Tangle - The Federal Reserve’s rate cut

Episode Date: September 19, 2024

On Wednesday, the Board of Governors of the Federal Reserve met in Washington, D.C., and agreed to a 0.5% — or 50 basis point — cut to the federal funds effective rate. The 0.5% cut, which lowered the federal interest rate to between 4.75% and 5.00%, exceeded general economist expectations of a 0.25% cut. It is the first Federal Reserve (Fed) interest rate cut since April of 2020. On November 5, we are going to be hosting a live, in-person election night watch party at Tangle HQ in Philadelphia. But before we start planning, we want to know what the demand would be for an event like this. So, if you could, please fill out this quick form and let us know if you'd like to come (or tune in). You can read today's podcast⁠ ⁠⁠here⁠⁠⁠, our “Under the Radar” story ⁠here and today’s “Have a nice day” story ⁠here⁠.You can watch the replay of our live stream of the Harris Trump debate with commentary from Isaac on our YouTube Channel!Check out Episode 6 of our podcast series, The Undecideds. You can subscribe to Tangle by clicking here or drop something in our tip jar by clicking here. Help share Tangle.I'm a firm believer that our politics would be a little bit better if everyone were reading balanced news that allows room for debate, disagreement, and multiple perspectives. If you can take 15 seconds to share Tangle with a few friends I'd really appreciate it. Email Tangle to a friend here, share Tangle on X/Twitter here, or share Tangle on Facebook here.Take the survey: What signal do you think the Fed’s 0.5% rate cut sends? Let us know!Our podcast is written by Isaac Saul and edited and engineered by Dewey Thomas. Music for the podcast was produced by Diet 75. Our newsletter is edited by Managing Editor Ari Weitzman, Will Kaback, Bailey Saul, Sean Brady, and produced in conjunction with Tangle’s social media manager Magdalena Bokowa, who also created our logo. Hosted on Acast. See acast.com/privacy for more information.

Oh, that coffee smells good. Can you pass me the sugar when you're finished? Whoa, whoa, whoa, what are you doing? That's salt, not sugar. Let's get you another coffee. Feeling distracted? You're not alone. Many Canadians are finding it hard to focus

with mortgage payments on their minds. If you're struggling with your payments, speak to your bank. The earlier they understand your situation, the more options and relief measures could be available to you. Learn more at canada.ca slash it pays to know. A message from the Government of Canada.

From Searchlight Pictures comes A Real Pain, one of the most moving and funny films of the year. Written and directed by Oscar-nominated Jesse Eisenberg and starring Eisenberg and Emmy Award winner Kieran Culkin, A Real Pain is a comedy about mismatched cousins who reunite for a tour through Poland to honor their beloved grandmother. The adventure takes a turn when the pair's old tensions resurface against the backdrop of their family history. A Real Pain was one of the

buzziest titles at Sundance Film Festival this year, garnering rave reviews and acclaim from both critics and audiences alike. See A Real Pain only in theaters November 15th. 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+. 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, and a little bit of my take. I'm your host, Isaac Saul, and on today's episode, we're going to be talking about the September Federal Reserve rate cut, which we got news about yesterday.

Pretty important update on the economy and where things are heading. We're going to talk about what it means, what it doesn't mean, and what we're still uncertain about. Before we do, though, a quick heads up that tomorrow we are going to be doing a side-by-side comparison of Donald Trump and Kamala Harris on all the big issues. The economy, immigration, abortion, healthcare, crime, the environment, guns, and foreign policy, all in one newsletter. It's going to be a beast. It's been a big lift for us,

but it's something a lot of people are asking for. And we're going to try and give you guys what you asked for. A reminder from what I said yesterday, in case you forgot, if you want to get ad-free podcasts, we are going to have subscriptions set up for this podcast soon. We have made some forward momentum finally,

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All right, with that, I'm going to pass it back to John for the main story and then I'll be back for my take. And then we have a special guest for our listener question today. So stay tuned for that. Thanks, Isaac, and welcome, everybody. Here are your quick hits for today. First up, the House blocked House Speaker Mike Johnson's plan to fund the government for six months tied to a measure already passed in the House that would require proof of citizenship to register to vote in national elections. Number two, the Teamsters union said it would not endorse Trump or Harris opting to stay neutral in the 2024 election for the first time in almost three decades. Number three, Iranian hackers sent material that they stole from the Trump campaign

to President Biden's campaign, though there's no evidence any of the recipients responded, according to the FBI and other federal agencies. Number four, the Department of Justice filed a $100 million lawsuit against the owner and operator of the Dali, the vessel that alighted with Baltimore's Francis Scott Key Bridge in March, alleging gross negligence by the company. At number five, Nippon Steel plans to refile its application for a national security review by American regulators to acquire U.S. Steel, giving the company an additional 90 days to close the deal. The Federal Reserve's first rate reduction in more than four years could directly impact the finances of millions of Americans.

On Wednesday, the Board of Governors of the Federal Reserve met in Washington, D.C., and agreed to a 0.5 percent or 50 basis points cut to the federal funds effective rate. The 0.5% cut, which lowered the federal interest rates to 4.83%, exceeded general economists' expectations of a 0.25% cut. It is the first Federal Reserve interest rate cut since April of 2020. The higher than expected cut comes as unemployment remains above 4% following a 0.1% month-over-month decrease in August. Meanwhile, year-over-year inflation remains at 2.5% as measured by the Personal Consumption Expenditures Index, the Fed's preferred measure of inflation. The final board vote was 11 in favor and 1 against, the first dissenting vote from a Fed governor since 2005. Fed Chairman Jerome Powell described the economy as in good shape, highlighting healthy growth and dropping inflation. We're trying to achieve a situation where we restore price stability

without the kind of painful increase in unemployment that has come sometimes with disinflation, Powell said in a post-meeting press conference. However, Powell noted that slow job creation over the past few months bears watching. Economists and analysts are mixed on what the signal means for the near-term future of the economy. The S&P 500 spiked following the announcement, briefly hitting an all-time high as investors interpreted the cut as a signal that inflation is under control and the market is ripe for opportunity. Optimists anticipate the rate cut will mean smaller credit card charges, spurring consumer activity, and lowering mortgage rates, encouraging more turnover and lowering costs in the housing market. This will improve the material

well-being of all Americans, said Joe Brusuelos, chief economist at RSM USA. We had three years of extremely aggressive policy out of the Fed. We're now pivoting toward the normalization of rates in the post-pandemic economy. Conversely, concerned analysts highlighted the historical trend of interest rate cuts preceding an imminent recession. After initially spiking, the S&P 500 ended the day down 0.29% on Wednesday. With unemployment hitting and remaining over 4% since May, the aggressive rate cut could be an indicator that the Fed is anticipating a worsening job market. This is a bit surprising, said Brian Colton, chief economist at Fitch Ratings. It suggests that the Fed may be more concerned than most about the state of the labor market, where the pace of job creation still looks pretty solid.

Wednesday's meeting was the last time the Fed board will convene before the election on November 5th. However, Powell signaled the Fed would be likely pursuing another round of interest rate cuts in its next meeting on November 6th through 7th. Today, we'll break down what the right and the left are saying about the rate cut, and then Isaac's take. We'll be right back after this quick break. directed by Oscar-nominated Jesse Eisenberg and starring Eisenberg and Emmy Award winner Kieran Culkin. A Real Pain is a comedy about mismatched cousins who reunite for a tour through Poland to honor their beloved grandmother. The adventure takes a turn when the pair's old tensions resurface against the backdrop of their family history.

A Real Pain was one of the buzziest titles at Sundance Film Festival this year, garnering rave reviews and acclaim from both critics and audiences alike. See A Real Pain only in theaters November 15th. Oh, that coffee smells good. Can you pass me the sugar when you're finished? Whoa, what are you doing? That's salt, not sugar. Let's get you another coffee. Feeling distracted? You're not alone. Many Canadians are finding it hard to focus with mortgage payments on their minds. If you're struggling with your payments, speak to your bank.

The earlier they understand your situation, the more options and relief measures could be available to you. Learn more at Canada.ca slash ItPaysToKnow. A message from the Government of Canada. All right, first up, let's start with what the right is saying. The right is concerned about the size of the cut, suggesting it portends an economic downturn. Some note that the cut could hinder efforts to fight one of the biggest drivers of inflation, housing. Others argue the Fed's decision-making process should be less opaque. The Wall Street Journal editorial board noted,

Powell says the economy is strong, but still cuts the rates by 50 basis points. The question is whether to believe what Chairman Jerome Powell says or what he does. Mr. Powell in his press conference said all is well in the economy, but such aggressive monetary easing suggests he's more worried than he sounds, the board wrote. Mr. Powell and the FOMC also stressed that the risks between inflation and unemployment are roughly in balance, but the 50 point cut, plus the rapid pace in the Fed's estimate of future cuts, suggests a sharp tilt toward heading off more unemployment. Mr. Powell's bets seem to be that inflation is sufficiently whipped and that the Fed can ease aggressively now to forestall a slowdown that hasn't arrived.

He may be right, the board said. But it's notable that the FOMC registered its first dissent since June of 2022, as Fed Governor Michelle Bowman preferred a 25 basis point reduction. If Mr. Powell is wrong about inflation, if it doesn't continue its deceleration back to 2%, the Fed's credibility will take another major blow that it can't afford. In hot air, Ed Morrissey wrote, go big or don't go home. Powell tried to frame it as a matter of strategic planning and a desire to get ahead of the

issues they see, which doesn't conflict at all with the read that we're at least crisis adjacent, Morrissey said. Lowering the rates means easier terms for job- creating investments, even if it also means slightly more loose money in the economy. However, the real drivers of inflation now are not so much prices on consumer goods and services. It mainly comes from shelter costs and municipal utilities. To solve that problem, the economy needs more investment in residential construction, especially in multi-unit properties. Higher interest rates discourage such investment and construction, generally speaking. That could be a problem, however, if other conditions don't change.

Pushing lending rates back down below 3% will allow a lot of families to buy their own homes, but will create a demand spike in the market where supply already can't keep up with demand, Morrissey wrote. That makes the bold approach a risk, especially since the Fed has no direct way to prompt liberalization in these Fed and local policies. For the Cato Institute, Norbert Michel said the Fed's rate cut shows why policy rules are needed. While the public was left to guess what the Fed would do, it is a fact that multiple rates have already been declining for months. For example, the 30-year mortgage rate, which has essentially been declining since October, as have the three-month and one-month Treasury rates, Michelle wrote.

So maybe the Fed's not as powerful as everyone seems to think. Regardless, the public should not have to guess what the Fed will do with its targets each meeting. Perhaps none of the rates are the right one. But the precise value of the rate's target is not what matters most. What matters most is that people want and need predictability and accountability for the Fed, and they have neither. Congress could, however, fix this problem by requiring the Fed to follow a policy rule,

Michelle said. This sort of reform would greatly reduce uncertainty with respect to the Fed's future policy actions without overly restricting the Fed. It would also make it much easier to hold the Fed and elected officials accountable for their decisions. All right, that's it for what the right is saying, which brings us to what the left is saying. The left is heartened by the rate cut, arguing that the Fed has nearly achieved its soft landing. Some support the cut, but note the varied risks it carries. Others suggest the cut may have come too late. In U.S. News & World Report, Jason Furman said, Pop the champagne for the Fed rate cut and the soft landing ahead.

The Fed is not omniscient nor omnipotent, but it does have a better track record of predictions and policy actions than most outside prognosticators. That's in large part thanks to its strong, nonpartisan, technocratic, and independent tradition, Furman wrote. While Trump is complaining that the Fed's decision to cut rates now was political, many Republicans disagree, as does everyone who works in markets for a living. Moreover, the Fed's interest rate cut will have little to no impact on the election, since it will take time to be reflected in expanded job openings and lower grocery prices. Some economists didn't want the Fed to cut rates until inflation was back down to 2%. There are three reasons that would not have made sense.

First, monetary policy operates with a lag, so the Fed needed to get started now. Second, the Fed is responsible not just for inflation, but also for unemployment, and it needed to prevent it from rising further. Finally, the significant decline in inflation over the last two years means that the Fed didn't need to keep interest rates high anymore,

Furman said. Today's rate cuts still felt like a bit of a sip of champagne, with the Fed savoring a so-far-so-good moment. The Economist wrote about why the Federal Reserve has gambled on a big interest rate cut. The argument for a half-point cut rested on several pillars. Crucially, the Fed is confident that it is on track to bring inflation under control. Price rises have slowed to an annual pace of 2.5%, not far from its target of 2%. With oil prices sagging and rents rising more slowly, there is a good chance that inflation will soon ease further.

So the Fed's worries have shifted to the job market, the authors said. The Fed's cut is a form of insurance. It takes months for the rate reductions to filter through to the economy. Given this lag, and given the expectation that the economy will continue to slow, it makes sense for the Fed to make a bigger move now in order to get ahead of the coming weakness. The Fed's big cut nevertheless poses some dangers. A hefty rate cut against a strong economic backdrop risks sending the wrong signal to markets. The central bank judged that this risk was manageable, the authors wrote.

Another danger is politics. Coming just before the presidential election, the big rate cut may attract criticism from Donald Trump as a sign that the Fed, a regular target of his ire, is trying to help Kamala Harris. Yet a quarter point cut could just as easily have invited a charge from Democrats that Mr. Powell had been intimidated by Mr. Trump. In The Atlantic, Roger Karma asked, did the Fed wait too long to act? Most Americans might not be able to explain what the federal funds rate is or why it matters,

but they will hear that the country's economic experts have declared that inflation has been defeated and that better days are ahead, Karma said. This could become a self-fulfilling prophecy. If the Fed succeeds at brightening the economic mood of the country, then perhaps businesses will keep hiring and raising wages, consumers will keep spending, investors will finance new projects, and the economy will remain strong. The risk remains that the Fed waited too long to act. Inflation has been near the central bank's target for almost a

year, and the economy, while still far from recession territory, has begun to show clear signs of slowing. The number of job openings has fallen, the unemployment rate has risen, and more people are behind on their credit card bills and car payments. None of this would be particularly worrying if the Fed could simply press a button and provide an immediate boost to the economy. Alright, let's head over to Isaac for his take. So I want to try and just talk about what this isn't, what it might be, and what it is. So first, the easy stuff. This is not the Fed playing politics. If the Fed wanted to play politics, it could have kept rates as they were, presumably to help Trump through the election,

or it could have cut rates months ago, presumably to help the Biden-Harris campaign. Indeed, the timing of the rate cuts is too late to some economists, but mostly right about the time a lot of people really predicted them to come. The size of the rate cut was bigger than most people thought, but that could be explained by the Fed's inaction in July, and the timing is about as apolitical as it could get. Now, what it might be. Well, the list here is long.

Assessing the Federal Reserve's comments often requires playing a little bit of a subtext game. Powell is saying the economy is healthy and returning to normalcy. His dual mandate is to control inflation while seeking maximum employment, essentially to pursue economic stability. So it's hard to imagine a world where he'd come out and tell a dire story. But cutting rates by this much is a pretty extreme move, and it's easy to interpret it as a signal that the Fed sees worrisome signals beneath the surface of a relatively strong economy. At the same time, it also might be unambiguously positive for all of us. We're living in unprecedented, the word here feels appropriate, economic times. The post-pandemic economy has been abnormal at every turn, so maybe only focusing on the consecutive months of

unemployment over 4% would be wrong. Yes, unemployment is ticking up, but it remains relatively low at 4.2%. Meanwhile, inflation has been steadily trending downward, and a big rate cut should help rein in high housing costs. And for what it's worth, housing seems to be a point of emphasis for Powell right now. Maybe that's why this cut was so large. Rate cuts are usually a reliable indicator of a coming recession, but we've been hearing warnings about an incoming recession for years. So maybe, just maybe, we are witnessing the final stage of the sought-after soft landing, and that's all this really is.

Now, what can we say with certainty? Very little, I confess. I'm not an economist, and even the economists are divided over what this means. But I will go out on a limb here for the first time in several years and express some genuine, unabashed, without caveat confidence on inflation. One thing that is definitely true is that the Fed's fears about inflation have dissipated. Otherwise, they never would have cut rates by 50 basis points. My concerns have dissipated too. Nearly every signal is headed in the right direction, and I think even after this cut, they will continue to. The population at large still has concerns, but that's normal. We know consumer sentiment takes a long time to

catch up to the data. It's already catching up, but it might take longer than usual in this case as prices are never going to return to 2020 or 2021 levels. That's just not how this works. But consumer sentiment is in part a political question. Inflation data is strictly economic. On the latter, the forecast is rather sunny. On the former, we have a much hazier picture. Obviously, there is an election around the corner, and everyone wants to know how the Fed's decision will impact that. The short answer is that it's much more likely to help Harris than help Trump by giving her a great answer to the inflation question. More importantly, the cuts will make a tangible difference for Americans, lowering interest rates and mortgage rates and generally making it easier to seek out investments for businesses.

This is all good stuff, and the kind of things that help cash flow and boost economic activity when we don't have to worry about driving prices up. It should be relatively smooth sailing for the next few months, though. Whoever is president in 2025 will have plenty to worry about. All right, that is it for my take, which brings us to our reader question today. And for that, I'm going to pass it to Ari Weitzman, our managing editor, who actually answered today's question and is going to drop in on the pod to do so now. We'll be right back after this quick break.

Got a mortgage? Chances are you're thinking about your payments right now. Need help? Ask your bank about relief measures that may be available to you. Learn more at Canada.ca slash it pays to know. A message from the Government of Canada. 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+. From Searchlight Pictures comes A Real Pain, one of the most moving and funny films of the year. Written and directed by Oscar-nominated Jesse Eisenberg and starring Eisenberg and Emmy Award winner Kieran Culkin, A Real Pain is a comedy about mismatched cousins who reunite for a tour through Poland to honor their beloved grandmother. The adventure takes a turn when the pair's old tensions resurface against the backdrop of their family history. A Real Pain was one of the buzziest titles at Sundance Film Festival this year, garnering rave reviews and acclaim from both critics and audiences alike. See A Real Pain only in theaters November 15th. Managing Editor Ari Weitzman here. I very much appreciate this question,

but heads up, this will be a mechanical and indelicate answer a bit. First off, I want to define what passive voice is because many people misapply this criticism online. In our favorite in-house reference guide, Garner's Modern American Usage by Brian A. Garner, Garner writes, quote, the point of passive voice is that the subject of the clause doesn't perform the action of the verb, end quote. This can lead to inverting sentences, as in this case, in a way that downplays the actor or by omitting the actor altogether, as in the phrase, passive voice is not preferable. The headline example you're quoting is Olympic marathon runner Rebecca Cheptegi dies after being set on fire in gasoline attack by boyfriend. And it contains two verb

phrases, one active and the other passive. The first verb phrase, dies, is active, as Cheptege is the subject and she is performing the action. The verb to die is non-transitive, that is, you cannot perform the action of dying onto someone else, but that isn't the same thing as being passive. However, the second verb phrase, being set on fire, is passive. The sentence places the actor at the end of the sentence downplaying his involvement. Cheptaghi didn't happen to die after being set on fire. Her boyfriend killed her by setting her on fire. Jameel is right to take this phrasing to task, but I disagree with her both on her implication and in her solution. I don't think this headline was malintended. Headline writers try to punctuate

their headlines with important words at the beginning and end, though this often leads them into passivity. Even so, Jameel's solution doesn't solve the problem. Instead, it creates a new one. Jameel describes the action as murder, which she cannot accurately do without a court conviction. Most readers would probably give some grace to headlines as their constraints don't create the preconditions for great writing. Within those constraints, though, a better headline would have been Olympic marathon runner Rebecca Cheptegi set on fire, allegedly killed by boyfriend. All right, I'm going to pass it over to John for the rest of the pod, and I'll talk to you all on Sunday.

Thanks, Ari. Here's your under-the-radar story for today, folks. Drug overdose deaths, which have increased by double-digit percentages in recent years, dropped precipitously between April 2023 and April 2024. National surveys compiled by the Centers for Disease Control and Prevention show a decline of roughly 10.6% in that period, and some researchers believe the data will show an even larger decline when federal surveys are updated to reflect state-level data.

Approximately 100,000 people per year still die of overdoses, but the latest numbers are an encouraging signal after the number of annual overdose deaths rose by approximately 42,500 between 2018 and 2023. Experts haven't determined the exact causes of the reversal, but many point to improvements in the availability and affordability of medical treatments for fentanyl addiction as a likely catalyst. NPR has this story, and there's a link in today's episode description. a link in today's episode description. All right, next up is our numbers section. The number of Fed officials who support an additional rate cut of at least 0.5% over their two remaining meetings in 2024 is 10 out of 19, according to projections released

following the September meeting. The predicted increase in the unemployment rate by the end of 2024 is 0.2% from its current 4.2% to 4.4%, according to the Fed's Summary of Economic Projections. The projected median federal funds rate by the end of 2025 is 3.4%, according to the Fed's forecast. The number of times the Fed raised interest rates between February 2022 and July 2023 is 11. The number of months since the Fed's last rate reduction in March 2020 is 53. University of Michigan's Consumer Sentiment Index for September 2024 is 69, a 1.6% month-over-month increase.

Gallup's Economic Confidence Index score, ranging from minus 100 to plus 100, is plus 21 among Democratic voters in August of 2024. Gallup's Economic Confidence Index score among Republican voters in August 2024 is minus 76. And the percentage of Americans who said now is a good time to find a quality job in August of 2024 is 45%, down from 49% in April of 2024. All right, and last but not least, our Have a Nice Day story. Despite its delicious output, making chocolate can be a wasteful process. Chocolate production typically only uses the beans of the cocoa fruit while the rest goes to waste. But recently,

a Swiss scientific team based out of the Federal Institute of Technology has pioneered a chocolate-making method that uses the whole cocoa fruit. The new process has been touted as both more environmentally sustainable and as a strong economic proposition for farmers. The BBC has this news story, and there's a link in today's episode description. All right, everybody, that is it for today's episode. As always, if you'd like to support our work, please go to retangle.com and sign up for a membership. Isaac and Ari will be back on the mic for Sunday's podcast, and I will return on Monday.

For the rest of the crew, this is John Law signing off. Have a fantastic weekend, y'all. Peace. Our podcast is written by me, Isaac Saul, and edited and engineered by Duke Thomas. Have a fantastic weekend, readtangle.com. That's readtangle.com.