Marketplace - Powell holds off on rate cuts

Episode Date: June 12, 2024

Well, the Federal Reserve decided to stand pat on interest rates for now — and said it may make just one cut this year. In this episode, we break down the Fed’s latest move and look at which sectors are feeling the “lag effect” of rate hikes. Plus: Daycares are likely to raise prices as federal pandemic funding runs dry, and Fannie Mae’s chief climate officer says we should prepare for climate risk to become a bigger factor in the housing market.

Inflation cooled last month, so when might we get a break on interest rates? Plus a conversation with the chief climate officer of Fannie Mae. From American Public Media, this is Marketplace. In Baltimore, I'm Amy Scott in for Kai Rizdal. It's Wednesday, June 12. Good to have you with us. At 8.30 this morning Eastern Time, the Bureau of Labor Statistics came out with its latest Consumer Price Index showing that inflation slowed in May for the second month.

Core prices minus food and energy, rose by just two-tenths percent from April, the smallest monthly increase since October. Compared to a year earlier, core prices were up 3.4 percent, the mildest annual increase in three years, but not mild enough for the Fed to feel comfortable cutting rates yet. Just six hours later, Chair Jerome Powell was at the podium announcing no change to the Fed's target interest rate. We'll have to see where the data light the way. The economy has repeatedly surprised forecasters in both directions and today was certainly a better inflation report than almost anybody expected.

And we'll just have to see what the incoming data flow brings and how that affects the outlook and the balance of risks. The Fed is now signaling just one interest rate cut later this year with more expected next year. Today's decision leaves the Fed's target of between five and a quarter and five and a half percent where it's been for almost a year now, the Fed said all along as it was raising interest rates that higher borrowing costs would have a lagging effect on the economy, an effect that's still playing out, as Marketplace's Mitchell Hartman reports. Mitchell Hartman, M.D. It took a little while, but higher interest rates are definitely putting the brakes on

the economy now, says Sam Stovall at CFRA Research. We've seen them bite primarily in gross domestic product growth by restricting lending practices by banks as well as raising mortgage rates. So far this year we're in a descending trend. With GDP growth down from 4.9% in the third quarter of last year to 1.3% in the first quarter of this year. By contrast, Stovall says stocks have pretty much shrugged off higher rates. Nobody has really been hurt. The S&P is up almost 18% since the fed's last rate hike, 10 of 11 sectors have posted price gains. The outlier sector that's lost ground? Not surprisingly, it's real estate. When the Federal Reserve aggressively raised interest rate, essentially it priced out many buyers.

Lawrence Yun at the National Association of Realtors says a lot of buyers are on the sidelines with mortgage rates at 7% and a lot of sellers don't want to give up their old mortgages at 3%. Soaring borrowing costs finally appear to be causing consumers to pull back as well, with credit card interest rates the highest on record. Joanne Shue directs surveys at the University of Michigan. Consumers are voicing frustration over high interest rates. Hsu says high rates hit lower income and younger consumers who are more likely to borrow to make ends meet hardest. Economist Robert Frick at Navy Federal Credit Union says his frontline colleagues are starting to hear from customers. People who had their finances pretty well in shape. Now a lot of those people are starting to be late on payments, feeling a lot of financial

pain. It is working itself up the wage scale. Which he expects to continue until interest rates come down again. I'm Mitchell Hartman for Marketplace. On Wall Street today, a mixed reaction. We'll have the details when we do the numbers. Child care has always been a tough business to run with slim profit margins and low pay. But it's about to get even harder. That's because $39 billion in federal funding Congress passed during the pandemic to keep

child care centers open is coming to an end. In some states, the money ran out last year, and in others, like North Carolina, grants to child care centers end this summer. Without those funds, many providers plan to charge families more. WUNC's Liz Schlemmer has that story. Adrienne Wilke is home with her four-month-old son Thomas in Carboro, North Carolina. She has just finished up work for the day, and baby Thomas is in a good mood. You want to give a smile?

You have such a big smile. What? What? Yeah, I think normally he's napping around this time. Thomas would usually still be at daycare with his older sister, but his child care center closed its infant room that day. A neighbor provided care. So yeah, he was home today and we made it work.

His normal daycare providers were out to make a point. They build it as a day without childcare. And many providers say it's a sign of things to come. Many centers across the country may have to permanently close because federal COVID-19 relief funds are drying up. Some states like North Carolina used other federal funds to continue grants to child care centers until this summer. The clock is ticking. In a recent survey, nearly a third of child care providers in the state said they may have to shut their door. That mirrors national estimates. And until then, most child care centers

plan to raise tuition rates. Adrienne Wilke is expecting to pay up to 10% more for child care this fall. And so now we have two children in daycare. And so calculating that for 2024, I think we will be spending about $32,000 to $34,000 on childcare for one year. Still, it makes more financial sense for her to keep working full time than having a parent at home. I mean what are we gonna do? Like we need the childcare so it's just like okay that's what we're gonna do. This is not an easy time for providers either. The preschool's director Anna Mercer-McLean knows paying tuition is a hardship. I just want families to know that we do not want them to bear the burden of this cost, but we want families just to be able to let our legislators and others know what the weight and burden of this is on them.

Childcare providers in North Carolina hope their state legislature will increase state funding to make up for lost federal funds. States like Minnesota and Massachusetts have already done that. Early on, federal grants covered immediate pandemic-related needs. But the grants that are ending now were designated for compensating teachers. McLean says for her, there's no going back on raises. I'm not taking away salaries. I never will. Not going to do it. I mean, our teachers deserve every dollar they receive and they need more. McLean raised the base salary at her center to equal her county's basic living wage.

She says even so, she still struggles to hire enough teachers to meet the demand from families. We have a long waiting list. We just don't have teachers to fill the classrooms. She says the search for employees has become increasingly competitive. Early childhood teachers might make more working at Amazon or Costco. McLean says if she can't hire teachers to grow her center's enrollment, she worries she'll have to close after 32 years in business. I'm Leigh Schlummer for Marketplace. Okay, you've heard of SoHo, right? The neighborhood in lower Manhattan that's south of Houston

Street and maybe Lodo? That's lower downtown in Denver. But what about SoBro in Nashville, Nulu in Louisville? The list goes on and on and it's getting longer. Business Insider's senior real estate reporter James Rodriguez wrote about the abbreviation Epidemic Sweeping American Cities. Welcome to the program. Thanks so much for having me. You open your piece with a story about your own experience of moving to Denver back in 2018. You asked a friend for some advice on neighborhoods to consider and you got like a code in response. Tell me what happened there.

Yeah, exactly. It was like she was speaking another language. She was rattling off these names like Rhino, Sobo, Lodo, Lohi, and those names aren't anywhere on the city's official maps, but soon I was parroting all of them. Where do these names come from? I've always sort of assumed it was, you know, inspired by Soho and New York and other neighborhoods like that. Yeah, that's exactly right. And originally, you know, I kind of wrote them off as a quirk of Denver, but then I started covering real estate on a nationwide basis and found them all over the place. Charlotte has Mora and LoSo, Nashville has a SoBro, Boston has a SoA, Louisville, Kentucky

also has a SoBro. And it's really kind of this effort, mostly on the part of developers, real estate agents, business associations, to brand a neighborhood in a way that they think will draw new tenants and patrons to the area's restaurants. It's kind of almost like wiping the slate clean a little bit on existing neighborhoods and rebrand them. And so really my story is all about some of the the negative consequences of doing that and you know what we kind of lose along

the way with these rebrands. Yeah give an example of that where as you said wiping the slate clean is sort of erasure. Well I think going back to Denver one of the examples is Rhino or the River North Arts District, which is this relatively recent district overlay on part of an existing neighborhood, the Five Points neighborhood, which is this historically black neighborhood in Denver. And now you have all of these developers and businesses that are touting their location in Rhino. And of course there are exceptions there, and I don't think it's all malicious. In fact, in some ways I think it's kind of, you arrive to a new place and everyone's calling it rhino, so you do as

well. But it really turns out to be kind of this lucrative, if a little cynical play to kind of greasing the wheels of gentrification. And I think we're seeing that kind of around the country in these up and coming cities where you have these rebrands these two syllable monikers You talked about how developers real estate agents often do this to try to attract Newcomers, maybe give it a hip sort of vibe. It doesn't work. I mean do these rebrands Work to bring more people or do they sometimes backfire because it's kind of cheesy to bring more people or do they sometimes backfire because it's kind of cheesy? You know, I mentioned the story. It is hard to argue with the results. My hometown of Austin, Texas, which has the South Congress area, which used to be kind of the seedy area a few decades

ago, and now it has an Hermes store and the Soho house and it's this thriving retail district and it's known as SoCo. But we also do see this backfire. One prominent example is in New York, these real estate agents were trying to rebrand part of Harlem as SoHa, South Harlem. And that really saw some fierce pushback from basically anybody who looked at that and saw, okay, this is clearly just trying to gentrify a neighborhood by erasing the existing brand and trying to put a new one in place. Yeah. And that one certainly didn't stick.

Yeah, thankfully. So how do we move forward from here? I mean, do you think this trend has an eventual end when people are kind of over it? You know, I do think it gets to the point where it is, you know, made fun of so much that maybe people abandon it. On the other hand, I do think we saw so much interstate migration during the pandemic as all of these remote workers were suddenly untethered from their desks. And I think neighborhoods and their names should kind of naturally evolve with their

populations. But I think what I'm trying to point out here in this story is that when they're kind of just these ball face moves that kind of just wipe the slate clean on existing areas, I think that's where we run into issues. And it's part of this whole just really messy process of naming and defining neighborhoods. Yeah, the change is hard. So where did you ultimately decide to move in Denver? So I moved to the Capitol Hill neighborhood, which has had its own abbreviation as Cap. Not quite. It was Cap Hill.

I don't think it's gotten to Cap High quite yet, but I guess never say never at this point, right? James Rodriguez is a senior real estate reporter with Business Insider. Thanks so much. Thank you so much for having me. This is fun. Coming up. We still have a huge issue with housing supply in the United States. You can say that again, but first let's do the numbers.

The Dow Jones Industrial Average dipped 35 points, one tenth percent, to finish at 38,712. The Nasdaq gained 264 points, 1.5 percent, to close at 17,608. And the S&P 500 added 45 points, 0.8 tenths percent, to end at 5421. We just heard about neighborhoods rebranding with new names. Some companies have done that too, after mergers or just to seem a bit more edgy or hip, like Kella Nova, which was known as Kellogg Company until last October. The cereal giant's stock dropped 1 in 6 tenths percent. Or Alphabet, formerly known as Google, which was up 2 thirds percent.

And the tobacco company, once known as Philip Philip Morris now trades as Altria, which declined one and one-tenth percent today. Bonds rose, the yield on the tenured T-note fell to 4.32 percent. You're listening to Marketplace. Seasons change, why not your tech? Upgrade now during the Dell Technologies Summer Sale event and save on select PCs like the XPS 16 powered by Intel Core processors. You'll be able to bring your most intensive projects to life with built-in AI, minimalistic design, immersive visuals, and cinematic audio. Plus, complete your dream setup with deals on select monitors, mice, and

more must-have electronics and accessories. When you shop online at dell.com slash deals, you'll have access to exceptional tech and electronics plus free shipping on everything. Amazing prices await you for a limited time only at dell.com slash deals. That's dell.com. This is Marketplace. I'm Amy Scott. The climate crisis is in a lot of ways a housing crisis too. Consider this sobering estimate from realtor.com that nearly half of all U.S. homes are at risk of severe or extreme damage from events like flooding, high winds, and wildfire. Those risks are borne

by homeowners, of course, and their insurance companies, but also by Fannie Mae and Freddie Mac, the quasi-governmental corporations that together own or guarantee roughly 60% of mortgages in this country. Tim Judge is chief climate officer at Fannie Mae. It's his job to assess how climate change could affect the housing market and the company's huge portfolio of loans. Tim, welcome to Marketplace. Thank you for having me. All right, and what does it mean to be the chief climate officer at Fannie Mae? What are your, what's your role there? Well, it means I'm responsible for understanding

the impact of climate on Fannie Mae now and in the future as well as working on strategies to address the risk of climate to US housing. So that means working with internal stakeholders as well as external stakeholders on opportunities to mitigate and to promote and help the transition to a greener economy. What kind of risk do you see for Fannie Mae coming from not just you know the increase in severe weather but the insurance challenges that are happening partly as a result of that? So climate change is certainly going to have a large impact on US housing. I think what we're seeing in the insurance space is a clear

indication of that and insurance is now a kitchen table topic for most people in the United States. When we look at insurance, one of the things we do is our National Housing Survey. We asked a lot of consumers about insurance. Two thirds of them said their premiums have been impacted by the natural disaster events or some other damage to their property due to climate related events. Wow. So we continue to look at that and I think what we've seen in our book Amy is we still see that overall insurance is affordable, overall homeowners insurance is available, overall homeowners insurance

is available, but that doesn't mean that there aren't pockets in the United States that are seeing some of those big challenges. Yeah, so tell me about some of those pockets. I think a lot of people are familiar with the issues in Florida on the coast, Louisiana, also in California and wildfire country, but it seems that this the issue is growing and becoming something that we're seeing in much in more parts of the country. Yeah as you said Louisiana, California, and Florida have always been the leading discussion points. It is in the Midwest becoming a bigger issue and

it's largely driven by what you've seen in the last couple years in terms of severe convective storms in the Midwest. Last year there were 18 to 20 severe convective storms that cost over a billion dollars. That has to be reflected in insurance premiums going forward. And so I think some of those new places are really where you're starting to hear new headlines about it is starting to impact Midwest where insurance wasn't as much of an issue previously. So as you know, some people think that the market is in for a correction in places that

may be overvalued because climate risk hasn't really been priced in. And as insurance gets more expensive, we might see more of those properties losing value as more people have to sell or people are less inclined to buy. What kind of risk does that pose to Fannie Mae and therefore the taxpayer? So insurance rates have jumped due to a number of things. Inflation is a clear driver of insurance premiums across the United States. There's litigation issues as we know down in Florida with lawsuits. We've had you mentioned California where there's been some regulatory challenges that have driven kind of availability issues, but the last part of that is

certainly climate risk. So we have not seen big impacts to valuation due to climate change and that's a couple of reasons. One of which is we still have a huge issue with housing supply in the United States. So we have too few properties relative to the demand. So that signal somewhat outweighs quite honestly the climate signal at this point. Hmm. So some have said that Fannie and Freddie are really subsidizing home ownership in risky areas because it costs the same to get a mortgage on the coast as it does to get one further inland. Have you considered some kind of risk premium or pricing that

would send that signal so that people aren't easily able to live and in fact continue living and rebuilding in risky areas? There's a couple answers to that. The first is I don't think the analytics are at a level today to make those kind of property level distinctions. We continue to work on this as the head of modeling and the chief climate officer, if any may, I have a responsibility to ensure that the metrics make sense at a property level and I just don't think we've matured to that level yet. And I do think the question of taking properties or taking areas off the list probably misses the point of we should

really be thinking about what areas we need to invest more in terms of resiliency. You know, as we said, we have a housing supply issue. The last thing I want is to have lower supply of housing. And in many of these communities that are at risk, resilient investment in either the community or at the property level would make those properties still completely sustainable and safe. Let's talk a little more about disclosure, because it's kind of striking that there aren't requirements in many communities for a seller to inform a buyer that the house is flooded in the past, for example. Is that something that Fannie Mae could mandate for the mortgages it purchases?

We do need every state to have flood disclosures. Where it rains, it can flood, right? And we have seen a lot of progress lately, Vermont being the latest state that has just come out with flood disclosures. But I do think, you know, whether it's FANNY working with FHFA or FEMA or, you know, any state bodies working together is we do need to make sure consumers are more aware. One of the reasons why we focus so much on awareness is if you get people to be aware and you move it into their day-to-day lives, then we'll slowly acclimate to the climate being part of our risk assessment on housing. It'll be slowly letting that air out of the balloon.

If we go 20 or 30 years without taking real climate action, then I think you have built up a real challenge. And so what our real opportunity here is, is to make sure we transition as quickly as possible. And so we don't even have to think about those risks 20 or 30 years down the line. Yeah. Here's hoping. Tim Judge, Chief Climate Officer at Fannie Mae. Thank you so much. Thank you, Amy. If you want to hear more about climate solutions, check out the podcast I host, How We Survive.

You can find it at marketplace.org or your preferred podcast app. This final note on the way out today, a little behind the scenes look at what happens when the Fed gets important data like it did on inflation this morning after members of the committee have already made their forecasts, which are compiled into what's known as the SEP, the Summary of Economic Projections. Here's Jay Powell again. When that happens, when there's an important data print during the meeting, first day or second day, what we do is we make sure people remember that they have the ability to update.

We tell them how to do that. And some people do, some people don't. Most people don't. And I'm not going to get into the specifics, but you have the ability to do that. So what's in the SEP actually does reflect the data that we got today, to the extent you can reflect it in one day. So there you have it. Now don't you wonder how they do it?

Is it like an email? A text? A survey monkey? Our media production team includes Brian Allison, Jake Cherry, Jessen Duller, Drew Jostad, Gary O'Keefe, Charlton Thorpe, Juan Carlos Torado, and Becca Weinman. Jeff Peters is the manager of media production. And I'm Amy Scott. Hope you'll join us tomorrow. This is APN.