The Global Role of the Dollar

What happened at the Federal Reserve meeting today? you ask Here's what happened. You get a task force and you get a task force and you get a task force From American public media This is market price In Los Angeles, I'm Kar Risal. It is Wednesday. Today, this one is the seventeenth of June, goodood as it always is to have you along, everybody We begin today with the Federal Reserve's new chairman, Kevin Worsarsh and his first press conference. And as he promised, changes are coming. We got a task force for that. This was a more bureaucratic. than usual press conference, The economics of it in a minute, of course, but the main takeaway was that Warsh, as he said during his confirmation hearings, is bound and determined to change the way the Fed does business Telltale sign number one count of five new task forces on, should you be curious? Communications The Fed's balance sheet economic data. activity in jobs and inflation frameworks So Also though And more immediately A this moment in time, it doesn't feel as though providing forward guidance is right Forward guidance. That thing the Fed's been doing for the past I don't know, fifteen years or so letting everybody, which mostly meant markets Letting them know which way the Fed was thinking monetary policy interest rates were going to go well in advance of actually voting on them This is a big deal. So I think it's important to hear Chairman Warsh's rationale I think the financial markets work less efficiently. when they ask a question, how will the Federal Reserve react to that incoming information U The more that markets are paying attention to what's happening in the real economy dececiding what's good data and what's less good data. The more financial markets can price what they believe is the most likely. And what are the tail risks? Financial market prices are probably the most important source of information to guide central bankers But when all the financial markets are doing is reflecting back what we've said then we're taking the most important source of information and we're being blind to it All right, so the economy and Warsh's thoughts on it. Inflation is too high, he said The Fed's going to get it under control, he said. He did not, though anything about Forward guidance on how the central bank was going to do that except for this You've heard me say before, I tend to focus on the left of the decimal point Well, the two is the left of the decimal point for now zero is to the right. I see no reason until we have reestablished our commitment and ability to deliver on the two percent inflation objective to revisit that. So that'll be outside the scope of what we're taking on twowo decimal point zero is where the Fed wants inflation to be, as Chairman War said. The decimal placement on inflation right now, according to the most recent consonsumer price index. has a four to the left of it T to the right of it For those wondering what President Trump had to say about the Fed's decision not to cut interest rates today, as he has made clear is his monetary policy choice I'm going to give it to you. This is a quote. It really is. Whatever Wall Street today didn't think too much of the new Gu press conference, We'll have the details when we do the numbers Interestingly enough, or at least it was to yours truly, the word consumer was, by my count, said, only once in Chairman Warsh's press conference today. It's interesting because Say it with me now, spending by or on behalf of consumers accounts for give or take seventy percent everythingverything that happens in this economy So it was reassuring and interesting to get this morning's report on consumer spending for the month of May Overall, up nine ths percent from April, way more than people had been guessing. Some of that was gas, yes, of course but not all of it. So how oh how? in the face of rising prices and high interest rates and economic and geopolitical uncertainty How are consumers finding the capacity pon keeping on H'setplace Mitell Hartman The May retail rebound was more than a pleasant surprise for economist Kathy Bus Jansick at nationwide. is strong and broad based. Consumers continue to spend quite freely despite higher gasoline prices Now keep in mind, retail sales are not adjusted for inflation So they go up when people buy more and also when prices rise But in May, says Thomas Ryan at Capital Economics wasn't just the case of peoplee being forced to spend more on gasoline, there was also strength. Everywhere you look, motor vehicles are up Furniture sales. We've seen this pattern repeat over decades, says Ryan When the American consumer is faced with a hit to their real incomes, they tend to sort of absorb that hit lower their saving rate and maintain spending levels rather than cut back on discretionary spending That's exactly what happened in April. When gas shot up, the savings rate went down Kathy Bus Jansick expects it fell even more in May Consumers do feel miserable. They're not happy with higher energy prices They're still spending it up, backed by some strong economic tailwinds larger tax refunds this year strength in employment and also continued gains in the equity market, whichich especially helps upper income households who are key to this retail resurgence, says Kayla Broun at Morning Conssoult Each individual higher earning household kind of can punch above their weight, like they have more spending power added up into an aggregate of total retail sales. High earners account for a lot of that spending. It's that K shaped economy again. the wealthy, unworried about gas prices and inflation spending on high priced airfares and new cars while everyone else is operating way closer to the bone For lower income adults, the labor market is really essential to like whether they even can do discretionary spending As long as unemployment remains low, this strong retail run could last a while I'm Mitchell Hartman for Marketplace So as I said, setting up Mitchell's story, it wasn't all gas prices that drove that retail sales report. Spending was up in clothing in health and personal care products. Stores that sell and this is the official category Sporting goods, craft supplies, books and musical instruments. Hobbies. In other words, sales in that category? eleven point three percent in May from the same time a year ago Thisplac is Stephie Hghes when shopping today in Baltimore At Tctorman's fishing tackle, Travoris Hipkin stops in buy new line for his rod. A boat snaged all of my lines, so that's all I had Around his propeller? Yeah. Well salesperson Craig Brewer puts the line on, Hipkins shops for another rod, a longer one that'll let him fish in deeper waters And it's really nice and I kind of just wanted it. so. Kipkin says he spends at least a thousand dollars a month on fishing, including bait, gear, boat fuel. He's twenty four and has been fishing since he was six. It keeps me out of trouble. Like it's a way that I can get away from the internet and I love being outside and it's just honestly peaceful and relaxing The store's owner, Tony Tkerman, says revenue has been up this spring. He says some of that is inflation. They were hit by tariffs and had to pass those costs on. but also, people are buying more. I think that the hobby business was up because people wanted to escape They want to get away from the pressures of work or the pressures of the news. This tracks with the research of Katie Thomas, who studies consumer behavior at the consonsulting firm Carney. People are seeking community, belonging, and physical experiences. So they're spending on sports and books and hobbies that bring them together with other people And so I think, you know, maybe I can't afford to go to the World Cup But I can buy myself some new gear or buy my kids an outdoor activity, or an indoor one In Baltimore, just around the corner from Doctrents, is a brand new store called Local Stitch. It sells yarn and books. Nicholas Medina stops in because he wants to try an embroidery technique called sashiook. It's visible mending. so you can mend your clothes as they get worn in, but like in a very I guess I don't know stylish way Madina's interested in making his clothes last longer because he's spending more on other necessities like food and insurance It's kind of like wearing your hobbies on your sleeve. The store's owner, Natasha Abraham teaches classes here. I frequently notice this light goes off in people's heads. The first time they make something with their own hands And they're like, I can do this. And she says as they improve, they can make things that are better than what they can buy And Baltimore with Stephanie Hughes from Markplace There's a report out today from Harvard University's Joint Center for Housing Studies that's worth spending a couple of minutes on In twenty twenty one, the report says About two million new households were formed in this country. That's people moving out of a family home or some other kind of group housing setup In twenty twenty five, the report says Just over one million. new household Thispl Sana Field has more on why and what it's going to mean for this economy You can probably guess the major reasason so many more young people are living at home with their parents or sharing apartments with roommates these days Housing affordability is very, very major in that. Laorurie Goodman at the Urban Institute says in the years since the pandemic hit, housing costs have risen much faster than wages not only the cost of buying a home, but also rental costs have accelerated much faster than wages. And more recently, it's also gotten harder to find a job. Household growth follows job growth. And I think the trend in job growth over the last few years been slowing Daniel McHugh at Harvard's Joint Center for Housing Studies says if you can't find a job or you're not confident the job you have is solid, you're less likely to want to sign a lease or buy a house and move out on your own especially if the cost of everything else is rising too. Right now a lot of the forces are negative. They're working against housing demand. whether it's you know, rising unemployment, slowing job growth. inflation, the return of student loan debt payments. But Mcgh says it's not just young people living at home or with roommates who are keeping household growth down. In the last year or so, since President Trump returned to office, immigration has also slowed way down. And so we're expecting that drop in immigration to translate into a further drop in households. All of these factors add up to less demand for housing. And Rob Warnock an apartment list says less demand tends to lead to less new construction The housing market is kind of cyclical in that way, right? Like pply chaces demand, demand chaces supply. The problem, he says, is that if new home construction slows down too much, when things inevitably do turn around And when housing demand and household formation does come back positive. We run the risk of not having homes for that new formation to move into And that, Warnock says, could just push housing prices up even higher. I'm Samantha Fields for Marketplace Coming up It's not as if the world would suddenly come to an end. No, but it would look pretty different. First though, let's do the numbers Yeah, the wahas but barely down industrialals down five hundred six today. one percent finished at fifty one thousand four one hundred ninety two. then NASDAq subtracted three hundred fifty four points. That's about one and a third percent there Closed to twenty six thousand twenty one, the S and P five hundred down ninety one points, one and two tenths, one percent, seventy four and twenty. Retailers, you ask? Sure. Target gave up four and two tenths percent. Walmart down two and four tenth percent. Macy's dropped about four and two tenths percent as well. That's a lot of fours and two All Birds is no longer in the sneaker business and now it's not called All Birds anymore either The company changedes its name to smmartbird because it's now an AI company because that's the way it works these days. The company formerly known as Allbirds, accumulated thirty nine percent and a tenth percent today you're listening to Marketplay This is Marketplace. I'm Kai Rizdahal. It's a fair bet that most of you didn't think about this much today, but The US dollar got a little bit stronger against a basket of global currencies on the open markets today. You didn't think about it much unless you're going to a place like this D did you want to buy or sell the bezelos? Tell me again, it's not a global economy Foreign Currency Express, tucked into a hotel lobby in downtown Los Angeles, is one of those exchange counters you might visit if you're going overseas. I got this business back in nineteen ninety one. That's Michelle White, and on the wall behind the counter and the bulletproof glass, she's made art out of the tools of her trade, cash money as well as pictures of some of her celebrity customers. You recognize this guy? Oh, it's Lou Figno, the home. Of course. Of course. And obviously you Pretty much every transaction Michelle does here, even for the Hulk, involves U. S. dollars Does it matter for you whether the dollar is weak or strong Yes, we had to watch our market when dollar weak is strown. so we know accordly how to quote the rate and buy. You must read the news too. because all the geopolitics now and the war and the trade wars in the China and the Europe, mean We watch all of that because it does have a very strong influence on the market. If you don't cover yourself, you don't watch the market, you can lose your shirt Michelle literally wakes up thinking about exchange rates because that is her business. She trades currencies every single day Most of us don't part because the United States has what is sometimes called the exorbitant privilege of having the most important currency on the planet ingo Asia brring dollar down there because everybody in Asia, they want dollar Even you go down to Mexico, sometimes they one dollar down there. That international demand for dollars lets the U.S government borrow more cheaply It helps shelter the economy from global turbulence. and it gives the U. S. powerful geopolitical leverage About ninety percent of all international transactions. thinkink about that. ninety percent of all international deals have the dollar on one side Close to sixty percent of the reserves held by foreign central banks are in dollar denominated assets We are really right now supporting everybody, Asia, Europe, everybody If we collapsse, then what then what? is what we're going to tackle in the next couple of minutes. What would happen if the dollar wasn't doll To be clear, it still is, but The world's relationship to it is changing and it has been for decades. The dollar's share of foreign reserves has gone down And we're in a moment right now Conversations about the dollar's role in the global economy are picking up Some countries, Russia and China among them payment systems that avoid U.S. dollars. There are reports that ships have gotten through the strait of Hormz, by paying fees to the Iranians. in Chinese Renmin B. So imagine with me for just a second what a world without US dollar dominance might be like It doesn't look radically different from where we are today, but I think it'll be different in important ways The global economy looks like more chaotic It's not as if the world would suddenly come to an end Goodood. That was Maury Osfeld. He's a senior fellow at the Peterson Institute for International Economics Also Zoe Lu at the Council on Foreign Relations, and Jay Chambaugh, prorofessor of economics and International Affairs at George Washington University As an economist, we sometimes joke about the fact that people like me are a rarity, people who grew up in America who study exchange rates are unusual because we didn't have to grow up thinking about them We didn't grow up thinking about them But we're gonna today, in this hypothetical less dollar centric world To be clear, we're not talking about a dellarized world We're just, you no one wants to hold treasuries. no one wants to hold dollars. and you know, at that point, we're in a global financial crisis, and it's The international roll of the dollar is the least of our worries That's a really important point, the sudden loss of confidence in the US dollar, where demand dries up overnight That would be so catastrophically bad They trying to map it out as a hypothetical would be impossible So we're not going to try What we are going to do is imagine a scenario where the dollar just doesn't have the dominant international position. that it does right now More hopeesell You know, in any world we can think of in the medium term the erosion of the dollar status would be Gadual unless what the government does beeds things up Those include pressuring the Fed to lower interest rates running veryer, very large Federal budget deficits You know, the U. S. behaving in a way that is not cooperative and you predatory to other nations, which makes them want to insulate themselves from the levers of power that the dollar endows the U S with. I hear you saying, I hear what you're saying on the whole gradual thing, but but you of course know that saying and I forget the attribution thingsings happen very slowly and then all at once I mean, those three things you just rattled off are happening in real time right now Mhm Yeah, I mean One of the big factors, I would argue the biggest factor that supports the dollar are what economists call network externalities. You know, I use the dollar because everyone else uses the dollar An analogy that's useful here is thinking of the dollar kindind of like the English language. You know, I don't need to speak Sahili and people who speak Sahili doesn't need to speak Japanese or Chinese. We can all speak English in order to communicate. In other words If you want to exchange you know Argentine pesos for Turkish Lira probably turn the pesos into dollars and the dollars into Lira Right now Argentine banks don't have to hold Turkish lira to do business with Turkish companies. They all just trade in dollars which makes things more efficient for everybody You take dollars out of that equation There's an efficiency loss there on an ongoing basis But it's actually a cost on the entire world because the entire world benefits having the dollar as a global currency I'm going to say that again The entire world benefits from having the dollar as the global currency. The first big difference of our hypothetical less dollarized world is a less efficient system with more currency risk for businesses and the expense of more currency transactions you know, effectively like having a small a small tax veryery small tax on all transactions The second big difference America's borrowing cost will go up The federal government's debt held by the public, that's investors and other countries is more than thirty one trillion dollars, which is, in turn, more than the entire American economy is worth. We spent a trillion dollars on interest last year which makes the higher borrowing costs that would come in our less dollar dominated world Well, it would be real money. And the paralysis that Congress goes through every single year trying to pass a budget Wellll forget that Every physcical fight becomes shopper For you and me, mortgages and car loans and student debt, all of that would get more expensive too So American consumers have a tougher time. American businesses have a tougher time. Congress has a tougher time Who wins out of this? Who gains globally out of out of the dollar out of dedllarization I'd just say there is no true absolute winner, you dedllarize the world. although The US government absolutely loses its power to sanction foreign entities. That's the third big difference that we're going to talk about. The way the global financial system works now, It's just hard to move money without touching the US dollar or a big US bank And that means that When the United States chooses to, it has the ability to impose sanctions that cut people off from global finance J Shambaugh again right there, George Washington University Those sanctions biggest economic weapon Washington has. So terrorist groups, countries that are trying to acquire a nuclear weapon when they've said they wouldn't, or know Russia invades Ukraine If we lose the role of the dollar, we lose that sanctions ability The Dollar is what it is and we get what we get. lower rates, significant sanctions power becausecause of the perceived stability of the U. S. economy and its government, a history of paying our debts on time and strong financial regulation. an independent central bank What's that thing people say about great power and it coming with great responsibility People see us as irresponsible with our power It makes it just much more likely that they will find ways to move money that don't touch the dollar The dollar again, makes the global economy more efficient for everybody It doesn't mean there aren't ways around it It's expensive to do those things But if the U.S. gives countries a reason to do it You could see us walking towards that less dollarized world And that kind of tipping point could occur rather quickly. I guess the core message is that the only enemy to the US dollar is not a rivaling currency. It's not the Yini, it's not the euro, it's not the Japanese yen. It's our own fiscal responsibility itself or fiscal irresponsibility, right Rate your responsibility from that point of view This hypothetical that we've been talking about is still a hypothetical The U.S dollar is so essential to the global economy that it's not going to be replaced soon. But the institutions of this economy of which the dollar is w depend on the institutions of this democracy. This final note on the way out today, a word on nomenclature or maybe it's on horifics. I don't know. You might have noticed that earlier in the program I referred to the new guy at the Fed as chairman Wharf. The convention for the past two incumbents, Yellen and Powell has been Cheer. But Warsh's biography on the Fed's website says, Chairman. so chairman, here it shall be Our media production team includes Brian Allison, John Folki, Montana Jhn, Drew Jhsted, Gary O Keee from Trooplland Thorp. Alex Simpson is the manager of media production. and I'm Kai Risdal. We will see you tomorr everybody This is APM