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If inflation has peaked, why are we still raising interest rates?
May 4, 2022
Episode 656

If inflation has peaked, why are we still raising interest rates?

Plus, what Airbnb does to rents.

It’s the day we answer your questions, and to start, one listener wants to know why Federal Reserve Chair Jay Powell is still raising interest rates if inflation has peaked. We’ll also answer an urgent question about the blockchain and supply chains from a listener with a term paper deadline looming. Plus, a question about Airbnb and rents, and why doesn’t the U.S. electrify its railways? Finally, we end with a sci-fi recommendation on this Star Wars Day. May the fourth be with you.

Here’s everything we talked about on the show today:

Do you have a question for Whaddya Wanna Know Wednesday? Send a voice memo or email to makemesmart@marketplace.org, or leave us a voicemail at 508-U-B-SMART (508-827-6278).

Make Me Smart May 4, 2022 transcript

Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.

Kimberly Adams: Now is fine. Now is fine.

Kai Ryssdal: Now is fine, thank you very much. Hi everybody, I’m Kai Ryssdal, welcome back to Make Me Smart making today make sense.

Kimberly Adams: And I’m Kimberly Adams, may the fourth be with you. Thank you for joining us for what – come on, you know I couldn’t resist.

Kai Ryssdal: That’s fine. I know you had to.

Kimberly Adams: Thank you for joining us for Whaddya Want to Know Wednesday, the day that we answer your questions, you can email those questions to makemesmart@marketplace.org Or leave us a voicemail. Our number is 508-U-B-SMART. Alright, so we have questions. The first one, go.

Mark:  Hey, Kai and Kimberly. This is Mark out of Chicago. My question is I keep seeing headlines about how inflation may have peaked back in March. At the same time, I see nothing but new stories about how the Fed is planning on raising interest rates, potentially 50 basis points at their next meeting. And my question is, why would they go ahead and do that if inflation may have peaked and is coming down? And at the same time we’re seeing all these potential worries about recessions going on? I know that you’re not Jay Powell. But I’m just curious if you could make the smart. Thanks a lot.

Kimberly Adams: But you like to think you know what Jay Powell is thinking. So why don’t you go.

Kai Ryssdal: I do like to think I know what Jay Powell is thinking. Yes, that’s my whole riff. Okay, so couple of things, couple of news items. And then the analysis. First of all, Jay Powell and the Fed did today raise the federal funds rate to a range of point seven, five to 1.0%. That is to say they raised it a half a percentage point, 50 basis points is what you will hear. You might also have noticed that the stock market after Jay Powell said, “Oh, we’re only going to raise it a half a percentage point, not three quarters of a percentage point.” The stock market said “yay!” And went crazy because everybody was worried about more rate hikes in a bigger dynamic. So here’s the deal,

Kimberly Adams: Wait, who thought that? Who thought it was all gonna be three quarters of a percent?

Kai Ryssdal: Nobody – Nobody thought, nobody thought it was gonna be three – yeah, nobody thought it was gonna be three quarters of a percent this time. But they were worried about 75 basis points next time and the time after that. Right. Jay Powell has been completely clear as have all the Fed governors when they’ve been speaking in the last two weeks, it’s going to be a half percentage point full stop. Right.

Kimberly Adams: Right. Okay.

Kai Ryssdal: But the fear had been, “Oh, my God, they might do 75 basis points.” And Powell took that off the table today. So investors went, traders went “yay, that’s great.” But look, here’s the deal. While inflation is yes, seeming to turn a corner, and here’s data point number two, the PCE personal consumption expenditure, which is what the Fed likes to look at as a measure of inflation, was 5.2% year over year in it’s most recent reading for the month of April, that was down from 5.3%. So down, yes, but really, really just a little teensy bit down. So inflation is still a huge deal. And what the Fed wants to do, and in a big, bad hurry, because Jay Powell said this today, price stability is the key to this economy, people have to be able to have price stability, that is stable prices, which is not crazy inflation. So why are they keeping on raising interest rates? Because the Fed wants inflation at plus or minus 2%. 2%. Not 5.2%, not 5.3%. Not 8.5%, which is the consumer price index measurement, right? They wanted to 2% so they’re gonna keep raising interest rates. To get it down to that, is it going to be a tricky dance to get it down to that without causing recession? Yes. Is the recession in the offing? I don’t actually think so. Right? The labor markets really strong. Consumers are flush with cash, companies are doing well. The only bugaboo in this economy is inflation right now. And that’s what Powell concentrating on now, is he going to be able to do what’s called the soft landing. I don’t know. He said today in his press conference, look, there’s a path we can do it it’s going to be super challenging. But we can do it. So we’ll see. But that’s why they’re keeping up with with interest rate increases.

Kimberly Adams: I mean, not to be terribly, you know, reductive with this. But isn’t it also just because this takes a minute?

Kai Ryssdal: Oh, yeah. Oh, hell yeah. Yeah, I guess I should have just said that. Thanks for your question. It takes a minute.

Kimberly Adams: It takes a minute for these – sorry, Kai.

Kai Ryssdal: No, you’re right.

Kimberly Adams: Like, it just takes a minute for this stuff to work its way to the economy. So just like it took a while for inflation to start to show up and then start to ramp up and start to peak, it’s going to take a minute for the Feds actions to continue to ripple through the economy. So if you imagine, I kind of think of it like COVID hospitalization rates, and unfortunately, death rates, like it was always you saw the hospital rates ticking up, and then everybody freaked out. Because you know, if the hospitalization rates were ticking up, then the death rates were going to eventually start ticking up. But it was going to come a little bit later. And so whatever actions you took to address that, we’re going to also be kind of trying to play catch up. And I feel like that’s what the Fed might also be doing.

Kai Ryssdal: That’s exactly what takes a minute. Let us proceed, shall we?

Kimberly Adams: Yeah, a question about blockchain and supply chain.

Kai Ryssdal: Yep.

Mary: Hi, Kai and Kimberly, and all the smart people at Make Me Smart. This is Mary, in Pontiac, Illinois. And what I want to know is what you think about the success of the blockchain partnership between IBM, and Maersk. And I want to know that because I have a term paper due Sunday with a video presentation and I might do a little bit of a sound bite from you. Thanks again.

Kai Ryssdal: This answer is gonna – we deserve a footnote in that paper. I’m just saying, well, Kimberly does.

Kimberly Adams: First of all, props to you for thinking ahead. Because term papers for me, I would not have been thinking on whenever you sent this in for a term paper due on Sunday, so good for you for not procrastinating. Um, but as to whether or not it’s a success. Who knows. So here’s some context and background for all of this. Global supply chains, as has been mentioned on just about every Marketplace programming can think of are incredibly complicated and have just been absolutely thrown for a loop during the pandemic, because of you know, waves wildly at the universe, everything. So in addition to them being just complicated, by default, they’re harder to keep tabs on when ports shut down. Or when maybe you get in trouble because you find out a particular manufacturer you’re using gets tied to, you know, human trafficking or something like that, or maybe improper policies or handling things wrong. Any myriad of things that can make any point in your supply chain, either be logistically complicated or complicated for your image or for you know, human rights or whatever. So, there enter the blockchain and distributed ledger technology, which lets you set up a decentralized digital database that could technically function without any one authority in charge. So let’s just say you have a company that you’re like, Hey, make sure our supply chain is operating well, but it turns out, they’re garbage at their jobs, you in theory have a backstop. A few years ago, IBM just threw itself into developing several of these blockchain databases is a databases, database. It’s not databaci.

Kai Ryssdal: Oh, I don’t know.

Kimberly Adams: Anyway, databases, including one with the shipping giant Maersk, it was called TradeLens. And the goal was to create a single platform for sharing shipping data between everybody who needed to know where giving shipping container – where a given shipping container is and what’s inside, and that could be retailers, shipping company ports, customs, authorities, financial services, firms, maybe human rights groups trying to track where products are moving throughout the world. It kind of depends on whether or not all these different players view this system as a neutral third party, and given its connections with the biggest shipping company in the world Maersk and IBM one of the biggest technology firms in the world. A lot of people were a little bit skeptical of TradeLens and and initially struggled to attract users. But companies have slowly been signing on and as of 2021 TradeLenswas used by five of the top six container shippers. However, it’s been hard to get data on this in the pandemic, when global shipping and supply chains have been a mess. So as to whether or not it’s been a success, eh I don’t kno. If anybody knows if this is your actual job to work with TradeLens or blockchain as related to supply chains and shippings – shipping, let us know we’d be interested.

Kai Ryssdal: Yeah, totally fascinating.

Kimberly Adams:  And good luck on your paper.

Kai Ryssdal: Yeah, no joke. I’m serious about the footnote thing, though. Just saying. Credit where credit’s due.

Kimberly Adams: Wait, there was a quote from a president where it’s like, “Imagine how much we could get done. If no – if you’d not worried about who gets the credit.” What’s that?

Kai Ryssdal: I want to say it was Lincoln, but yeah, I don’t know. Yeah.  Probably wasn’t even, I don’t even know.

Kimberly Adams: Okay. All right. The next question comes from the deep dive that Kai and Amy did last week that looked at this new phenomenon of building homes that are actually meant to be rentals.

Ashley: Hi, this is Ashley from Memphis. I just listened to your episode on the housing market, and the build to rent. And I’m curious about what the effect of the Airbnb rental market is on the overall housing crisis. So if you could answer that, that’d be awesome. Thanks, guys. Love your show.

Kai Ryssdal: Yeah, so first of all, there is a housing crisis in this economy. First of all, it’s an affordable housing crisis, right? There’s just not enough stock for first time homebuyers for renters, what have you. So it’s a real issue number one. Number two is there is some anecdotal evidence that Airbnb and other you know, rental companies like that do contribute to a rising cost of housing, because what happens is the homeowners will take stock off the market for purchase or long term rental and turn it into vacation or short term rentals, because that can tend to be more lucrative, right. And Marketplace reporters have done some reporting on this, Savannah Maher and Amanda Peacher have done some stuff where it’s happening anecdotally. But the deal is, yes, research does generally support the idea that there is some effect on local housing prices, because of Airbnb. Cities are trying to regulate this right San Francisco, most famously, also New York, lots of cities are trying to do it because –

Kimberly Adams: D.C.

Kai Ryssdal: Yeah, because locals are like, “Come on, man, you cut it out.” So the short answer is, yes, there is an effect. But I think in terms of the scale of the larger housing crisis, this is one of many factors is I think the short answer to that one. Shorter answer anyway. That’s what I got.

Kimberly Adams: Yes, what Kai said all the things.

Kai Ryssdal: Yeah, there we go. Okay, infrastructure. Holy cow. We have not talked about infrastructure a very long time. Go.

Carl: Hi, Make Me Smart. My name is Carl from Madison, Wisconsin. We’ve heard a lot about electric vehicles in the last year. And my Wonder is about electric trains. Why would we not electrify our rail lines? We have one of the most extensive networks in the world. And yet we don’t electrify it, like much of the rest of the world does.

Kimberly Adams: Yes, we do have one of the most expensive networks in the world, but not necessarily when you think about density of rail relative to space, and geography. Nevertheless, we do have a small amount of electric rail, including in the Northeast quarter, also known as like the Acele quarter, and all of those places between like that New York to D.C. route, although I should say I was sending my friend back up to New York after hanging out this weekend. And that route was shut down because power lines, oddly enough, were down. And they ended up having to take a bus from Philadelphia to New York, get off the train. Anyway, this question was a little too complicated for us. So we asked Colleen Callahan, co-executive director of the Luskin – excuse me of the Luskin Center for Innovation at UCLA. She said yes, electric trains can be less costly and less polluting than the diesel trains to operate.

Colleen Callahan: But the reason that we don’t see more of them in the US and I think it’s only about 1% of trains are electrified in the U.S. compared to a much higher percentage in other advanced technology countries around the world is the upfront costs. And unlike other advanced technology countries that do have electric train systems, our railroads are owned privately. And we have not had strong public private partnerships that would really allow for the private sector that owns our railroad systems to deal with those upfront costs and then reap the benefits over the long term.

Kimberly Adams: Now inquiring minds may be questioning, “isn’t Amtrak state-owned?” Why, yes, in fact, it is owned by the government. However, most of the tracks on which the Amtrak trains run are separately owned by private host railroads. And Amtrak only owns about 600 miles of the approximately 21,000 miles of track that it uses every day. So the problem that was just laid out remains, there are a few other things that could complicate the task of electrifying our rail lines, including lower population density, as I mentioned, compared to other countries, a less forgiving terrain and some other parts of the world. We’ve got lots of mountains and hills and rivers and gullies and all sorts of fun topographical things. But basically, it just costs a lot more money here.

Kai Ryssdal: Right, right. Exactly. Exactly. I’ll tell you so my mother I think I’ve related before on this podcast super quick. My mother travels only by train she’s afraid to fly. So she came down to Portland a couple of weeks ago. Portland, Maine. Sorry, Portland, Oregon, down to L.A.

Kimberly Adams: I was gonna say that’s a long train ride.

Kai Ryssdal: Yeah. But her trains get delayed all the time. She’s on an Amtrak train, but they have to give way to the freight trains operated by the company that owns the rails. It’s crazy. It’s absolutely crazy making. Quick anecdote. That’s it. All right.

Kimberly Adams: Well, since the last one is for you, anyway. So you go ahead. You have the floor after this question.

Kai Ryssdal: Alright. Alright.

Leland: Hello, Kai and Kimberly. This is Leland from Woodland Hills. Last Thursday, I heard Kai starting to say something about “The Expanse” and got cut off or didn’t want to talk about it anymore. My ears perked up. And I really would like to know the rest of what he was gonna say. Thank you.

Kai Ryssdal: I remember Leland, apologies for stepping on you. But if I remember correctly, the conversation went. “Oh, yeah. I’ve been watching this show called “The Expanse.” It’s really good. Kimberly, weren’t you the one who recommended that to me?” And she said, “Well, Kai, I also recommended “Neverending Story.'” And so that one just got derailed just out the gate. So don’t look at me Leland it was Kimberly. Yeah. So I think Kimberly  did actually recommend the experience to me, it’s good science fiction space in the future. All kinds of stuff. It’s really good. I’m in the middle of season four. So no, no spoilers, please. But yeah. And yeah, I’m really enjoying it. So thank you for the recommendation, Ms. Adams.

Kimberly Adams: You’re welcome. I like “The Expanse” because as much as I love “Star Trek,” and of course, “Star Wars,” may the fourth be with you and all.

Kai Ryssdal: *sighs*

Kimberly Adams:  Sometimes it – why? Why do you want to take my joy? Can’t you just like, embrace the theme?

Kai Ryssdal: Sorry, you’re right. You’re right. You’re right. I should just let you have your joy with no editorial comments.

Kimberly Adams: Or editorial sighs really? Anyway, um, “The Expanse” is a little bit grittier. And unfortunately, given what we know about how humanity operates, feels a touch more realistic than some of the other sci-fi that it’s made. It has made its way to television. And I think that’s what makes it particularly cool.

Kai Ryssdal: Totally agree. It’s good. It’s good.

Kimberly Adams: Yeah. So that’s it for us today. This Star Wars Day. Thank you very much for listening. We will be back tomorrow with news and some Make Me Smiles.

Kai Ryssdal: Keep sending us your questions though. For Whaddya Want to Know Wednesday or comments on what you hear on the show my sighs, or Kimberly’s recommendations take your pick, makemesmart@marketplace.org, leave us a voicemail if you’d like. 508-U-B-SMART. And we’ll be back in your feed tomorrow same time, same channel. Same bad time, same bad channel.

Kimberly Adams: Make Me Smart is produced by Marissa Cabrera today with help from Rose Conlon. Our intern is Tiffany Bui.

Kai Ryssdal: Today’s show was engineered by Charlton Thorp, Ben Tolliday and Daniel Ramirez composed our theme music. Our senior producer is Bridget Bodnar.

Kimberly Adams: What are you doing to celebrate Star Wars Day? Do you have like an R2D2  mask or something?

Kai Ryssdal: I don’t observe. I don’t observe.

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