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Why the US central bank decided to keep interest rates steady · DEEP INSIGHT

• 0:00
  Speaker 1: With just a week till the midterm elections, the U.S.
• 0:02
  Speaker 1: Federal Reserve is holding interest rates steady. Now, that news
• 0:06
  Speaker 1: could disappoint President Donald Trump, who had been pressuring the
• 0:09
  Speaker 1: Fed to slash interest rates. Posting last month on his
• 0:12
  Speaker 1: Truth Social platform, the U.S. president wrote, lowered the interest
• 0:16
  Speaker 1: rates for the United States of America and fast. A
• 0:19
  Speaker 1: message he expressed all in caps to really just get
• 0:21
  Speaker 1: that point across. Now, since he returned to the White
• 0:24
  Speaker 1: House last year, Donald Trump has repeatedly demanded that the
• 0:27
  Speaker 1: Fed lower interest rates. That's partially because concerns about the
• 0:30
  Speaker 1: economy and the cost of living are dominating voters' minds
• 0:34
  Speaker 1: this election cycle. But Fed Chief Kevin Wurst said it
• 0:37
  Speaker 1: was a purely economic decision to keep interest rates steady.
• 0:42
  Speaker 2: Politics played no role in the decision. I just spent
• 0:46
  Speaker 2: two days with my colleagues upstairs. I didn't hear an
• 0:50
  Speaker 2: utterance about politics. I didn't hear a reference to politics. Politics, elections,
• 0:57
  Speaker 2: what's happening in the next week or so.
• 0:59
  Speaker 1: So it's economics over politics for the Fed chairman. But
• 1:02
  Speaker 1: what does that mean for the U.S. president and America's economy?
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  Speaker 1: To answer those questions, I'm joined by Gerald Cohen. He's
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  Speaker 1: chief economist at the Keenan Institute of Private Enterprise. Gerald,
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  Speaker 1: thanks a lot for joining us.
• 1:17
  Speaker 3: Thank you for having me. Great to be here.
• 1:20
  Speaker 1: So the Federal Reserve chairman says that politics played what
• 1:22
  Speaker 1: he said, or quote, no role in the decision to
• 1:25
  Speaker 1: hold interest rates stable. Do you think that's believable?
• 1:30
  Speaker 4: I think generally, yes. I mean, the Fed works very
• 1:35
  Speaker 4: hard to be apolitical. They should be completely apolitical. The
• 1:42
  Speaker 4: question is, are they completely apolitical? That's a more nuanced
• 1:50
  Speaker 4: answer to that. I think they're hesitant about raising rates
• 1:54
  Speaker 4: right into an election.
• 1:56
  Speaker 3: But if they have to, they will.
• 1:58
  Speaker 4: So I think that the data gave them cover. And
• 2:04
  Speaker 4: so they were able to avoid what may have been
• 2:08
  Speaker 4: a little bit of a difficult decision. But they've definitely
• 2:11
  Speaker 4: in the past raised rates significantly. during periods of strong
• 2:15
  Speaker 4: growth or higher inflation, during election years, right near an election.
• 2:20
  Speaker 4: But I think they're conscious of the fact that they'd
• 2:27
  Speaker 4: rather not do it.
• 2:29
  Speaker 1: Now, the Fed is supposed to be apolitical. But as
• 2:32
  Speaker 1: you said, this decision comes at a politically sensitive moment.
• 2:35
  Speaker 1: I mean, many Americans... believe they're worse off financially now
• 2:38
  Speaker 1: than before Trump retook office. So how possible is it
• 2:42
  Speaker 1: that the Fed can truly separate economics from politics, especially
• 2:46
  Speaker 1: in an election year like the one we're facing now?
• 2:50
  Speaker 4: Well, I think the Fed's job is to maintain, well,
• 2:54
  Speaker 4: price stability, but that really means inflation at around a
• 2:59
  Speaker 4: 2% rate and promote healthy economic growth.
• 3:04
  Speaker 3: And so.
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  Speaker 4: If they believe that those mandates aren't being met, and
• 3:11
  Speaker 4: there's an interesting question that Chair Warsh is pushing on,
• 3:15
  Speaker 4: is which of those mandates is more important?
• 3:17
  Speaker 3: He's weighing the inflation mandate.
• 3:21
  Speaker 4: But if those aren't being met, then they need to act,
• 3:24
  Speaker 4: and they need to act to maintain their credibility. And
• 3:28
  Speaker 4: the challenge is, then inflation has been above their 2%
• 3:32
  Speaker 4: target for over five years.
• 3:35
  Speaker 3: And rather than it declining, being flat to down, it's rising.
• 3:42
  Speaker 4: And so they need to show, they need to raise
• 3:45
  Speaker 4: rates as they did to show their credibility. And there's
• 3:49
  Speaker 4: something that Chair Walsh said about whether the economy is
• 3:53
  Speaker 4: overheating or not.
• 3:53
  Speaker 3: I think that's more of an open question.
• 3:55
  Speaker 4: I would beg to differ a bit about this question
• 3:59
  Speaker 4: of overheating. He said, or their announcement said, that they're not.
• 4:05
  Speaker 4: I might say that the inflation that we're seeing beyond
• 4:09
  Speaker 4: food and energy prices suggests that there might be some overheating,
• 4:12
  Speaker 4: in particular in sectors around data center growth.
• 4:15
  Speaker 3: And things like that.
• 4:17
  Speaker 1: Now, let's actually take a listen to Kevin Warsh for
• 4:19
  Speaker 1: just a second. When he was speaking about the Fed's decision,
• 4:21
  Speaker 1: he painted a fairly rosy picture, at least in my opinion.
• 4:26
  Speaker 3: Let's take a listen.
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  Speaker 2: We discussed geopolitical developments and fast-moving changes in technology. We observed,
• 4:35
  Speaker 2: but were not surprised, that financial markets showed bouts of
• 4:40
  Speaker 2: volatility and shifting correlations. So as we widen the frame
• 4:45
  Speaker 2: to survey the broad economic and financial picture, real activity
• 4:50
  Speaker 2: is clearly pointing in the right direction. That's good news.
• 4:54
  Speaker 2: But inflation is too high. Energy and related prices have
• 4:58
  Speaker 2: moved higher again in recent weeks.
• 5:02
  Speaker 1: Now, he seems to be pointing a fairly rosy financial
• 5:07
  Speaker 1: picture at the moment, saying that much of the data
• 5:08
  Speaker 1: is pointing in the right direction. But that doesn't seem
• 5:11
  Speaker 1: to gel with how many Americans feel about the economy.
• 5:14
  Speaker 1: So how exactly do you explain the disconnect?
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  Speaker 4: Right.
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  Speaker 3: I think there are two points I want to make.
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  Speaker 4: The first is, I think that the reason why people
• 5:24
  Speaker 4: don't feel so good or one of the reasons why
• 5:27
  Speaker 4: people don't feel so good is that as we've been seeing,
• 5:30
  Speaker 4: wages are not keeping up with inflation. And so wage
• 5:35
  Speaker 4: growth is not keeping up with inflation or wages are
• 5:37
  Speaker 4: rising more slowly than prices are rising. And so that
• 5:40
  Speaker 4: means that people's purchasing power is falling. And so I
• 5:47
  Speaker 4: think that is a key reason why people don't feel
• 5:50
  Speaker 4: confident about the economy, because they feel they're working, and
• 5:54
  Speaker 4: yet they're making less and less on an inflation-adjusted or
• 5:58
  Speaker 4: price-adjusted basis. So when they go to the grocery store,
• 6:02
  Speaker 4: when they fill up their gasoline tank, or when they
• 6:04
  Speaker 4: buy a computer, they're really feeling that pinch. The second
• 6:09
  Speaker 4: thing that I want to say, and this goes to this,
• 6:12
  Speaker 4: you know, inflation is only a question of, the reason
• 6:18
  Speaker 4: why inflation is rising is only because of food and
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  Speaker 4: energy prices is not true.
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  Speaker 3: And one great example to illustrate.
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  Speaker 4: That is computer prices are up 10% over the last year,
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  Speaker 4: and that is a record. Historically, we've seen computer prices
• 6:34
  Speaker 4: on a quality-adjusted basis fall. They've had a couple of
• 6:38
  Speaker 4: periods where they've risen, and actually in 2000, during the
• 6:42
  Speaker 4: COVID period, they did. But we've never seen computer inflation
• 6:47
  Speaker 4: at this level.
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  Speaker 1: So with inflation hitting Americans, at least American voters, every
• 6:54
  Speaker 1: which way, I mean, really, and sorry, excuse me, across
• 7:00
  Speaker 1: the board, how much pressure is the Fed under from
• 7:03
  Speaker 1: politicians and voters who want to bring down borrowing costs?
• 7:08
  Speaker 3: So that's what the president wants. And I should say
• 7:11
  Speaker 3: that generally presidents always want lower interest rates.
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  Speaker 4: I might argue this president is a little bit more
• 7:17
  Speaker 4: aggressive in pushing this agenda and especially trying to fire
• 7:27
  Speaker 4: Fed board members, which we have never seen before.
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  Speaker 3: They might grumble, but they have never done these types
• 7:34
  Speaker 3: of actions.
• 7:36
  Speaker 4: But the fact of the matter is that lowering interest
• 7:39
  Speaker 4: rates is going to work in the opposite direction.
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  Speaker 3: Because what it will do is it.
• 7:45
  Speaker 4: Will spur the economy even more and cause more inflation.
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  Speaker 4: And so this is not the right time to be
• 7:51
  Speaker 4: lowering interest rates. If you've not hit your inflation target
• 7:56
  Speaker 4: for five years and inflation is moving in the wrong direction,
• 7:59
  Speaker 4: people are going to lose confidence.
• 8:02
  Speaker 3: In the Fed.
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  Speaker 4: As an institution to keep prices low or to keep
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  Speaker 4: inflation low. And I will say I was talking to
• 8:09
  Speaker 4: a group of business people today, and I polled.
• 8:12
  Speaker 3: Them about this. And the vast majority of.
• 8:17
  Speaker 4: Business people that I talked to said that they believe
• 8:20
  Speaker 4: inflation was going to be higher or unchanged relative to
• 8:24
  Speaker 4: where we are today over the next five years.
• 8:27
  Speaker 3: And if I were the Fed, that would make me really.
• 8:30
  Speaker 4: Nervous because that suggests that they've lost some credibility on
• 8:33
  Speaker 4: their inflation mandate.
• 8:35
  Speaker 1: So why exactly is Trump so fixated on interest rates
• 8:38
  Speaker 1: being lower if you're saying that it could likely drive
• 8:41
  Speaker 1: up inflation in the.
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  Speaker 3: U.S.? Because he does.
• 8:46
  Speaker 4: I don't think he understands the impact of lower interest
• 8:48
  Speaker 4: rate of of. I don't think he understands this trade-off
• 8:52
  Speaker 4: between interest rates and inflation. He's a real estate guy,
• 9:00
  Speaker 4: and all they always want is lower interest rates because
• 9:02
  Speaker 4: that spurs the economy. But he has to worry, or
• 9:06
  Speaker 4: he should worry that the economy will overheat and will
• 9:09
  Speaker 4: get even more inflation and risk something that happened in
• 9:13
  Speaker 4: the 1970s, where you get this.
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  Speaker 3: Inflationary cycle.
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  Speaker 4: I don't think we're anywhere near there, but that's the
• 9:21
  Speaker 4: risk if you keep lowering interest rates. And that's what
• 9:24
  Speaker 4: the Fed, the lesson the Fed learned because Lyndon Johnson
• 9:27
  Speaker 4: was pushing Fed chair to keep interest rates low. And
• 9:34
  Speaker 4: as a result, the economy overheated and we had these high,
• 9:37
  Speaker 4: you know, double digit inflation in the mid to late 1970s.
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  Speaker 4: Paul Volcker had to use a very aggressive raising interest
• 9:46
  Speaker 4: rates to double-digit levels for a number of years to
• 9:53
  Speaker 4: fight that inflation. At least when I was there, and
• 9:58
  Speaker 4: my understanding of the institution is that even today is
• 10:02
  Speaker 4: that knowledge, they don't want to repeat that history.
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  Speaker 2: All right.
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  Speaker 1: So right now, interest rates are remaining steady. But at
• 10:10
  Speaker 1: the exact same time, Americans are still feeling the pinch.
• 10:14
  Speaker 1: Is there any reason to think that there could be
• 10:15
  Speaker 1: some type of economic relief coming down the pipeline in
• 10:18
  Speaker 1: the midterm that could help Americans just pay their bills
• 10:21
  Speaker 1: a bit better and maybe not be pinched so much
• 10:24
  Speaker 1: by these inflation rates?
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  Speaker 4: I mean, I think, you know, one big question is
• 10:29
  Speaker 4: the impact of the war on gasoline, you know, on
• 10:32
  Speaker 4: oil prices and inflation.
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  Speaker 3: Related prices.
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  Speaker 4: So it's not just oil, but it's, you know, trucking
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  Speaker 4: of fresh food, fresh fruit and vegetables and trucking of,
• 10:41
  Speaker 4: you know, and we have most of our goods and
• 10:43
  Speaker 4: services are trucked or met. Much of our goods and
• 10:47
  Speaker 4: services in the United States are come by a truck.
• 10:50
  Speaker 4: And so the impact of those higher energy prices are playing.
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  Speaker 3: A significant role. I think, you know, we this.
• 10:58
  Speaker 4: This administration pushed an agenda of, you know, we want
• 11:01
  Speaker 4: to keep oil rather than moving towards EVs. And so
• 11:05
  Speaker 4: now we're seeing the consequences of that as oil prices
• 11:08
  Speaker 4: are moving higher.
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  Speaker 3: So I think that's a potential source of relief.
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  Speaker 4: I think you could get as in, you know, if
• 11:15
  Speaker 4: we could if if if you could unlock the oil
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  Speaker 4: flowing out.
• 11:19
  Speaker 3: Of the Mideast, that would be a potential source of relief.
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  Speaker 4: I also think that the economy is overheating a bit,
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  Speaker 4: and it.
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  Speaker 3: Might be specifically.
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  Speaker 4: Related to AI, but the Fed might have to raise
• 11:33
  Speaker 4: rates to try to clamp down on that, or by
• 11:36
  Speaker 4: raising rates, clamp down on other sectors. And there's more
• 11:39
  Speaker 4: likely to be pain in the near term than some.
• 11:45
  Speaker 3: Really positive outcomes.
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  Speaker 1: All right. That's a bit of a pessimistic note that
• 11:48
  Speaker 1: we're going to have to leave it on. But thank
• 11:50
  Speaker 1: you anyway for sharing.
• 11:51
  Speaker 3: Sorry, I don't mean to be so pessimistic. That's OK.
• 11:54
  Speaker 1: I mean, we're just reporting the facts as we see them.
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  Speaker 1: So we're going to have to leave it there. That
• 11:59
  Speaker 1: was Gerald Cohen, chief economist at the Kenan Institute of
• 12:01
  Speaker 1: Private Enterprise. As always, thank you very much for your analysis.
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  Speaker 3: Thank you. Great to see you.
• 12:09
  Speaker 1: So what do you think? Are you feeling the pinch?
• 12:11
  Speaker 1: Let us know in the comments below. Thanks for watching.