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The Fed hiked interest rates. Here’s what you can do about inflation.
Jun 15, 2022
Episode 694

The Fed hiked interest rates. Here’s what you can do about inflation.

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The Federal Reserve raised interest rates today by the largest amount since 1994 to try to get inflation under control. One of our listeners is wondering what the average consumer can do to keep inflation at bay. We’ll offer a potential solution. Plus, we tackle your questions about rent control, private equity and the costs of all those canceled flights.

Here’s everything we talked about today:

If you’ve got a question for us, send it to makemesmart@marketplace.org and (508) 827-6278 or (508) U-B-SMART.

Make Me Smart June 15, 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: It’s time to go.

 

Kai Ryssdal: Yeah, I guess. Hello everybody I’m Kai Ryssdal. Welcome back to Make Me Smart. It’s making today make sense. It’s what we do.

 

Kimberly Adams: And I’m Kimberly Adams, thank you for joining us for Whaddya Wanna Know Wednesday. And that means it’s time for all of us to get smarter by way of answering your questions.

 

Kai Ryssdal: If you’ve got one by the way – a question that is – that you’d like us to find the answer to, or that we just happen to know off the top of our heads. You know what to do. Email us makemesmart@marketplace.org or leave us a voicemail. Our number is 508-U-B-SMART.

 

Kimberly Adams: Okay, first question of the day.

 

Clay: Hi, this is Clay from San Francisco. I was wondering what regular consumers like me can do to help the economy and improve the current inflation situation. Thanks for making me smart.

 

Kai Ryssdal: It’s a good question.

 

Kimberly Adams: Nice Clay. You go ahead Kai.

 

Kai Ryssdal: Here’s the answer, Clay. Stop spending money. Do nothing, buy nothing. Buy food and gas, maybe clothes if you need to. But otherwise, don’t spend anything. Here’s the deal, right? Inflation is too much money chasing too few goods, fundamentally. And what we have in this economy right now, is consumers still two years on with pent up demand from the pandemic and not enough goods, whether that’s gas, or refrigerators, or couches, or whatever, right. And that’s why the Federal Reserve raised interest rates today, right? The federal funds rate up 75 basis points, three quarters of 1%. The Federal Reserve is trying to convince you not to spend money. It wants people to say, well, let’s put this in the bank, or let’s put it under our mattresses or let’s just hang out for a little while. And it wants companies to say you know what, it’s too expensive now to borrow and invest in new equipment or what have you. Consumers right now are driving a huge part of the inflation in this economy. So individuals, consumers would stop spending? That would do it. Of course, that’s ridiculous. But that’s what it would think.

 

Kimberly Adams: I mean, so it also helps the environment. Don’t buy stuff you don’t need.

 

Kai Ryssdal: Yes, that is true. Don’t buy what you don’t need. All right. Next question. Here we go.

 

Roger: Hi, my name is Roger. Longtime listener, first time caller. I want you guys to help make me smart by answering how rent control works?

 

Kimberly Adams: Yes. The thing that many many people wish they had about now. Rent control is a broad term used to describe government programs that limit how quickly or how much your landlord can raise your rent, right? Intention there is to keep housing costs affordable, particularly in places where rents are really volatile, or where there’s risk of gentrification. So for example, if you live in California, in a city that doesn’t have its own rent control rules, rent increases will be limited to 5% plus local inflation, but could never exceed a total of 10%. But it’s not super common in the US. I mean, you’ve probably heard stories of people who got the super cheap pandemic rents. And then like when it came time to renew, the rent doubled, or went up by 50%, or something like that. According to a 2019 study by the Urban Institute, and remember, this is pre pandemic, 182 municipalities in the US have rent control regulations. All of them are in New York, New Jersey, California, Maryland, or here in Washington, DC. It’s a controversial thing, because a lot of states have banned these rent control laws. And a lot of landlords obviously hate them, because they say that it keeps the rental supply low because it encourages landlords to get out of the rental market and convert their properties to condos or commercial use. Obviously, proponents of rent control think it helps control rental prices in city where the rents rise faster than wages. I mean, here in DC, it’s really hard for people to live in the city and work if you’re not making, you know, way more than the median income. And so, you know, there are plenty of people who would love to have rent control. It’s not super common. And there is a hefty lobbying effort by landlords and many companies to not have it be more common.

 

Kai Ryssdal: Yeah, it’s super contentious, super contentious. But yeah, it’s a thing and you know, renters like it and landlords don’t. And that’s why it’s so controversial.

 

Kimberly Adams: Indeed. All right. Next up is a question about private equity, which also sometimes ends up in the rental market.

 

Ian: My name is Ian from Atlanta. I work for a company that recently was invested in by a private equity firm. And I was wondering what that really equates to. if you could just give me a broad 30,000 ft view and maybe get into the weeds on it a little bit and make me smart! Thanks!

 

Kimberly Adams: …the weeds.

 

Kai Ryssdal: Yeah, that’s right. So private equity is basically companies that gather money from lots of stakeholders, right? Pension funds, endowments, college endowments, rich people, you name it. Lots of people contribute to private equity. And what private equity does is buy companies, and then generally speaking, try to turn them around and take them public, sell them to someone else, and profit by it. Here’s the catch, though. And maybe the best example of this in the last like five, eight years is Toys R Us. A private equity firm bought Toys R Us, and then loaded it up with debt, right, and also trim down the company. Fired people, cut stores, this and that, and then unloaded it, trying to make a huge profit. The catch, of course, is that those companies then are challenged with the debt load, people lose their jobs. And private equity can be really destructive in that sense, right? Because private equity is out for private equity. If you’re a publicly traded company, nominally, you have an obligation to all the stakeholders, right? Not your shareholders, but employees and ESG, and all the rest of them. Private equity becomes really challenging when they do that thing that private equity does, which is buy companies, load them up with debt, stripped them down and try to sell them off. It’s interesting that Ian was talking about being invested in by private equity as opposed to being bought by private equity. I mean, private equity companies do just make general investments, right? They just do. You know, they have lots of money. And so they need to find a place to put it to work. What I’m speaking specifically about this private equity companies buying controlling interests, which can be, two-edged sword, I guess, is the answer.

 

Kimberly Adams: Do you think that private equity buyouts or investments are going to become more common in a high interest rate environment where it’s harder for businesses or more expensive for businesses to get loans?

 

Kai Ryssdal: Yeah, that’s a really good question. I think, you know, it obviously depends on the terms of any individual deal. I would also point out, and this is a little, just recent historical trivia, which becomes relevant. The federal funds rate today, which is the interest rate that the Federal Reserve controls, was increased by three quarters of a percentage point, as I said. It now sits. They do it in a range of 1.5% to 1.75% is what the Fed says, right. And then they conduct open market operations. They buy and sell bonds to make that work. But the federal funds rate sits right now exactly where it was in October of 2019, which is the most recent rate moving in meeting of the Federal Reserve, right? So right now, everybody’s like, oh my god, it’s at 1.5%, that’s crazy. Exactly where it was before times, right. Is it going up? Yes, some, but it’s not, it’s not off…it’s not even remotely outrageously high right now. So I think everybody needs to take a deep breath. Might PE deals thrive somehow this year? Sure. Totally good. Who knows?

 

Kimberly Adams: That’s interesting. Before we go on to the next one, you know, another place where private equity is huge, it’s probably the reason why many of our listeners no longer have a local newspaper. Private equity companies have been buying up tons of local newspapers and just like decimating the newsrooms turning them into like content farms and chasing out all the journalists. It’s quite sad.

 

Kai Ryssdal: Yeah. All the capital, I believe. Hang on one sec.

 

Kimberly Adams: That’s the big one that a lot of people know.

 

Kai Ryssdal: Yeah, it bought the Mercury News I think. It bought a bunch of others. But yeah, that’s exactly right.

 

Kimberly Adams: I think they tried to buy the Post-Dispatch, the St. Louis Post-Dispatch. I can’t remember if they actually did it or not. Anyway, let’s move on.

 

Kai Ryssdal: Yep. Okay, so next question. Jim, in Georgia, here’s what he wants to know. How much does it cost an airline to cancel a flight?

 

Kimberly Adams: How much annoyance does it cost us?

 

Kai Ryssdal: What is the price of annoyance?

 

Kimberly Adams: I know. What is the price of annoyance okay? Just for some background, airline canceled flights for all kinds of reasons. Sometimes it’s weather, sometimes it’s mechanical issues. But a big one lately has been staffing shortages, due to a staffing shortage more broadly, not having enough employees because people can go do other things, but also because of the pandemic. People getting COVID and being sick or having to take care of family who are sick or losing a loved one. All the things. Airlines are understaffed, they remain understaffed from during the pandemic. And it’s creating problems as people rush back into travel, especially as we’re heading into this peak summer travel season. And so airlines are canceling routes, they’re scaling back their summer flight schedules. I mean, you know, I was last time I was in St. Louis, I was supposed to come back a day before and they just canceled my flight. But look, we checked in with Mark Hanson at the Institute for Transportation Studies at UC Berkeley. And he says that a rule of thumb is that a cancellation is equivalent to about two hours of a flight delay. And the cost of a flight delay is roughly six sorry, roughly $3,000 per hour. So you know, it’d be $6,000. But the actual costs, you know, obviously, just a rule of thumb, actual cost – situation specific. And in some cases, airlines can reduce expenses by canceling a flight. So for example, it may be more cost effective to cancel a flight than delay a flight, because that allows other flights to move up in the queue. And the cost of the airlines includes what the airline has to pay crew members who are already in place and refunds to passengers who decide not to rebook their flight. But you know, in some cases, it doesn’t really cost them that much. I’ll go back to my example. It didn’t really cost Southwest anything on my end, because I just got in an empty seat on the flight the next day. It’s not like I got bonus points or anything. I just shifted, and I was inconvenienced. But you know, that to spend an extra day in the garden with my mom.

 

Kai Ryssdal: Yeah, I’ll tell you though, it’s gonna keep getting worse actually, through this summer. I mean, Delta has already canceled 100 flights a day for most of July and August. It’s not getting any better. That’s for sure.

 

Kimberly Adams: Did you see that story in the journal about how Delta is restricting the amount of time people can spend in like their fancy lounges?

 

Kai Ryssdal: Oh, I did. Yes. Yes, I did.

 

Kimberly Adams: Because basically, people were like, posted up there for the free snacks and booze. Like the person running it said we’re not WeWork.

 

Kai Ryssdal: More flights. Look, I get it. I mean, airlines have … problems and labor problems the same way everybody else does. I get it. But still.

 

Kimberly Adams: Yeah, but they also regularly get bailed out by the federal government so there’s that. All right. That’s it for us today. Thank you for listening. We will be back tomorrow to try to make sense of the news and hopefully make you smile.

 

Kai Ryssdal: In the meanwhile, questions, thoughts, comments, makemesmart@marketplace.org or leave us a voicemail. 508-U-B-SMART is how you can do that.

 

Kimberly Adams: Make me smart is produced by Marissa Cabrera. Olivia Zhao is our new intern, Ellen Rolfes writes our newsletter.

 

Kai Ryssdal: Juan Carlos Torrado engineered today. Ben Tolliday and Daniel Ramirez are the writers and composers of our theme music. Our senior producer is Bridget Bonner.

 

Kimberly Adams: I love that they finally took the pronouncer off of Ellen’s last name. I guess they believe they have faith in me to say it right now.

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