michael barbaro

From The New York Times, I’m Michael Barbaro. This is “The Daily.” Today: The U.S. economy is in the middle of a historic boom. So why is the government now deploying an economic weapon it last used during the financial crisis? Plus, last night’s Democratic debate. It’s Thursday, August 1.

clare toeniskoetter

Nice to meet you. All right, come on in here.

michael barbaro

Hey.

ben casselman

Hey, Michael.

michael barbaro

Is C-Span where it’s at for Federal Reserve announcements?

ben casselman

I mean, it’ll be on every channel, man.

michael barbaro

On Wednesday afternoon, economics reporter Ben Casselman stopped by the studio.

ben casselman

But C-Span will have the whole thing.

clare toeniskoetter

I checked online. We’ll keep it on C-Span.

michael barbaro

So Ben, give us a little bit of context about what we’re waiting for.

ben casselman

So the Fed announced 28 minutes ago that it is cutting interest rates for the first time since the financial crisis. They cut a quarter percentage point, which sounds very, very small —

michael barbaro

Truly.

ben casselman

— but makes a very big difference. There had been some talk they might go crazy and cut a half percentage point —

michael barbaro

[WHISTLES]

ben casselman

— but they didn’t go that crazy. We are now waiting to hear Jay Powell, the Fed chair, come out and talk to us about why they did that and what that means, and what everybody is going to be listening for is any hint of what happens next.

michael barbaro

And was there a lot of debate around that decision?

ben casselman

There has been a lot of debate in the months leading up to this, because, on the surface, the economy right now is pretty good. The unemployment rate is close to a five-decade low. This is now the longest economic expansion in American history. We have been adding jobs for eight or nine years straight now. Wages are rising. I mean, things are pretty good, and normally the Fed cuts rates when things are bad or when there’s worry things are getting bad. And so there were a lot of people who looked at that and said, why would the Fed be taking action now when the economy is in pretty good shape? In fact, often in a situation like this, you might expect the Fed to be raising interest rates, to try to keep the economy from overheating. But they’re looking out there and they’re seeing a lot of things to be worried about in the future, and they’re basically trying to take out an insurance policy here and make sure that we don’t go over the edge.

michael barbaro

So there are real differences of opinion, it sounds like, about whether the federal government should intervene in this moment, and we’re waiting to hear what the Fed chief, Jerome Powell, says about why they did it.

ben casselman

That’s right.

archived recording The Federal Reserve announcing today it’s cutting interest rates by a quarter of a percent.

michael barbaro

O.K., we’re going to listen.

archived recording — holding a news conference live on C-Span.

michael barbaro

Can you guys turn this up?

archived recording (jerome powell) And I’ll discuss the thinking behind today’s interest-rate reduction and then turn to the path forward. As the year began, both the economy and monetary policy were in a good place. The unemployment rate was below 4 percent, and inflation had been running near our 2 percent objective.

michael barbaro

So he’s making the it’s-been-good case.

ben casselman

That’s exactly right.

archived recording (jerome powell) Over the first half of the year, the economy grew at a healthy pace, and job gains pushed unemployment to near a half-century low.

michael barbaro

So we’re waiting for a but.

ben casselman

We’re waiting for a but. It will come.

archived recording (jerome powell) People who live and work in low- and middle-income communities tell us that many who have struggled to find work are now getting opportunities to add new and better chapters to their lives.

ben casselman

What we’re listening for is how big is the but.

archived recording (jerome powell) The median committee participants’ assessments of the neutral rate of interest in the longer-run normal rate of unemployment have also declined this year.

ben casselman

I warned you the fireworks were muted.

michael barbaro

[LAUGHS] Yes.

archived recording (jerome powell) These changes in the anticipated path of interest rates have eased financial conditions and have supported the economy.

michael barbaro

Are we sure that we want this to be a full episode of “The Daily“?

ben casselman

That only you can decide.

archived recording (jerome powell) But manufacturing output has declined for two consecutive quarters.

ben casselman

But.

archived recording (jerome powell) Business fixed investment fell in the second quarter.

michael barbaro

This is the downside.

ben casselman

That’s the downside.

archived recording (jerome powell) Foreign growth has disappointed, particularly in manufacturing and notably in the euro area and China.

michael barbaro

So what case is he making here?

ben casselman

He’s making a case that there is a lot of uncertainty right now and that there are signs that the global economy is slowing and that it might be starting to affect the U.S. as well —

archived recording (jerome powell) After simmering early in the year, trade policy tensions nearly boiled over in May and June.

ben casselman

— and that that is making businesses nervous about what the future looks like.

archived recording (jerome powell) Looking through this variability, our business contacts tell us that the ongoing uncertainty is making some companies more cautious about their capital spending.

ben casselman

And that’s maybe a sign that the economy is not as strong as some of these other measures might suggest.

archived recording (jerome powell) We’re mindful that inflation’s return to 2 percent may be further delayed and that continued below-target inflation could lead to a worrisome and difficult-to-reverse downward slide in longer-term expectations.

ben casselman

It’s a sense that the Fed needs to insure against things getting worse. It’s not just that things are weaker overseas. It’s that they could get weaker still. It’s not just that there’s a trade war. It’s that the trade war could get worse. And the Fed would rather give the economy sort of a little bit of a kick now so that it has some momentum in case things get worse rather than waiting for things to actually slow down and need to give it a bigger shove to get things moving.

archived recording (jerome powell) It will continue to monitor the implications of incoming information for the economic outlook, and will act as appropriate to sustain the expansion with a strong labor market and inflation near its symmetric 2 percent objective.

michael barbaro

I feel like you guys have your own vocabulary.

ben casselman

There is absolutely a Fed vocabulary.

michael barbaro

It’s subtle.

speaker

O.K., thank you very much.

archived recording (jerome powell) Thank you.

ben casselman

So was that all crystal clear to you?

michael barbaro

[LAUGHS] Yeah, crystal clear like a opaque window.

[music]

michael barbaro

Can we start with a really basic question?

ben casselman

Yeah.

michael barbaro

What is the role of the Fed, and in particular, what’s the role of its leader in a moment like this?

ben casselman

The Fed is our primary tool for trying to keep the economy in a good place. It’s as simple as that. They have two missions. They’re meant to try to maintain maximum employment, to basically keep unemployment as low as possible, and price stability, to try to avoid letting inflation get out of control. And their main tool for dealing with that is interest rates.

michael barbaro

And tell me how that works.

ben casselman

So the Fed basically sets the interest rates that are then used to decide everything else through the economy — what your mortgage rate is going to be, what companies that want to borrow money in order to invest or to hire more workers, what they’re going to pay. When interest rates are low, it’s cheap to borrow, and so that encourages people to borrow more and to spend more, and that helps the economy go faster. The risk is if it goes too fast, then we start to see inflation. Prices go up, and they start going up so fast that that can become a really big problem in the economy, right? We saw this in this country in the ‘70s. The Fed doesn’t want to let that happen. So if the economy starts to go too fast, they’re going to try to tap the brakes and slow it down.

michael barbaro

By raising the interest rate, which raises the cost of borrowing, which raises the price of things like your mortgage or your credit card bill.

ben casselman

That’s right. Or for a business, they’ll be less likely to borrow money, so they’ll be less likely to keep investing. They’ll be less likely to hire more workers, and it’ll slow things down.

michael barbaro

O.K., so it’s been how long since we did this last?

ben casselman

Since the middle of the recession, more than a decade ago.

michael barbaro

O.K., so help us understand how we got to this moment today where the Federal Reserve decided to lower interest rates for the first time since then.

ben casselman

So in the middle of the financial crisis, the Fed had to act aggressively to try to basically keep the economy from pitching into the Great Depression again. They cut interest rates as far as they could, all the way to 0.

michael barbaro

To 0.

ben casselman

To 0.

michael barbaro

Which means what, exactly?

ben casselman

It means, essentially, for the safest borrowers, they could borrow money for practically nothing. There was essentially —

michael barbaro

Cost-free borrowing of money.

ben casselman

That’s right. I mean, no actual human being could borrow money for literally 0, but it was as cheap as money could be. If you wanted to borrow money, you could have it.

michael barbaro

And what’s the rationale for doing that?

ben casselman

That the economy was in really bad shape, and they needed to find some way to encourage businesses to invest, consumers to spend, to try to get things moving again. And they went to lengths that the Fed has never gone to before to try to make that happen. And it worked in the sense that the economy began to get better. The unemployment rate got as high as 10 percent. It began to fall. Jobs had been getting cut at the rate of hundreds of thousands a month. They began to increase. Incomes gradually began to go back up, right? Corporate profits rebounded. The stock market rebounded.

michael barbaro

And what’s happening to that interest rate as that recovery begins?

ben casselman

For most of that period, nothing at all. It stayed at 0 for years. Even though the economy was starting to see some signs of improvement, it wasn’t enough that the Fed felt that they could start to raise interest rates.

michael barbaro

And when does that start to change?

ben casselman

So finally, at the end of 2015 —

archived recording (janet yellen) Good afternoon.

ben casselman

— the Fed raises rates.

archived recording (janet yellen) Earlier today, the Federal Open Market Committee decided to raise the target range for the federal funds rate by one-quarter percentage point —

ben casselman

A quarter point —

archived recording (janet yellen) — bringing it to one-quarter percent to one-half percent.

ben casselman

— the smallest-possible increase they could make.

michael barbaro

And that’s a kind of vote of confidence in the health of the economy.

ben casselman

That’s right. The economy was finally starting to return to normal.

archived recording (janet yellen) As I will explain, the process of normalizing interest rates is likely to proceed gradually.

ben casselman

And they actually talked about it. They talked about it that way as normalization, that they were trying to get back to a period where interest rates were no longer near 0. They were the way we think about interest rates, where it actually costs money to borrow again.

archived recording (janet yellen) This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near 0 to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.

ben casselman

So they raise interest rates by a quarter point, and then they do it again, and they do it again, and they do it again. They eventually do it nine times —

michael barbaro

Wow.

ben casselman

— over that period from 2015 until just last year. Eventually rates were basically at two and a quarter to two and a half points. Still very, very low by historic standards, but more normal compared to where they had been in the middle of the recession.

michael barbaro

And at the end of all these gradual interest-rate increases, where does the economy stand?

ben casselman

So the economy right now is good. There are a lot of caveats, and we can go through a lot of those caveats, but on a basic level, the economy right now is in good shape.

[music]

michael barbaro

We’ll be right back. Ben, I think we should go through those caveats for just a moment. This has felt a bit like a funny moment in the economy, because many Americans see that the economy is doing well, but there’s also a pretty pervasive sense of insecurity. Does that feel right?

ben casselman

I think that’s right. I think that it helps to step back and think about what we even mean when we say how is the economy doing? So one way to think about that is how’s the economy doing right now? Do people have jobs? Do they have incomes that are sufficient to pay for their needs and for their desires? And in that sense, things right now are looking really good. But there are concerns about where things are in sort of a larger context, and I think that’s some of what you’re picking up on. Which is, O.K., I have a job, but is it enough to set aside money for retirement? I have a job, but is it enough to pay off my student loans? Am I ever going to be able to buy a house? Am I confident that my job is not going to be lost to a robot or an algorithm or to a worker overseas? And that, I think, ends up getting to this sort of larger question of whether this economy is working for the average person. If you own stocks, you’re doing great. If you are just relying on wage income, not so much. And if you are further down to the bottom of the ladder — if you have less education, if you are in a part of the country where there aren’t a lot of good jobs, if you are black or brown or an immigrant — you may very well be working a job that’s part-time, that may not offer health insurance, where you may be a gig worker who’s not an employee at all. For those people, this economy doesn’t feel like it’s working, and so they can look at this and say, I hear the unemployment rate is low, and I believe that. I can get a job, but it doesn’t feel like I can’t afford that sort of middle-class life that I might have anticipated.

michael barbaro

O.K., so with that in mind, what are we to make of this decision by the Fed just 35 minutes ago to cut the interest rates?

ben casselman

So the conventional wisdom has been that all that stuff I was just saying about the long run and inequality and all of those concerns, the conventional wisdom has been none of that is something the Fed should even be thinking about. They are thinking about how is the economy doing today and where is it going over the next couple of years? But I think there was a really interesting moment in the press conference. Powell made a point where he said, earlier this year, when things were going so well, we were seeing wage growth, especially at the bottom. And there’s been a bit of a shift in the way that the Fed has been thinking over the last several years, where there’s a recognition that in periods of a really strong economy, the benefits often flow disproportionately to people at the bottom, to the exact same people that we’ve been saying have been left behind in a lot of the recovery.

michael barbaro

It helps people at the bottom?

ben casselman

That’s right, and there’s a pretty simple reason for that. When the economy is really strong, and especially when the unemployment rate is really low, it gives bargaining power to people who don’t normally have it. So we’ve written stories about people with criminal records getting jobs, people with disabilities getting jobs, people who have been out of the workforce for a really long time getting jobs or being able to demand better pay, companies offering training. We saw just the other day, Amazon announced a big training program because they’re saying, we can’t find the people that we really want to hire, so we’ll hire other people and we’ll train them up. We’ll give them skills, and we’ll pay them more as a result.

michael barbaro

So when unemployment is low and the economy is doing really well, the most vulnerable members of our economy suddenly have more leverage and greater opportunity.

ben casselman

That’s exactly right. And what Powell was saying there is this is finally happening. Why would we let it end? We should do everything we can to try to keep this going while we can, because it’s finally benefiting the people who didn’t benefit for such a long time. And because we’re in that moment right now, that kind of moment where the unemployment rate is really low and it’s starting to help people at the bottom, keeping things going for longer, at least in theory, will help those people at the bottom more. And maybe some of that even lasts when the economy eventually does slow. Some of those benefits will stick around.

michael barbaro

So even though the Federal Reserve doesn’t see its job as kind of socioeconomic engineering — fixing the income inequality in this country — you’re saying the interest rate cut is, in a way, designed to try to fix that?

ben casselman

That’s right. The Fed has faced a lot of criticism for a long time for thinking mostly about people at the top, for helping Wall Street, for helping finance, and not thinking about the way that its policies flow through the whole economy. And there have been groups that have been pushing, saying, hey, don’t get overstressed about inflation. Don’t get too worried about what’s happening on Wall Street. Think about how your policies affect people who are often left out of the economy, and the way to help them is to let the economy get hot, hotter maybe than the Fed in the past would have been comfortable. And Powell, to some extent, is saying, I’m buying into that, at least to some degree.

michael barbaro

And it may not be his overriding goal, but it’s baked in to how the Federal Reserve behaved on Wednesday.

ben casselman

That’s exactly right.

michael barbaro

Ben, everything you’ve just said makes me think that the economy is doing pretty well, the Federal Reserve wants to keep it that way, but that it sees signs of storm clouds. So does everything that happened today pretty much mean that soon enough, there’s going to be some sort of problem in the economy, some sort of recession? Is that kind of what happened today, that we were officially put on notice that the good times are probably going to come to an end in the near future?

ben casselman

So there are sort of two paths you could think about here. One is now that we’ve gone from a period where we were raising interest rates to a period where we’re cutting interest rates, we’ve officially crossed over the peak, and now we’re on the way down. That’s one interpretation, that we’re going into a cutting cycle, into a downturn that the Fed has to respond to. There’s another possibility, which is what the Fed is hoping is happening here, which is that the Fed is just trying to nudge the economy along so that it doesn’t have to take those more aggressive moves down the road. And we don’t know yet which of those two paths we’re on. The Fed’s going to be watching those numbers very, very closely to try to figure out whether it needs to keep cutting or whether it can get by with a cut or two and just keep the economy going.

michael barbaro

When will we know?

ben casselman

Economists almost never see a recession coming ahead of time. The best they can do is know that we are in a recession now. The Fed is trying to prevent us from falling into one. We won’t know if they succeeded until we look up one day and we say we’re in a recession.

michael barbaro

Or we are talking in six months and we say, man, we’re not in a recession.

ben casselman

That’s right.

michael barbaro

So that’s when we’ll know?

ben casselman

On some level, if the Fed succeeds, we may never know. We will never know exactly what would have happened in the economy if the Fed had not taken this action today. So if we don’t fall into a recession, we’ll never be able to play it back through without the cut and say, would we have gone into a recession if it weren’t for the Fed?

michael barbaro

Right, because like you said, the Fed is very subtle.

ben casselman

They try to be.

[music]

michael barbaro

Thank you, Ben.

ben casselman

Thanks so much.

michael barbaro

We’ll be right back. Here’s what else you need to know today.

archived recording (bill de blasio) Tonight, we have to get to the heart and soul of who we are as Democrats. Joe Biden told wealthy donors that nothing fundamentally would change if he were president. Kamala Harris said she’s not trying to restructure society. Well, I am.

michael barbaro

From the opening moments of Wednesday night’s Democratic debate, the leading candidates on stage, former vice president Joe Biden and Senator Kamala Harris, were repeatedly attacked by their opponents as guardians of the status quo on issues from health care to immigration.

archived recording (kirsten gillibrand) What did you mean when you said, when a woman works outside the home, it’s resulting in, quote, “the deterioration of family?” archived recording (joe biden) No, what — archived recording (kirsten gillibrand) — and that we are avoiding — these are quotes. It was the title of the op-ed. archived recording (joe biden) No. archived recording (kirsten gillibrand) And that just causes concern for me, because we know America’s women are working, and — archived recording (dana bash) Thank you Senator Gillibrand. archived recording (kirsten gillibrand) So, well, he has either — archived recording (dana bash) I want to bring Senator Harris into this conversation. archived recording (kirsten gillibrand) Either he no longer believes it — I mean, I just think he needs to — archived recording (joe biden) I never believed it. archived recording (dana bash) Thank you. Senator Harris, please respond.

michael barbaro

Much of the night’s focus was on Biden. In a series of pointed exchanges, Senator Kirsten Gillibrand, former housing secretary Julian Castro, and Senator Cory Booker challenged Biden on his past record and current positions.

archived recording (joe biden) The fact is that there’s a lot we’ve done, but here’s the deal. The fact is that we’re talking about things that occurred a long, long time ago, and now all of a sudden, you know —

michael barbaro

Both Biden and Harris defended their records against what they said were unfair and inaccurate attacks.

archived recording (joe biden) Everybody’s talking about how terrible I am on these issues. Barack Obama knew exactly who I was. He had 10 lawyers do a background check on everything about me and civil rights and civil liberties, and he chose me, and he said it was the best decision he made. archived recording (jake tapper) Thank you, Mr. Vice President. archived recording (joe biden) I’ll take his judgement. archived recording (jake tapper) Mr. Yang, your response?

michael barbaro