households that haven't even filed tax returns in years. John Buckley, John Gordon, Noya Carr, Diantha Parker, Amanda Peacher, and Stephanie Sieck are the marketplace editing staff. Amir Bibaoui is the managing editor. I'm Amy Scott. Hope to see you back here tomorrow. This is APM.