Tangle - Interest rates go up (again).

Episode Date: March 27, 2023

Last week, the Federal Reserve raised interest rates for the ninth time since March of 2022, this time by a quarter of a percentage point. Interest rates are now at 5%, the highest level since 2007. The move comes at a time of unusual uncertainty, as some bankers and investors urge the Fed to pause the rate increases because of the failure of several mid-sized banks. Plus, I follow up on Friday's clickbait edition.You can read today's podcast here, today’s “Under the Radar” story here (paywall) and today’s “Have a nice day” story here. Today’s clickables: Quick Hits (0:51), Today’s Story (2:48), Right’s Take (6:53), Left’s Take (10:57) , Isaac’s Take (14:36), About Last Friday… (16:53), Under the Radar (20:39), Numbers (21:30), Have A Nice Day (22:11)You can subscribe to Tangle by clicking here or drop something in our tip jar by clicking here.Our podcast is written by Isaac Saul and edited by Zosha Warpeha. Music for the podcast was produced by Diet 75.Our newsletter is edited by Bailey Saul, Sean Brady, Ari Weitzman, and produced in conjunction with Tangle’s social media manager Magdalena Bokowa, who also created our logo.--- Send in a voice message: https://podcasters.spotify.com/pod/show/tanglenews/message Hosted on Acast. See acast.com/privacy for more information.

Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada, which is Chinatown is streaming November 19th, only on Disney+. yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages six months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed. Learn more at flucellvax.ca.

From executive producer Isaac Saul, this is Tangle. Good morning, good afternoon, and good evening, and welcome to the Tangle podcast, the place we get views from across the political spectrum, some independent thinking without all that hysterical nonsense you find everywhere else. I'm your host, Isaac Saul. And on today's episode, we're going to be talking about the interest rate hikes at the Fed, what they mean, what it means for inflation and the banking crisis. And as always, before we jump in, we'll start off with some quick hits. First up, First Citizens Bank agreed to purchase $72 billion of Silicon Valley Bank's assets, while another $90 billion will stay in FDIC receivership. Number two, at least 26 people were killed and dozens more were injured after 12 tornadoes

touched down in Mississippi and Alabama over the weekend. Number three, Israeli Prime Minister Benjamin Netanyahu fired his defense minister on Sunday after the minister publicly criticized his judicial reforms. Netanyahu may pause those reforms after the continued widespread protests. Number four, Russian President Vladimir Putin said Russia will station tactical nuclear weapons in Belarus, though there is no evidence it has moved the weapons yet. Number five, the Los Angeles Unified School District said it struck a deal with school employees to end a strike in the country's second largest district. The Federal Reserve has raised interest rates again by another quarter of a percentage point. Today's decision came against the backdrop of troubles in the banking industry. The rate

hikes are being blamed by some for weakening banks, but Fed policymakers stuck to their stance that higher rates are essential for the moment to try bringing inflation under control. Federal Reserve raising by one quarter point by 25 basis points to a new range of 475 to 5%. It is the ninth hike in a row since the Fed began hiking in May 2022. Chairman Jay Powell suggested the agency might slow or pause any future increases. We believe that events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses,

which would in turn affect economic outcomes. It is too soon to determine the extent of these effects, and therefore too soon to tell how monetary policy should respond. Last week, the Federal Reserve raised interest rates for the ninth time since March of 2022, this time by a quarter of a percentage point. Interest rates are now at 5%, the highest level since 2007. The move comes at a time of unusual uncertainty, as some bankers and investors urge the Fed to pause the rate increases because of the failure of several mid-sized banks. The Fed expressed caution about the banking crisis and also indicated rate hikes may be nearing an end despite the persistence of

inflation. A quick reminder, interest rates represent the cost for banks to borrow from the Federal Reserve. When the Fed raises interest rates, that increase is passed through to credit card debt, mortgages, and loans. The Fed uses interest rate hikes to slow spending and investment in order to tamp down inflation, and has been raising interest rates to battle inflation for a year. Meanwhile, inflation is measured by the Consumer Price Index, or CPI, which is designed by the Bureau of Labor Statistics to measure price fluctuations for urban buyers who represent the vast majority of Americans. The CPI tracks 80,000 items in a fixed basket of goods and services, representing everything from gasoline to apples to the cost of a doctor's visit. There were some questions about whether the Fed would or should hike interest rates again.

it. There were some questions about whether the Fed would or should hike interest rates again. The failure of Silicon Valley Bank, or SVB, was, in part, precipitated by increased interest rates, which devalued government bonds that the bank owned. Before SVB's failure, the Fed was expected to raise interest rates by half a percentage point, but was then put in the difficult and unusual position of having to decide how to keep fighting inflation while also navigating a potential banking crisis. Fed Chair Jerome Powell emphasized that the inflation fight isn't over yet. Historically, the Fed has aimed to keep inflation around 2%, but since October of 2021, it has consistently been around 6% on a year-over-year basis. The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy, he said in a post-meeting news conference. Softening inflation data dominated

the end of 2022, but more recent data has caused some renewed concern. In February, the consumer price index rose 0.4% about what economists expected, and the annual inflation rate was up 6%. economists expected, and the annual inflation rate was up 6%. Core CPI, which excludes food and energy prices, was up 0.5%. The 0.25% increase in interest rates was considered a compromise, lower than the expected 0.5%, but not a complete pause. Today, we're going to look at some commentary from the right and left about the rate hike and what the Fed should have done than my tape. First up, we'll start with what the right is saying. Many on the right say the Fed is facing a crisis of its own making and urges it to focus on inflation. Some say the Fed should focus on its anti-inflation credibility, and others say Fed Chairman Jerome Powell must see the job through on rate increases despite the extraordinary outside pressure to ease up.

The Wall Street Journal editorial board said the Fed is trying to thread the needle on interest rates. If we're all lucky, the board said, Fed Chairman Jerome Powell will be right that the American banking system is safe and he will get inflation under control. The hike was less than the half-point increase markets had expected, and the rate-raising cycle appears to be one more and done. That's out of step with inflation that remains well above the Fed's 2% target, and the central bank's prediction that inflation will fall rapidly this year may be too optimistic given its poor forecasting record. Two weeks ago, price data had signaled higher inflation, but then came SVB's failure and other turmoil that exposed the threats that rapidly

rising rates pose to a financial system distorted by more than a decade of very loose monetary policy. Powell said the Fed views inflation and bank turmoil as two separate challenges, which is the right message to send markets to maintain anti-inflation credibility. But it's also risky. If the Fed fails to prevent a larger panic, it could be forced to ease before it conquers inflation. Both issues are problems of the central bank's creation. In National Review, Steve H. Hanke and Manuel Hines called it a self-directed tragedy. The Fed expanded the money supply at an unprecedented average annual growth rate of 19% between February 2020 and February 2022, and then reversed gears and began to shrink the money supply by an unprecedented and cumulative 2.2% between March 2022 and January 2023, they said.

To put those numbers into context, based on the quantity theory of money, the rate of growth of the money supply that is consistent with the Federal Reserve's hitting its 2% inflation target is 5-6% per year. These dramatic Fed maneuvers stress the banking system, and SVB and other regional commercial banks are the collateral damage. If that wasn't bad enough, regulation of SVB falls under the purview of the San Francisco Fed, where any bank examiner should have seen the writing on the wall. The Fed is now between a rock and a hard place. One option is to engage in a monetary squeeze to fight inflation while inflicting pain on the

commercial banking system. The second option is to provide commercial banks with liquidity, which will probably set the Fed back in its fight against inflation. In the Washington Examiner, Tiana Lowe asked if this was Jerome Powell's Paul Volcker moment. As the saying goes, the Federal Reserve usually raises interest rates until something breaks. After one year and 450 basis points of tightening, something has finally broken, Lowe said. Powell's resolve to keep fighting inflation has persisted so far in a period when raising rates has been relatively easy. Now he must prove if he is the man for the moment. It is, or at least should be, easy to raise rates while the economy is still roaring.

It is much harder to stomach the political pain and Wall Street wailing when raising rates after a financial break sparks investor panic. Just like in 1984 when Volcker did the right thing, Powell should not prioritize financial stability over his legal mandate to restore price stability. CPI inflation was 6% in February, three times the Fed's inflation target. In core PCE, the Fed's preferred inflation measure actually rose last month. Is it politically possible for Powell to pull this off? Not that Powell should care, but recall that President Ronald Reagan won 49 states during his 1984 re-election, in which Volcker had interest rates at 9% while inflation was 4%. If Powell wants to prove the Fed stands independent, he will see the job through. All right, that is it for what the right is saying, which brings us to what the left is saying.

The left is split on the hike, with some saying Powell should have paused, while others say mixed signals are dangerous. Some argued pausing rate hikes with signals they would come back would have been the best decision. Others say inflation is the real and immediate threat and should be the Fed's main focus. Before the rate hike was announced, the Washington Post editorial board urged the Fed not to raise rates. Despite this stubborn inflation problem, there's a larger concern, the board said. The rapid downfalls of Silicon Valley Bank and Signature Bank have zapped confidence in critical parts of the banking sector and triggered concerns about what is next to rupture. The Federal Reserve should temporarily pause interest rate hikes on Wednesday to give the financial system time to adjust to the new reality. Bank failures are

scary and people are shaken, all while regional banks remain under pressure. They say the Fed should signal in its forecast that more hikes are coming, including at the next meeting on May 3rd. But the Fed's ultimate job is risk management, and right now the bigger risk is further harming financial stability. There are 190 banks at similar risk of a squeeze like the one that happened at Silicon Valley Bank. Regional banks are a big driver of commercial and real estate, the board said. Construction job openings were already falling fast in January, and this crisis could accelerate the retreat. The full extent of the fallout in numerous industries isn't yet clear. The Bloomberg editorial board said Powell's balancing act raises some questions. The Fed split the difference between the bigger increase it signaled earlier this month and the pause that many demanded over the banking crisis. It's a defensible

compromise, but cracks are showing in the central bank's reasoning. At the moment, entrenched inflation is the greater danger, and interest rates should be set according to macroeconomic conditions. Powell maintained the Fed loses nothing by moderating its anti-inflation strategy until it has a clearer view of where things are headed and a small increase in rates with the stress-induced tightening of financial institutions will keep prices down. It's a plausible but flawed logic, the board said. The Fed can't credibly promise to raise rates later if it's too easily deflected by doubts about where things are heading. The so-called hawkish pause timidity now, determination later, is a contradiction in terms.

And the supposed tightening due to financial uncertainty is probably exaggerated. High inflation, the biggest problem the economy faces, is not a hypothetical issue. It's here and now. If the Fed is suspected of flinching, it will become very much harder to solve. Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, a background character trapped in a police procedural who dreams about a world beyond Chinatown. When he inadvertently becomes a witness to a crime, Willis begins to unravel a criminal web, his family's buried history, and what it feels like to be in the spotlight.

Interior Chinatown is streaming November 19th, only on Disney+. The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada, which is nearly double the historic average of 52,000 cases. What can you do this flu season? Talk to your pharmacist or doctor about getting a flu shot. Consider FluCell VaxQuad and help protect yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages six months and older, and it may be available for free in your province. Side effects and allergic reactions can occur, and 100% protection is not guaranteed. Learn more at FluCellVax.ca. In The Guardian, Robert Reich also called on the Fed to pause rate hikes to prevent more bank runs.

Yes, higher rates could imperil more banks, especially those that use depositors' money to purchase long-term bonds when interest rates were lower. But the sensible thing would be for the Fed to pause rate hikes long enough to let the financial system calm down. Besides, inflation is receding, albeit slowly, so there's no reason to risk more financial tumult. The Fed already bailed out uninsured depositors at two banks and signaled it would bail out others. One advantage of being a bank is that you get bailed out when you make dumb bets. This is why central banks and bank regulators must not only pause interest rate hikes, but also join together to set stricter bank regulations and ensure that instead of a race to the bottom,

we have a race to protect the public. If the public loses confidence in banks, the financial system can't function. Alright, that is it for the left and the right are saying, which brings us to my take. All right, that is it for the left and the right are saying, which brings us to my take. So I think Powell actually made the right choice. And if anything, this compromise is what was risky. The complexities of our banking system are deep, and I'll be the first to concede that it's not my area of expertise. So in many ways, I'll defer to the folks above who write specifically about these issues for a living. Still, there's an important point here that I don't see a lot of people making. The Fed has been raising interest rates for months in an effort to fight inflation and has committed to those hikes with the expectation it would cost hundreds of

thousands of people their jobs and set off a potential recession. The banking crisis at SVB and the instability elsewhere was obviously caused in part by those hikes after years of loose monetary policy, but they were also caused by its own mismanagement, bad bets, and shoddy regulation. When we first covered the SVB failure, I wrote that depositors did nothing wrong but trust the bank. Writers like Matt Levine and many knowledgeable Tangle readers have successfully convinced me otherwise, arguing that many of these depositors were financially savvy, super educated, well-funded startup founders who could have known better but didn't really care. Either way, the depositors and the banks are all being looked after already. A potential

banking crisis is hypothetical and at this point seems unlikely. Inflation is very real, very much here, and continues to threaten the U.S. economy as a whole. It also most acutely hurts low-income and middle-class Americans who don't have any influence to turn the screws on the Fed as Wall Street does. The Fed's central job is price control, and it should prioritize crushing inflation. Given how much the government is already doing to stabilize the banks, I think pausing interest rate hikes would have been both redundant and much riskier in the long term. Powell seems to have made the right choice, though the 0.25% compromise hike smells a little like a wobble. It's hard to blame him for wanting to appease everyone and keep things calm during such an uncertain time, but writers like Tiana Lowe, under what the writer's saying, hit the

bullseye that this can't be about sentiment or appeasement. It has to be simply about the data, which continue to show persistent inflation, which Powell is singularly tasked with addressing. Hopefully their focus remains there unless or until there is a real banking crisis to navigate. All right, that is it for my take. Instead of today's reader question, I want to address Friday's clickbait email, which generated a lot of conversation. For those of you who only listen to the podcast, we have a newsletter, obviously, that comes out every day. And on Friday, I released a newsletter that had a scary title about something bad happening. The subject line was some very sad, terrible news to share. But the newsletter was actually about clickbait and negative news

and our desire to constantly read negative news and why we shouldn't. So first of all, I'm sorry for the scare. It became very apparent to me quickly that a lot of readers opened Friday's email out of fear something had happened to me or my family or was going to happen to Tangle. Given how personal this newsletter is for me and the wonderful relationships I've built with so many readers in this community and listeners here on the podcast, I did not adequately think through how that subject line might have hit everyone. And I recognize that a lot of people probably opened the email out of personal concern for me rather than some addiction to negative news. So in that sense,

the experiment was probably a failure in the scientific sense anyway. Still, the results were basically what I expected. 67% of readers opened the email, which means it will probably be at 68% or 69% in a week after folks who tend to read later go through and check their inboxes. It wasn't just the most opened email of the week, but it may end up being the most open newsletter I've ever published. Recently, we got a lot wrong about Trump and Russia, and my response to your criticism both got 65% open rates. Last week's open rates were 61%, 59%, 56%, and 58%, then 67% and counting. So it was a clear outlier.

The article also drove over 70 comments on the website, the most we've ever gotten on a Tangle piece. About 20 people became paying subscribers, around 50 donated to our tip jar, and about 70 people unsubscribed from the newsletter. Presumably they were mad about the clickbait. Also, the most clicked link in the story was the NBC News article on the contaminated eye drops,

which got 537 clicks, even though I asked folks to try not to click it. One thing is clear from this experiment. People are really tired of the nonstop negativity and also have a really hard time avoiding it. It's worth it for all of us to consider how we can fight it in our own little ways. I will keep this in mind as we continue to produce Tangled.

One reader wrote in and said, my gut reaction after the first paragraph was irritation, but after reading it, you make an amazing point. This is a phenomenal Friday edition. Thank you, Isaac. Another said, using gross clickbait tactics to prove a point about gross clickbait tactics is still gross. Please don't do this again. One reader sent me an email with the subject line, you really suck, which of course I immediately clicked, and the body of the email was a nice note with gratitude about Tangle, so you should all know I immediately fell for my own trick.

trick. A lot of people just wrote in to say something nice about how much Tangle means to them, which made me realize I forgot to mention one admittedly cliche point I should have included in the piece. Positivity, like negativity, is also very contagious. That alone is one of the best reasons to make an effort to focus more on the good. So, I promise never to use fake clickbait again, and as is our policy to refrain from using real clickbait in our newsletter. I apologize again for anyone who is scared in the moment and appreciate you all writing in with your concern and kind words. The response to the piece

really was overwhelmingly positive. If you miss the story titled Some Very Sad Terrible News to Share, you can read it by clicking the link in today's episode description. All right, everybody, that is it for an update on Friday's edition, which brings us to our Under the Radar section. Honduras announced it would establish diplomatic ties with China

and formally cut ties with Taiwan, leaving the island nation with just 13 diplomatic allies. Most of those partners are small states in Central America and the Pacific, the Wall Street Journal reports. Taiwan is an inalienable part of Chinese territory, and as of this date, the Honduran government has informed Taiwan about the severance of diplomatic relations, pledging not to have any official relationship or contact with Taiwan again, the Honduran foreign ministry said. Honduras was weighing packages of aid from both Taiwan and China when it made the decision. The Wall Street Journal has the story,

and there's a link to it in today's episode description. All right, next up is our numbers section. The estimated number of banks that could face a similar fate as Silicon Valley Bank, according to one study, is 190. The current average price of a gallon of gasoline in the United States is $3.44. The average price of a gallon of gasoline in the United States a year ago was $4.24. The rate of year-over-year inflation in June was 9%, which was the peak of inflation. The rate of year-over-year inflation this month was 6%. The percentage increase in food prices over the last year was 9.5%. The percentage of total year-over-year CPI increase

that is attributable to shelter costs is 60%. All right, and last but not least, our have a nice day section. A 90-year-old radiated tortoise named Mr. Pickles just became the father of three baby turtles. Mr. Pickles is the oldest animal at the Houston Zoo, and his partner, Mrs. Pickles, who is 53, just welcomed three new members of the family, Dill, Gherkin, and Jalapeno. Mr. Pickles is the most genetically valuable radiated tortoise in the Association of Zoos and Aquariums Species Survival Plan. His offspring bring hope for the critically endangered species, plus they are just adorable to look at.

There is a link to a photo of them in today's episode description. All right, everybody, that is it for today's podcast as always if you want to support our work please go to readtangle.com membership and become a member we'll be right back here same time tomorrow have a good one peace our podcast is written by me isaac saul and by Zosia Warpea. Our script is edited by Sean Brady, Ari Weitzman, and Bailey Saul. Shout out to our interns, Audrey Moorhead and Watkins Kelly, and our social media manager, Magdalena Vukova, who created our podcast logo. Music for the podcast was produced by Diet75.

For more from Tangle, check out our website at www.untangled.com. Based on Charles Yu's award-winning book, Interior Chinatown follows the story of Willis Wu, We'll be right back. his family's buried history, and what it feels like to be in the spotlight. Interior Chinatown is streaming November 19th, only on Disney+. The flu remains a serious disease. Last season, over 102,000 influenza cases have been reported across Canada, which is nearly double the historic average of 52,000 cases. What can you do this flu season? Talk to your pharmacist or doctor about getting a flu shot. Consider FluCellVax Quad and help protect yourself from the flu. It's the first cell-based flu vaccine authorized in Canada for ages 6 months and older Thank you.