WSJ What’s News - The Fed’s Dilemma Ahead of Its Next Interest Rates Meeting

Episode Date: September 13, 2024

P.M. Edition for Sept. 13. The Wall Street Journal’s Nick Timiraos discusses how the Federal Reserve is weighing the numbers ahead of its meeting next week. And the Biden administration takes aim at China-based retailers like Shein and Temu. The Journal’s Richard Vanderford on what the U.S. plans to do. Plus, WSJ Germany bureau chief Bertrand Benoit talks about the painful choice European governments have to make: increase spending on defense without cutting social programs. Tracie Hunte hosts. Sign up for the WSJ's free What's News newsletter. Learn more about your ad choices. Visit megaphone.fm/adchoices

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This is shaping up to be a close call between a quarter point and a half point. So I think there's more suspense than normal here. Plus, European leaders struggle to balance defense spending and social programs. It's Friday, September 13th. I'm Tracy Hunt for The Wall Street Journal. This is the PM edition of What's News, the top headlines and business stories that move the world today. That $12 dress from Xi'an or that $3 handbag from Temu is about to get pricier.

The Biden administration announced today that it's moving to close what many bipartisan critics call a loophole that allows China-founded retailers like Xi'en and Temu to more easily ship goods to the United States. Called the de minimis exemption, it allows shipments valued at $800 or less to enter the U.S. without duty and with little scrutiny. It was originally intended to allow people to more easily ship small goods to the country or enter the country with souvenirs. But the US has seen the number of packages entering via the exemption grow to more than 1 billion a year, mostly from e-commerce companies with roots in China. The administration said under a new rule it intends to propose those packages will now have to use a more

formal entry method. Richard Randerford is a reporter with the Wall Street Journal and he joins us now. So Richard, why is the administration making this change now? It's been under a lot of pressure from lawmakers in both parties, from law enforcement officials, from especially textile and apparel makers in the United States who say the de minimis exemption has a lot of problems, its use has grown way beyond what was intended. So there's a huge surge of parcels coming into the US this way. Basically, one criticism is that it's operating as a kind of de facto free trade agreement with China to let cheap goods that haven't

really been scrutinized by customs enter the US. So how would this change in this rule work and how soon could it go into effect? So there's been a lot of competing proposals from lawmakers on how this should be handled. The administration's proposal would make it so that shipments of goods that would normally be subject to US tariffs that have been imposed on China and other countries wouldn't be eligible for de minimis treatment anymore. Proponents of keeping the status quo say it's going to raise costs across the board, including

on potentially US businesses that ship inputs through this method. The proposal right now is that new rules be made, so that's a process that takes some time. It's not clear exactly how long that might take. What are the companies saying about it? Both of the companies have said in the past that they don't rely on the de minimis provision to fuel their success.

And broadly speaking, they said they're willing to work on any kind of reform. That was the Journal's Richard Vandervoort. Thank you, Richard. Thanks. UK Prime Minister Keir Starmer is expected to urge President Biden to let Ukraine use European-made cruise missiles to strike deep inside Russia. That's according to U.S. and Western officials.

Starmor is expected to make the ass during his visit in Washington today. Until now, Western countries had been resistant to allowing Ukraine access to such weapons for fear of escalating the conflict. Russian President Vladimir Putin has warned the U.S. and its allies that permitting Ukraine to use Western-made, long-range missiles against Russia would mean the North Atlantic Treaty Organization countries were at war with Russia. But now that it's been revealed that Iran has shipped weapons to Russia for use in Ukraine,

Western leaders are rethinking those restrictions. Several European and U.S. officials have advised the White House to grant permission and are hopeful Biden will formally do so later this month. Biden said this week that his administration was weighing the matter. The war in Ukraine has revived some Cold War-era tensions in Europe as the promise of many countries to raise military spending is conflicting with the reluctance to sacrifice their generous welfare programs. My colleague Anthony Bansi spoke with our Germany bureau chief Bertrand Benoit about

the challenges facing European governments. The militaries of European countries used to be focused on the Russia threat. And after the end of the Cold War, European governments decided that Russia was not much of a threat anymore. And they started to spend much less on the military and also to reshape their militaries to be less about defending the homeland and more about expeditions in faraway countries. Now this is completely changed with Russia's invasion of Ukraine. War has returned to Europe and European governments in a rush have to reverse these many, many

years of underspending on the military to face the Russian threat. So what have been some of the challenges that these European countries have had in raising their military spending or getting money to raise their military budgets? It's been very difficult to raise spending at the speed and to the extent to which it's needed. And the reason is because we're talking about high numbers. at the speed and to the extent to which it's needed. And the reason is because we're talking about high numbers.

It's difficult to turn this around in just a few months or years. In particular because a lot of the spending that was diverted away from the military during those peace years went into welfare benefits and building welfare states. And it's proven to be very unpopular to try and divert that money back into defense. Also, a lot of countries in Europe are now struggling with pretty high public debt. And that means it's also difficult to raise debt, increase budget deficits to fund that spending. And so at the end of the day, you're finding yourself having to either cut from other parts of the budget, including welfare or raise taxes, none of which wins elections.

That was Wall Street Journal, Germany Bureau Chief Bertrand Benoit speaking with my colleague, Anthony Bansu. Coming up, the big Federal Reserve decision next week that's keeping investors up at night. That's after the break. Introducing TD Insurance for Business with customized coverage options for your business. Because at TD Insurance, we understand that your business is unique, so your business insurance should be too.

Whether you're a shop owner, a pet groomer, a contractor, or a consultant, you can get customized coverage for your business. Contact a licensed TD Insurance Advisor to learn more. It's a question that's had investors on the edge of their seats for weeks now. What, if anything, will the Fed do when it meets next week on interest rates? Nick Timmeros has been speaking to the analysts, listening to Fed members, and looking at the data for the Wall Street Journal, and he joins us now. So Nick, Federal Reserve Chair Jerome Powell has said they're going to be guided by the

data. What does the latest data going to be guided by the data. What does the latest data tell them? Well, the data has been mixed. The labor market has been slowing down. There were fewer jobs added this summer than previous reports had suggested. But the payroll numbers in August were not bad. We added 140,000 jobs more or less in August. And the inflation numbers have been getting better.

So the questions for this meeting aren't so much decided, I think, by the data as how you want to manage the risks, that the economy is either slowing faster than you think or that inflation might not be coming down as fast as it has. I call it regret avoidance. What are you more likely to regret at this meeting? The argument for cutting larger at this meeting goes down to interest rates are still going to be at a relatively high level, and if the economy is fine, you're probably not going to regret it.

On the other hand, if you only cut interest rates by a quarter point, there's a chance that the economy slows more than you expect by the time of your next meeting, which is in early November, and you might regret that more. So the argument for doing a larger cut at this meeting comes down to you'll regret it more if you're wrong and you don't do the larger cut. The argument for doing a smaller cut at this meeting is the economy seems fundamentally fine and you don't want to freak people out by doing the larger,

maybe less expected move here. And it's not only how big or small the first cut will be, but how many times the Fed will cut rates over the next year. Which one do analysts think will matter most? Well, the size of the cut at this meeting is important because that is your action. But once a quarter, including at this meeting, Fed officials publish their projections. If the economy unfolds along the lines of what they expect, how many interest rate cuts do they see over the course of this year and next year?

And investors will pay a lot of attention to where most Fed officials see interest rates by the end of this year. And the question is, do they plan to cut interest rates by a total of three quarters of a point? That would be three quarter point cuts. Do they plan more, maybe a full percentage point, which would entail at least a half point cut somewhere in there? The truth here is the data is in the driver's seat. What the Fed does in November and December is going to be determined by how the economy develops and the data really will determine where the Fed takes interest rates over the next three and six months. Nick Temaros

is chief economics correspondent for the Wall Street Journal. Thanks Nick. Thanks for having me. In any case many investors seem to believe that the Fed next week will decide on a 0.5 percentage cut in interest rates. That's according to the CME FedWatch tool. The rethink on the Fed's next move has pushed major U.S. indexes towards a strong week of gains. On the day, the Dow added 0.7% or 297 points, the S&P 500 rose 0.5%, and the Nasdaq gained 0.7%. U.S. officials say Israeli special forces conducted a rare raid in Syria earlier this week, killing at least 16 people and striking a blow against a suspected Iranian missile factory.

Israel has long carried out airstrikes in Syria to disrupt the flow of Iranian missiles and technology to Hezbollah, the Lebanese militia firing rockets at northern Israel. But this raid was unusual due to its ambitious scale and the use of Israeli troops in addition to airstrikes. The U.S. officials said Israelis notified them of the plan in advance of the operation, but didn't elaborate on how or when it would take place. As the nearly year-long war between Israel and Hamas continues, we want to hear from you. What do you want to know about the conflict and where it may be headed? Send a voice memo to wnpod at wsj.com or leave a voicemail with your name and location at 212-416-4328.

We might use it on the show. And that's What's News for this week. Tomorrow you can look out for our weekly Markets Wrap-Up, What's News in Markets. Then on Sunday we'll be answering your questions about banning phone use in U.S. schools. Should they be banned and can these bans actually be enforced? That's in What's New Sunday. And we'll be back with our regular show on Monday morning. Today's show was produced by Pierre Bienneme and Anthony Bansi with supervising producer Michael Cosmitis. Additional

support this week from Trina Menino. Michael LaValle wrote our theme music. Aisha Almoslem is our development producer. Scott Salloway and Chris Densley are our deputy editors, and Philana Patterson is the Wall Street Journal's head of news audio. I'm Tracy Hunt, thanks for listening.