Marketplace - Neel Kashkari and the Fed’s inflation fears

Episode Date: February 22, 2024

Overall, inflation has plummeted since June 2022, shortly after the Federal Reserve began hiking interest rates, and the Fed is getting closer to its 2% target. But consumer prices are still high. So why is it taking so long for the Fed to cut interest rates? “The Federal Reserve has been faked out before, where we thought inflation was licked, and then it flared back up again,” Neel Kashkari, president of the Minneapolis Fed, told us on today’s show. “That’s what we want to avoid.” Also: What to expect when Amazon replaces Walgreens on the Dow, how congressional budget fights threaten federal firefighters’ pay, and why the U.S. is selling its helium reserve.

Let's say you get to weigh in on interest rates in this economy. What would you say? Think about that for a second. From American Public Media, this is Marketplace. In Los Angeles, I'm Kyle Rizdell. Wednesday, today, 21 February. Good as always to have you along, everybody. Delivered to us today by the Federal Open Market Committee were the minutes of its most recent meeting. Fed watchers will, of course, pour over them in search of tea leaves to be read. We, however, have gone to the source.

Neil Kashkari is the president of the Federal Reserve Bank of Minneapolis, not a voting member of the FOMC this year, it should be said, but he's in the meetings. Neil Kashkari, it's good to talk to you again. Good to talk to you, Kai. Scale of one to 10, what do you think of this economy right now? 10 being good, one being really not good? I would say a seven. I mean, right now we have low good, one being really not good? I would say seven. I mean, right now we have low unemployment. We keep being surprised with strong economic growth.

Consumers seem like they're doing well. There's some, you know, some nervousness around the edges, but overall the economy is doing very well. So what's the monster under your bed? What's keeping you up at night? What's keeping me up at night is an open question of whether or not inflation is going to continue the rapid progress that we've made. You know, inflation's now running on a six-month basis around 2%. We need to see that continue for a few more months. So we're not all clear yet, but that's what's keeping me up at night. Are we going to get all the way there? All right. So let me just on behalf of everybody out there who's screaming at their radio or at

their podcasting advice saying inflation is down. What are you waiting for? When are you going to cut rates? Come on. Right. Well, I hope they're right. There have been times in the past when the Federal Reserve has been faked out before where we thought inflation was licked and then it flared back up again. That's what we want to avoid. We want to get the job done before we declare victory. Well, you know, I'm glad you brought up the time when you got faked out before, not you, but the institution itself. You and I spoke in 2018, and we spoke mostly about the financial crisis back then. It was the 10-year anniversary. But we had a conversation about inflation and what the Fed was worried about. And let's remember, this is 2018. Inflation was like, you know,

1.8-ish something percent. And I said, what are you guys so worried about with inflation? Here's what you said. And again, it's five-ish years ago. We are much more worried about high inflation than we are low inflation. And I think that that is a scar from the 1970s. Essentially, it's monetary policy by fear, basically. You know, policymakers, excuse me, policymakers are, and each has their own set of emotions and their own histories, and we do our best with the data that we have and the experiences that we've had. So it's 50 years later, and you guys are still traumatized, I don't think it's too strong a word, by what happened back then. I guess my question is, why? Well, I think look at the experience that we've all had.

We, for the 10 years before the pandemic, we struggled with inflation that was a little bit too low. We had this big flare up after COVID, after the reopening of the economy. And one of the things that we heard loud and clear from the American people is, the American people hate high inflation. If their paychecks, their real earnings are going down because their paychecks are not keeping up with

these higher grocery store prices, that really affects people's quality of life and their standard of living. And so I think our fear of high inflation is well warranted, but we always have to look at both sides of the equation. Is it a fear that if you relax your guard here, that it will take off again and then get out of control? Is that what we're talking about? Because nobody's ever actually said that out loud. Well, out of control is the biggest fear. When we saw the 7%, 8% inflation a couple of years ago, you bet we were very worried. Oh, my gosh, what if it keeps climbing from here and we really can't stop it?

And then the second question is, how much pain do we have to inflict on the economy? In the late 1970s and early 1980s, Paul Volcker and the Fed engineered a very deep recession, which ended up being necessary to put inflation back in the bottle. Thankfully, so far, we have not had to do that. We have a very strong labor market. We want to make sure that we land the plane completely and not let it flare up again. You know, you pointed out in a memo a couple of weeks ago that financial conditions, which is, you know, bonds and stock market and all the rest of that stuff, it's not really that tight given where the Fed is at five and a quarter ish percent. That's right. If we look at various financial indicators, you know, one of the places I look to right away to see how tight is monetary policy is the housing market.

And we know home sales has dropped a lot. But overall, investment in residential real estate has held up remarkably well. And remarkably, construction jobs have continued to climb. Normally, I would have thought raising rates this much would have led to a lot of losses of construction jobs. That makes me question, is monetary policy, do we have both feet on the brakes or just one foot on the brakes? Well, keep going on that. I mean, do you guys sit around the table at FOMC meetings and kind of shrug at each other and say, look, we're trying, but the economy is just going, you know, great guns here? economy is just going, you know, great guns here. It is. I mean, on some sense, it's a high class problem. We want the economy to be strong, but we keep getting surprised quarter after quarter at how strong GDP growth is and how strong consumer spending is. Those are good problems to have, but it makes me question, are we putting as much downward pressure on demand as we would

have assumed given where interest rates are. There will be industry types who will hear that last sentence you uttered, are we putting enough downward pressure on demand? And they will hear, oh man, Kashkar is thinking a hike. He's not thinking a cut. Well, I think the first question for me is how long do we hold at these rates before we start cutting. That's another way of putting more downward pressure is just holding at the current rate for longer. Actually having to raise rates, that's yet another dimension, and I'm not there yet. I'm going to go a little sideways here, but roll with me. The Fed is generally speaking, this is an outsider's impression,

it is a fairly consensus-driven group, right? You guys strive to have a unified voice on monetary policy with the occasional dissent here and there, which is why it struck me that in a conversation you had with Ginni Rometty the other day, the former CEO and chairman of IBM, you said you, Neil Kashkari, I'm talking about you this time, you seek out conflict, Ashkari, I'm talking about you this time. You seek out conflict, whereas the Fed and its members are sort of more conflict diverse. And I guess I wonder what that translates into as you're going around the table, because I always sort of imagined they were very cerebral, highbrowish kind of conversations. Well, the FOMC is incredibly cerebral. It is highbrowish. People are exceptionally well-prepared. My nature is, if everybody has already reached a conclusion, there's a good chance they're right. But I want

to examine the alternatives to see, hey, maybe the consensus is missing something. And so if you look at my eight, or now I'm going on my ninth year at the Fed, I've been very willing to dissent if I have a different view than the center of the committee. Now, in recent years, during this COVID experience, the economy has been so hard to diagnose. It's been hard for me to have conviction that I'm right and everybody else is wrong. And I think that's part of the explanation why we've been so united in trying to get through this, because we're all trying to figure it out. And it's hard to know exactly which direction the economy is going to go. If you guys can't figure out what are the rest of us supposed to do?

Well, I think we all are doing our very best. We're doing our best at the Fed to get inflation back down and to read the signals. And I know the American people are doing their very best to make ends meet. And I think if we all continue to do our best, we're going to get through this and get all the way back to where we need to get to. Do you get the frustration, though, that people have with high price levels, even though inflation's down by a lot? Absolutely. I do the grocery shopping for my family. I started doing that when the pandemic hit, and I still have sticker shock. My brain has not reset to the higher prices that I see, and in some cases, the smaller packages that I see every Saturday when I go to the grocery store.

Neil Kashkari at the Minneapolis Fed. Neil, thanks a lot. I appreciate your time and your expertise. Thank you, Kai. On Wall Street today, a little up, a little up, a little down. With the three major indices, we'll have the details when we do the numbers. All right, in no particular order, what do these companies have in common? Boeing, Honeywell, JPMorgan Chase, Salesforce, and Walgreens Boots Alliance. No, wait. Scratch Walgreens. They are going to get the boot next week from the list of the 30 companies that make up the Dow Jones Industrial Average.

Amazon is going to slide on in its place. Why and what difference does it make? Marketplace's Kristen Schwab has today's explainer. The Dow Jones involves a little bit of math and a little bit of mystery. It's made up of 30 companies from the S&P 500. And here's the mysterious part. It's not governed by quantitative rules. Hamish Preston is head of U.S. equities at S&P Dow Jones Indices. He says what the Dow is governed by is the committee that decides which corporate giants best represent the U.S. economy. Kind of subjective, but basically the committee

considers company growth and investor interest, and it includes a mix of industries for balance. Which gets us to the math part of this. The Dow is weighted by share price. So when Walmart executes an already announced stock split next week, its ranking in the Dow will drop. Preston says adding Amazon gives some weight back to the retail industry. These types of changes have happened throughout history, and it's by design. The original Dow had just 12 companies in industries like sugar, tobacco, and leather. Since 1896, its components have changed 50-something times. It no longer includes Pfizer, AT&T, and Kraft Foods. And James Angel, a finance professor

at Georgetown, says household names like Alphabet have never made the Dow. They are rather hesitant to put in a very high-flying stock because they don't want to put in something at the peak of a bubble and then watch it pop. It means to get a spot in the Dow, a company has to innovate, re-innovate, and stand the test of time. And so to be included in the index is a sign that you've made it. To be taken out is a sign that you're no longer one of the cool kids. Walgreen's cool kid status didn't last long. It was added to the Dow in 2018 when it pushed out General Electric. I'm Kristen Schwab It has perhaps gotten lost in the increasingly chaotic news environment as the race for the White House does what races for the White House do. But Congress is once again staring a government shutdown in the face. March 1st is the earlier of two deadlines. And among the many potential casualties of the everlasting federal budget impasse are the salaries of federal wildland firefighters. They got a raise in the Inflation Reduction Act, 50 percent of their base pay or an extra $20,000 a year, whichever was less.

That money is long gone. The higher salaries have been kept up through a series of temporary continuing resolutions. And while a permanent fix does have a bipartisan support, as Marketplace's Savannah Marr reports, the firefighters are going to believe that when they see it. This past June, Daniel Uphuse was out with a Forest Service crew in western Washington. You know, we're in the black mopping up. That's wildland fire speak for extinguishing any material that's still burning after a fire is contained. It's tough work, and this time, Apu says the conditions were sketchy. People were thinking, oh, it's getting a little windy.

We shouldn't, I don't know if we should be in here. Wind speeds never top 10 miles an hour. Apu says that was the threshold for when his crew boss would pull them off the fire line. You hear the creaking and popping of a tree falling. Upuse guesses the red cedar that was coming down was 120 feet tall. Everyone starts yelling, trying to give indications of where the tree is falling. He says the top half landed maybe 30 feet from his crew. And after the shock wore off, Upuse was mad. He and his colleagues were risking their lives for

wages they probably could have been making in fast food or retail. Yeah, I think about that a lot, actually. When Upuse started working for the Forest Service in 2020 as a seasonal employee, Up Hughes started working for the Forest Service in 2020 as a seasonal employee. His base pay was just $15.50 an hour, and even working up to 800 hours of overtime each season. It's really not that much money. The 2021 pay boost brought him up to $22 an hour, and that was a big deal. It helped him pay off his student loans. He's got a degree in Spanish and history. And the possibility of going back to lower pay

has been weighing on Apuse and his co-workers. There are other people that have talked about maybe going into a state agency. A state agency like California's, which can pay firefighters double what they make with the U.S. Forest Service. Same with some city departments. And the more times Congress punts on federal firefighter pay, the better those state or private jobs start to look to frustrated workers. You know, most folks are on really thin ice. Kelly Martin heads up the International Association of Wildland Fire. She says the uncertainty has experienced firefighters especially fed up.

They have the most to gain by moving on. There's just such a tremendous loss of experience and qualifications when individuals can't pencil it out anymore. And lives and property are at severe risk. Martin says veteran firefighters are invaluable, especially with climate change making wildfires more frequent and more complex to contain. Michael Wara, a climate policy expert at Stanford, says that's changing the profession. It's kind of raised the tempo of activity. He says firefighters are spending more time away from family, more time breathing in smoke. That wears people down. They really need the off-season to recover physically and mentally.

Rather than working another job in the winter to supplement income. And Wara says the inaction from Congress gives federal firefighters the sense that they're not a priority. Sooner or later, those people tend to go where they feel valued. Well, I can't afford anybody to leave right now. Warner Vander Heule is a union rep for federal wildland firefighters. He also oversees a few crews in northern Michigan. Since this pay debacle started, he says turnover is high. Hiring is slow. We're at bare minimum staffing to meet the day's requirements. Having someone take a day off is very difficult. By now, maybe you're thinking this job sounds pretty grueling. Why would anyone sign up for it? Well, Daniel Upuse,

the firefighter who nearly had a tree fall on him, wants you to know he has other stories about all the cool places his job has taken him and crew camaraderie and beautiful backcountry scenery. But you can only get paid in sunset so many times. Apus recently scored a permanent firefighting job with the Forest Service. It comes with great retirement benefits. He's hoping that with some pay certainty, he can stick around. I'm Savannah Marr for Marketplace. Coming up. When it shuts down, that means 20% of the U.S. supply of helium will go offline.

Party balloons are going to be getting more expensive. That's all I'm saying. First, though, let's do the numbers. Dow Industrials up 48 points today at 10%, 38,612 for the blue chips. The Nasdaq went the other way, 49 points down, 3 tenths percent, 15,580. The S&P 500 added six points, about a tenth percent, 49 and 81. Palo Alto Networks plunged 28 percent today. That happened after the cybersecurity company cut its full year revenue forecast.

Speaking of big drops, Teladoc sank 23 percent. That's after the online health care company put out some worse than expected revenue and guidance numbers yesterday. Bond prices fell. The yield on the 10-year T-note went up 4.31 percent. You're listening to Marketplace. This is Marketplace. I'm Kai Risdahl. When is $22 billion in quarterly revenue not enough? When Wall Street had been expecting you to make even more in 90 days is the answer. NVIDIA reported said earnings after the bell today. It is, of course, the hot company in one of the hottest sectors in this economy.

NVIDIA designs the chips that power top-end artificial intelligence models. It is headquartered in California, but much of its manufacturing is actually done by TSMC. That's a company based in Taiwan. And the majority of all computer chips, globally, in fact, are made in Asia. Washington, as we've reported, and others as well, wants the United States to get a bigger piece of that chip-making pie. And this week, the Biden administration did give a billion and a half dollars to global foundries to expand its production abilities here. Marketplace's Stephanie Hughes has this update on domestic chip making. Even if they're made elsewhere, the U.S. is far and away the global leader in designing advanced chips, says Harvard Business School professor Willie Shee. Whether they are pure digital chips

or chips for radios that go into phones or what have you. Now she, who's also an unpaid advisor to the Commerce Department on the Chips Act, points out that of the $39 billion in the law to incentivize making chips here, this latest award to Global Foundries is the biggest we've seen to date. Still, he says the private sector is going to have to invest a lot of its own money to build each new chip factory, called a foundry, and then fill it with diamond saws and advanced lithography tools. And then, of course, once you do that, you also need the people to run it. Speed matters here because the U.S. is competing with other countries who are offering their own

incentives to chip makers, says Emily Kilcrease with the Center for a New American Security. Europe has its own version of the Chips Act that they're trying to move forward. There is going to be potential competition amongst governments as they're handing out these sorts of subsidies. Still, chipmakers here in the U.S. are making important advances, says IDC's Nina Turner. Now they're approaching the physical limits of being able to be smaller. So now they're going 3D. So they're building in the Z axis, not just the X and Y axis. Turner says that will increase chip speeds and reduce power consumption, making those chips more attractive to the companies that need them. I'm Stephanie Hughes for Marketplace.

I'm Stephanie Hughes for Marketplace. The General Services Administration had an auction last month, which normally would have meant used cars and trucks from the federal fleet, office supplies, maybe buildings sometimes. Not so, however, this time. The Federal Helium Reserve was up for sale. The government has been stockpiling helium for 100 years now underground near Amarillo, Texas, if you're curious. And once upon a time, it was for lighter than air aircraft. Now, though, it's used in MRI machines and semiconductor manufacturing party balloons, of course. The government has been trying to offload its stockpile for almost three decades, but not everybody wants it privatized,

as Marketplace's Henry App reports. So why exactly are we selling off the Federal Helium Reserve? To answer that, we have to go back to a congressional session in April 1996. The National Helium Reserve has really been a laughingstock, I think, for several decades. Then Wisconsin Representative Scott Klug spoke for a lot of Republicans who were really into cutting government spending. And the old helium reserve, he said, was a perfect example of ballooning government waste. In 1996, it's clear that blimps have absolutely nothing to do with national security. They may have to do with some intriguing shots at the halftime of a Monday night football game,

but I think they managed to do that without support from the federal government. game, but I think they managed to do that without support from the federal government. The bill passed. President Bill Clinton signed it, and a few years later, the government started selling off its stockpile of helium. But... They didn't foresee the demand in the early 2000s. Beau Sears runs a helium exploration business. As the government's sell-off began, so did a sharp rise in demand for helium, mostly for semiconductor manufacturing and MRI machines. But there was a problem. That 1996 bill tied the price of government helium to a formula intended to pay off some federal debt, not to the market. It just became very cheap helium. So you and I,

as U.S. taxpayers, were selling this stuff off for a song. And with a supply of cheap helium, private sector companies didn't really have any incentive to go look for more of the stuff themselves, Sears says. That led to rising prices and even a few shortages. Martha Morton felt them. She runs a biology and chemistry lab at the University of Nebraska-Lincoln that relies on liquid helium to cool huge magnets inside devices that can analyze the makeup of a cell. Helium cost went from $2 or $4 a liter and jumped to $5 or $6 a liter. I'm now paying $19 a liter. In 2013, Congress tried to stabilize the market, and it mandated that most of the remaining government helium

and the entire helium facility in Amarillo be sold by 2021, says Phil Kornbluth, an industry analyst. For a lot of people, it was like a kick the can down the road kind of thing. Now we've reached the can again. After a few more years of delays, in January, federal officials revealed bids from private companies that want to buy the helium reserve. There were just two. Meanwhile, some industry groups don't want a sale to go through. Net transfer is when we believe things are going to go sideways. Rich Gottwald is head of the trade group the Compressed Gas Association. Right now,

to get to refineries, the helium from the reserve flows through a pipeline that crosses three states. Gottwald says the federal government doesn't need to worry about state regulations in those areas, but a private owner will. Whether they be environmental regulations, whether they be gaining rights of way for certain areas where the pipeline goes through. Getting into compliance could take up to a year and a half, Gottwald says, and he thinks the reserve would need to be shut down that whole time. And when it shuts down, that means 20% of the U.S. supply of helium will go offline. Causing more supply problems for MRI operators, semiconductor companies, research labs. Gottwald wants the government to halt the sale process,

work out the regulatory kinks, and hold another auction in a few years. The government has until early June to decide whether to accept a bid. But some helium buyers aren't waiting to find workarounds. A few years ago, Martha Morton, the lab director in Nebraska, installed a system that captures most of the helium that escapes from her magnets. I now recover 80% of what I use over a year. That means she's less reliant on the turbulent market. But she says the recovery system needs almost constant maintenance.

And so me going off for a two-week vacation hasn't happened in a couple of years. But at least she's less worried about the Federal Helium Reserve. I'm Henry Epp for Marketplace. This final note on the way out today, and I'm just going to leave this here. I saw it in Fortune. We all know that women are just 10%, give or take, of CEOs of Fortune 500 companies. Turns out, though, that when the scarce few women do get the top job, they don't get to stay long. Men who are Fortune 500 CEOs stay an average of 7.2 years. Women, on average, just four and a half.

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