Rachel Siegel on the Fed, Commercial Real Estate, and the Economics of the 2024 Election

As inflation and other economic issues top the list of concerns heading into next year’s election, the commercial real estate market remains a major threat to financial and broader macro stability.

Rachel Siegel is a reporter for the Washington Post, where she covers the Federal Reserve and also reports on the domestic economy more broadly. Rachel joins Macro Musings to talk about the current Fed beat as well as her work on other economic issues, including how the Fed deals with physical cash, the precarious state of the commercial real estate market, the potential issues facing voters heading into the 2024 election, and a lot more.

Read the full episode transcript:

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

Beckworth: Rachel, welcome to the show.

Siegel: Hi, David. Thank you so much for having me. It's great to talk again.

Beckworth: It's great to have you on. I have, of course, followed your work at The Washington Post. You cover the Fed. I get to see your face every few months on the FOMC press conference. You're sitting there ready to ask Chair Powell questions, part of that exciting time. We're going to talk about your work on the Fed as well as your work on the domestic economy, as I mentioned in the introduction. Before we do that, Rachel, tell us about your journey into economics and journalism.

Siegel: My entry into journalism started well before I became an economics reporter. I started my middle school newspaper way back in the day, which admittedly only lasted for one issue. I did my high school paper. I did the college paper. I had various internships, but it was only a couple of years into my time at The [Washington] Post that I became a breaking news reporter on our financial staff. Then in the summer of 2020, when we all know what was going on in the world and in the economy, I started covering the Fed.

Beckworth: What is it like to be on the Fed beat? How do you do your job? I'm curious. There's a lot of information to collect, to analyze, to think about. You've got to make it accessible to the public. How do you do your job?

Siegel: Sure. It was something I've thought a lot about in large part because I don't come to this job with an economics background. I'm often literally teaching myself in real-time, or I'm at least trying to think about the story that I would want to tell to someone who also isn't steeped in wonky monetary policy or might be coming to these stories fresh. A lot of that has to do with trying to tell the stories of people, trying to break down models and theories that never quite clicked for me when I was in economics classes in college and, in a way, that is almost ironically painful. The last couple of years has made it a bit easier to draw that line. 2020 was… you didn't have to look very far out your window to understand how the economy was shaping everyone's life. You don't have to go very far to see how inflation shapes everyone's life or shapes how they think about the economy. I think those have been some of the driving forces that I've tried to keep in mind with my reporting.

Beckworth: Do you make contact with Fed officials, academics, other policymakers, when you write your stories up? Do you read other sources? How do you go about doing that?

Siegel: Sure. The best part of being a reporter, and especially being a reporter covering the economy, is that I just get to call people and ask them questions and often pretty basic, stupid questions. You've received many of those phone calls from me. It starts with just trying to understand a concept that either I don't understand, or I'm looking for a way to explain it to someone. In the Fed beat, it can be unique to other jobs. Fed officials stick to a very tight script. They are not hugely accessible. Maybe you'll get an off the record meeting with them, but it stays off the record.

Siegel: You're beholden to very scripted speeches, or limited appearances. I think that that makes Fed reporters perhaps more reliant on economists, on former Fed officials, to give some insight into what is in the minds of Fed folk. Then we have to spend a lot of time going out and really trying to understand what those things look like in the economy, talking to business owners, talking to people struggling with their rent, or trying to buy a house. Then it becomes our job to translate or apply those anecdotes in a way that will help tell a broader story.

Beckworth: Now, your coverage of the Fed focuses more on the Board of Governors than the regional banks. Is that right?

Siegel: That's right. That's in part because of our [Washington] Post audience. Although, I have found that the regional banks are just completely invaluable in helping tease out those stories of what's happening across the country because it's really the regional bank presidents who spend so much more of their time traveling around their districts in conversation with workers, with business owners. It's really just higher up on the list of things that they spend their time on, and they actually have much more liberty to tell you about those conversations. They really are interested in saying, "Well, I was just in Sioux City," or, "I was just in Austin, Texas, and this is what I learned." In that way, the regional bank presidents can be real troves of data, and they really help illuminate a lot of the theories and models that some of the regional banks or the Board of Governors will spend their time talking about.

Beckworth: In addition to those anecdotes from the regional bank presidents, do you find the anecdotes in the Beige Book useful?

Siegel: I do. They're useful. They're fun to read. I think, to the extent that I just would so much rather read a trove of anecdotes than a speech about the R-star debate, the Beige Book really comes in handy there. It's a really great launch point for story ideas. You can read a line, obviously the Taylor Swift line in the Philadelphia Beige Book got quite a bit of attention recently. And so, it can be helpful either to tease out story ideas, or I can be working on a story and say, "I wonder if that got any attention in the Beige Book," and you can go in the reverse direction.

Beckworth: Okay, so the Beige Book is useful beyond the anecdotes. It actually motivates stories and interesting angles. I want to bring up an article that you wrote, I believe, a few years back that received a lot of attention. It was about… two blocks from the Federal Reserve, there is a growing encampment of homeless people. There's tents set up, and you tell this story about how Chair Powell has to drive by it and looks at these tents. How did you come up with that story? That's kind of a great case study in reporting on the Fed beat.

A Case Study in Reporting on the Fed

Siegel: Oh, thank you. It's been my favorite story by far, although it was obviously about something really devastating. That was actually an interesting example of a time that Chair Powell was actually talking with quite a bit of specificity and detail in a way that he just doesn't, and I think that's why the story stood out for me. Back at that time, this was early 2021, I think people had maybe just started getting vaccines. We were absolutely not back in the office. The Fed press conferences were not back in person, just to bring us back to that time, and Chair Powell was on a panel, and the last question of the panel was, "Well, what keeps you up at night?"

Siegel: The economic backdrop at the time was still very high unemployment, inflation had really not taken off yet as the dominant economic issue. He said that the times that he was driving to work, he would look out the window and see this encampment of people who didn't have homes. He noticed that over the course of the pandemic, at that point, the encampment had just exploded, that there were always a patchwork of tents in this part of downtown that is mostly government buildings. It's very safe. There are reasons that people were drawn to the area, but that when the job market just cratered, that that area just completely exploded and was becoming very crowded, and the thing that kept him up at night was seeing that happen despite everything the Fed was doing to try and stop the bleeding, to keep the economy from just hemorrhaging even more. He brought that up the first time and I thought, "Huh." I wasn't aware of that story. It was a detail that I hadn't heard before. Then he said it again, and then he said it again. It was the span of a week where he brought this up in three different engagements.

Siegel: At that point, I was really curious to learn more about what was going on at the encampment, what were the reasons that so many people had come there? I think one of the most surprising, or moving things, that I learned in spending a couple of days there talking to the residents was that they had no idea that Chair Powell had noticed them, drove past them every day, and was using their stories on these huge platforms to talk about what a crisis the economy was in. By the same token, Chair Powell was driving by. He didn't know that one of the women who was living there had been laid off from her job at Popeye's, and another guy wasn't making any money anymore in his street performances because there was no one walking around downtown. And so, tried to use the story a bit as a bridge between the two at a moment when the economy was just still in a lot of pain.

Beckworth: It's a fascinating story. You go in, as you mentioned, you talk to people, and you talk to a family, at least a man and a woman, last name Lotus, if I recall correctly, and maybe they're both trying to finish high school. She's the one that worked at Popeye's, that got laid off. Do you have any follow-up on them or the encampment? Has the encampment gotten smaller? Has the economy recovered?

Siegel: I'm so glad that you asked. I did stay in touch—her name was Malo—with her a bit over Facebook Messenger, on and off. Again, it was a bit hard to stay in touch. They eventually ended up moving to a different encampment and, unfortunately, we really lost touch after that. There was another man in the piece named Mario Key who-- he and I had lunch a couple of months after the story published, or maybe it was closer to a year after the story published, he told me at that point that everyone in the piece, and the majority of people who had been living at the encampment at the time, were able to get into subsidized housing, and that there had been a real exodus from the encampment into more temporary housing, but a literal roof over their heads. That was really good news.

Siegel: I worry that that has maybe reversed a bit. I lost touch with Mario specifically, but it seems just when I see the encampment when I go by the Fed, that period where the encampment had shrunk, I think unfortunately is over. It really seems to have swelled again, and I’ve been curious to understand why the job market isn't necessarily the prevailing economic problem anymore. I'm curious if inflation or rent costs are what are keeping people there, but it certainly, to me, it remains as this example of what can we learn about the economy based on what's happening right outside the Fed.

Beckworth: Well, housing continues to be an important issue for the US economy. Structurally, I think it's probably one of the most important issues. People can't afford to move into housing. We don't build enough. There's been a lot of reform efforts, still ongoing, to make it easier to build, increase supply, lower price, make it more accessible for people like those in that encampment. I also think back to the story before the pandemic. We kept growing, labor force continued to grow, and we saw people, for example, move off of disability rolls. People who normally, you might say, aren't going to be in the labor force, they found a way back in as the economy continued to plod ahead.

Beckworth: I think the same thing is true now. We've had this really remarkable recovery. Of course, now we're talking about a softening taking place. But, a good economy is great for people to come back into the labor force. It's the best cure for some of these problems. Now, some of these problems-- other issues may be important as well, but I think one thing that I do worry about coming off this high inflation experience… and I'm someone, to be clear, it was critical, I think the Fed fell behind the curve, but I also don't want to throw the baby out with the bath water.

Beckworth: I think the fact that we had a quick recovery, the labor market got back pretty quickly, if anything, it's been overheated, I think that's a positive. It's a win for society. I don't want us to lose sight of the fact that we did recover so quickly. Maybe in the future we want to be a little more guarded in how we do it, a little better estimation of how we do it, but I think stories like this one of the encampment and then the fact that it went down, are a testament to doing good macroeconomic policy.

Siegel: Sure. I think that this gets to what will be the years if not decades-long reevaluation of what the Fed did, what fiscal policy did in response to the pandemic, and in a lot of ways how those decisions were motivated by the scars and fear left behind after the Great Recession of the sluggish jobs recovery, the view from fiscal policymakers that not enough was done to juice the economy back into really getting its momentum going. I think in the short term it's easy to criticize and say, "Oh, that playbook was for a different war. You were addressing the wrong problems. Look at how inflation shot up." If inflation ends up coming down against a very long timeline, is perhaps more transitory than it felt in the moment, I do wonder if the analysis or the critiques of that fight will look different with a little bit more time than in this immediate moment when inflation still is too high.

Beckworth: Yes. I would ask the audience, what is the counterfactual we would've had, had we followed the playbook in 2008, 2010, and it may have been a very different unforgiving economy coming out of something like that. It's possible it could have been far worse, and if we're going to err on one side, I'd err on what we went through. Although, again, to be clear, I think there's room for improvement. I think we can thread that needle going forward in a way that we can have the quick recovery without as much excess overheating.

Beckworth: Alright, well let's go back to you again and your work on the Fed. You've had some recent pieces on the challenge the strong economy is making for the Fed's job. We're talking about current Fed issues here. In fact, we got out of a meeting, the Fed didn't do anything, it's on pause for now. The Fed is trying to figure out where we are in this cycle. One of the key questions they're wrestling with is R-star; does this measure of a natural rate or equilibrium rate that keeps the economy on a steady path, has it gone up? Has it gone down? What is your sense of where we are and what the Fed is thinking about that?

The Current Path of R-Star and the Economy

Siegel: Before I directly answer your question, it's so remarkable to me that-- I've only been a Fed reporter since the summer of 2020, and it feels like there have been eight different iterations of what that means. For a central bank that usually moves a bit more steadily, it's just incredible that now we're in a moment of saying the economy is too hot because I just started this beat in such a different moment for what policymakers were having to figure out and respond to in real-time. It does seem that officials are still, at least to the extent they talk about this publicly, equally as stumped on this question.

Siegel: I think it goes to this real inability time and again, to both read the economy in real-time and then also figure out what it tells you about what you'll be doing a year from now, two years from now, three years from now, whether it will completely change economic thinking about where R-star is, and we've just been shown that. In some ways, I think Fed officials have become very humble about not assuming that they know the answer because whether they were trying to forecast how many rate hikes they were going to make, or where the federal funds rate was going to be at the end of 2022, 2023, they’ve just been wrong. They've had to revise those expectations over and over again, and I wonder if that's bleeding into the R-star debate where they don't want to be on record having to go back on their word then too, not because they-- I think they're obviously thinking about it extremely intentionally, but it has proven so difficult to answer too far out onto the horizon. Maybe that's why they leave it to economists and ex-Fed officials to answer that for them.

Beckworth: Right, and, of course, there's different views on that. You have the New York Fed's famous R-star estimate. That R-star is very different than the one from the Richmond Fed. I believe the one with the New York Fed is much lower than the one at the Richmond Fed. There's also market estimates, so really, it's all over the map. It's highly uncertain. I like what Chair Powell said at Jackson Hole this year. He talked about navigating by the stars, which actually referenced back to a previous Jackson Hole speech, but doing so when the skies are cloudy, overcast is maybe is the term he used, but it's hard to navigate by the stars, period, and then when it's overcast, it’s even more challenging. I think you described well their thoughts on that. Let me go to a different area that's a topical issue, I think becoming more so, and that is the state of fiscal policy. We just ran a $1.7 trillion deficit. If you add in the student debt forgiveness, close to $2 trillion, which is an increase from last year. I believe last year was $1 trillion, so quite a big increase for a peacetime, so to speak, period.

Beckworth: There's concerns going forward, CBO projections that the debt-to-GDP is on an unsustainable path, something has to give. Politically, we don't see any way forward on this. Republicans don't want to make meaningful changes and Democrats as well. It's a politically sensitive issue, understandably. And so, it appears it could create some problems down the road. There's always the fear of fiscal dominance where the Fed has to step in and keep the Treasury solvent if things get bad enough. And recently, Chair Powell was asked about this issue at the Economics Club in New York on October 19th, and he acknowledged that there's a problem. He even said that the economy's on an unsustainable path, but what he also said is that we don't pay attention to that. What we pay attention to are asset prices, inflation, interest rates. He acknowledged it was a problem, on one hand. On the other hand, he said we're not going to have decisions based on that. I just found that tension interesting. I was wondering if you've had any thoughts about it or heard other people talk about that issue as well.

The State of Fiscal Policy and Fiscal Dominance

Siegel: I think the tension is extremely interesting too. It's almost an impressively consistent line from the Powell playbook where he-- obviously, things that are happening in the economy bear very directly on what the Fed is doing, whether it's the deficit or the threat of a shutdown or strikes or whatever is going on on the Hill, trade wars. Powell has never broken the line, I guess, with the exception of some encouragement for more stimulus efforts earlier in the pandemic. He says, “we take the economy as it comes,” or he says, “that's really not for us to wade into. We evaluate the economy as it comes to us, and we make our own decision.”

Siegel: That has really been his consistent message, at least in terms of how it affects monetary policy. Of course, though, we know that the Fed does not operate in a vacuum, and he has been an incredibly effective liaison from the Fed to other parts of Washington. He's often on the Hill. He has really good relationships with Democrats and Republicans. He obviously had a very different relationship with President Trump, but it seems that under President Biden, things are more traditional and normal between the White House and the Fed chair. It's always been remarkable to me that there is obviously this extreme linkage between things like the deficit and the way the rest of the economy performs now or moving forward, but Powell is just very clear, at least in the public-facing way, that the Fed has its lane, it doesn't tell others what to do, and it expects the same to be reversed.

Beckworth: I understand that being the Fed chairman, you've got to claim your territory too. Fiscal dominance implies the Fed actually loses control of managing inflation, and its primary goal becomes preventing the US government from defaulting on the debt, so it has to start buying up debt or keeping rates low in order for Treasury to stay solvent. I understand you don't want to say that or you'll be forced in that corner, but it's their congressional mandate to have price stability, and they want to claim that and say, "We still are in control of it, and fiscal dominance, the Treasury challenges, are not something yet that has tied our hands."

Beckworth: However, it's interesting too that Jerome Powell was known for his efforts with the Obama administration trying to address some of the debt-to-GDP ratios, I believe. That put him on the map, then in turn put him on the Board as a governor, and then eventually as chair. You highlighted something that, I think, is really interesting is that he was very vocal about using fiscal policy during the pandemic. Greg Ip recently had an article on this in the Wall Street Journal where he thought it was a little bit ironic that he was so vocal that we need to do more fiscal policy, and now he's a little bit more reticent about telling Congress what to do in terms of reigning in fiscal policy. I understand he's in a sensitive role, sensitive place as well. He may not have the flexibility to do everything he wants to do in that position.

Siegel: If I could just add one thing, I think that's why the stimulus example stood out so much, why it stood out is such a departure from his usual messaging.

Beckworth: Rachel, let's move on to some other work you've done on the Fed. You have lots of great articles on the Federal Reserve and policy, and we encourage listeners to go check out the articles we've talked about, as well as others. But you've done some interesting work on how the Federal Reserve deals with actual physical money, cash. We tend to forget about that role. We think about interest rates, we think about financial stability, but the Fed actually has to manage cash. Walk us through that interesting story where you actually go to a warehouse where they collect cash and process it.

How the Fed Deals with Physical Cash

Siegel: Yes, it's a fun Fed story. One of the things that has been a basic thing to learn on this beat, but also a fun one, is that the Fed is this very wonky, insular, black hole institution, but it's also all around us. It affects so much of the way we go about our lives. When they're doing their job right, we wouldn't necessarily notice it. This just came about almost as a sequel to one of my first stories on the Fed beat when there was a coin shortage. You might remember that.

Beckworth: Oh, yes.

Siegel: Now there's no longer a coin shortage. It did get me just asking the very general question of, what happens when your money is no longer in circulation? I may have started with that question without totally knowing if the answer rested with the Fed, but I did some asking around and it turns out that the regional banks have enormous influence over making sure that the currency that we use, and I'm talking about paper notes, are fit for use, that all of the money swirling around is actually usable. It's not torn, it's not damaged, it's not marked up with a Sharpie.

Siegel: And so, I went to this very secure, locked-down money inspection facility up in Baltimore. It's managed by the Richmond Fed system. Along with the photographer and a videographer, we got to see how the process works. The basic explanation is that banks will routinely want their money to get inspected. They pull up in these armored carriers and stick wads of cash through these very secure windows and underground garages and the money is inspected. There are human elements to it. There are machines that use these lightning-fast cameras to see if money has any noticeable blemishes.

Siegel: Then ultimately, if something gets flagged and there's something on a dollar bill that doesn't pass the test, the bill is basically shredded into confetti, was the best thing I could compare it to, and it all ends up in this huge dumpster outside the facility. Is this as hard-hitting as trying to understand whether the Fed is going to raise interest rates or not? No, but it was fun and it taught me something about how the economy works, and hopefully it did the same for our readers.

Beckworth: Well, it’s an important role, maintaining the currency. I know in years past, when people still used a lot more checks, when we weren't as digital as we are today, that they played an important role as well, the original banks, in processing checks, but they still have to deal with money. I'm wondering if when you talked to anybody there, do they have any thoughts or concerns about the vast amount of currency that's overseas?

Siegel: Oh, interesting. That didn't come up, but now I'm curious to find the answer.

Beckworth: I think it's interesting because I've seen quotes that anywhere from two-thirds or more of our currency is overseas, for a good reason. People don't trust their domestic currency, so they use it. Zimbabwe is a great example. When they had hyperinflation in 2008, they were using dollars. The government tried to crack down on it, and eventually, the government just gave up and said, "Okay, you can use dollars." I don't know where dollars came out, but people were using it regularly. I'm just wondering when they think about the maintenance of paper currency, I guess that currency would just stay overseas and eventually would wear out.

Siegel: You just gave me part three to the story, so I'll report back.

Beckworth: We look forward to that. We look forward to it. It's interesting also how it actually navigates out of the country. I'm sure there's lots of stores you could tell, tourists, drug dealers, all of the above.

Siegel: I just wonder if the New York Fed is in charge of this in some way, but I'll find out.

Beckworth: The other thing is, of course, this is important, and that is the security part of this. There's many movies, TV shows, about robbing the Federal Reserve Bank. I believe the Amazon Prime, Jack Reacher, episode dealt with these people who were taking the one-dollar bill, they were washing the ink off of it and turning it into a $100 bill. That's a far-fetched story, but stuff like that, or just even people working at those warehouses. I imagine they have to go through a lot of security checks themselves. It'd be tempting for someone working there to pull out a bill and take it home.

Siegel: I mean, even when we were there, we wore these red smocks. If you were going into the inspection facility, you had to have someone standing next to you the whole time watching where your hands were and your every move, and I totally understand. These are centers that literally just have tons and tons of cash either cycling through or in storage. And again, this is a part of what keeps the economy going, and it's got to be done right.

Beckworth: Yes, and I have a collection of money that was chopped up. I believe I got it from the Chicago Fed. They turned it into a small cube or brick, I forget, but you could take it home.

Siegel: One of the souvenirs, yep.

Beckworth: Yes. They also gave out a bag of shredded dollars. For this one, there's a part of you, "Oh, can I actually glue these back together into a bill?"

Siegel: Piece it together, yes, It's amazing. They're either those trinkets or a lot of that money is recycled or it's composted. The Fed is also super creative about what it does with these dumpsters full of shredded cash. It's all part of the process.

Beckworth: Yes. So many fascinating things the Fed does that we don't think about. We look forward to your third installment now on the international part of currency. Okay Rachel, let's switch to the domestic economy. You cover that as well. I want to touch on something that I know you're gearing up to cover, and you've already been thinking about it, and you've written on it to some extent, and that is the 2024 election, and how will the economy, if at all, affect that? One thing that I think about as I ask this question is a chart that I often see on X, formerly known as Twitter. That's hard to say. I want to say Twitter.

Beckworth: But it's a chart that shows two series on top of each other. One of them is consumer confidence, and the other one is consumer spending. Historically they tend to track each other. People are optimistic, they'll spend more, if they're pessimistic, spend less. Lately, there's been this divergence. People are tending to have more pessimistic views, but consumer spending is way up. The disconnect is jarring when you look at that chart. Are we suffering from mass delusion, or is something else going on? What are your thoughts about this upcoming year and the election and what the economy means for it?

The Impact of the Economy on the 2024 Election

Siegel: I think it is endlessly fascinating and really such a puzzle. I've been looking at the same charts, I think, for a year now. I've been talking to people about this disconnect between this sense that the economy is very bad, whether that's because, for a time, people thought a recession was coming, or they just think that, overall, the economy is on the wrong track and that way of thinking just isn't reflected in actual behavior. It's not translated into people spending less, saving more, reconsidering their finances. There's just this disconnect that no one has been able to explain.

Siegel: I totally am listening to and appreciate the answers that economists try to give or other experts try to give. I think it really has to be a question that has to be part of our campaign coverage going into next year. I think we need to be asking voters, who will be thinking about the economy very seriously in terms of where they want to cast their vote… I think we're starting to see polling that suggests that, unlike the midterms, the economy really will be a dominant issue for voters, a real animating issue, and I think we really need a better sense of what explains that disconnect that you were talking about.

Beckworth: This polling that shows the economy will be an important factor in the upcoming election in 2024, do you think when people say that it is going to be a factor, are they reporting on this perception they have versus the reality? Is that the issue?

Siegel: I think that's the question. I don't know the answer, and I think part of the reason that I really want to get out on the trail next year and try to find the answer is because it's such a puzzle to me. One of the answers I've come across so far is that maybe people have a broad sense that the macro economy is doing better, or they understand we're not in a recession, they're told the economy is doing well but that they don't feel that kind of progress reflected in their own life. They don't feel this closer, more immediate, more personal bump. I think there's some element of it that the last couple of years have been unbelievably destabilizing, disorienting, even if we're only talking about the economy.

Siegel: Inflation is a super destabilizing force, that it's worrisome and doesn't leave you feeling great if, for a year or two, you're told that a recession is around the corner, your rent is really high. It doesn't really mean all that much to you that the inflation rate has come down a lot because your eggs are more expensive, all these things that maybe they don't square exactly with headline macroeconomic statistics, but have really left people with a sense that things are just not the way they should be.

Beckworth: That's a great point about inflation versus the price of goods and services. I know economists have not done themselves any favor by going on Twitter or X and saying, "Hey, inflation's coming down. What's the big deal?" When the reality is that the price level itself is permanently higher and maybe it's just going to take time for us, as the public, to adjust to that. Maybe that's part of the story is to acknowledge things are just more expensive, even if the rate of increase of the prices of them has slowed down.

Beckworth: The other observation I wonder about is also political party, and I looked at it before we got online here because you can break down that consumer sentiment by party. It's true, like right now, the Democrat consumer sentiment is higher than the Republican, but they both have trended down. They've dipped. There is a level difference, and of course, when Trump was president, the Republicans were above the Democrats. It's amazing how sentiment can flip during a presidential election. Something else will probably happen next year. That'll be interesting to watch. Even, I guess, overall, even some Democrats have their concerns, which is surprising.

Siegel: It is surprising, and I think this has been a real unsolved issue, at least so far, for the Biden campaign because it is not proving to be, and I don't think will prove to be, a good campaign message to say, "No, let me explain to you actually why the economy is better than you think it is." Or, "Actually, my policies and Bidenomics made it so that the economy was great by all these measures. I just need you to understand why that is even if you're not feeling it in your daily life.” That is not going to be a winning campaign message, and if anything, [it is] one that would be very easy for Republicans to go against. That's a question to be solved by political strategists, but I think it's a big one, especially if Biden is going to be pointing to his economic policies and platforms as a reason that voters should vote for him again.

Beckworth: Yes, I think the Biden administration can make a great case that the labor market is in phenomenal condition right now. Labor participation, unemployment, any measure you look at, it looks really great and it is really great, but there is this perception that things aren't great, and again, maybe it's the inflation versus price level. Maybe people are concerned about the debt level. It's interesting to try to figure out why is [there] this disconnect between what we see in the data and what people feel and maybe it's just, again, a legacy you mentioned of the uncertainty from the pandemic and things need to settle down, get on a more stable path, more certain path.

Siegel: I do think there's something to be said for a need for an extended period of stability, even if the job market in this moment is strong, the inflation rate is coming down. I think that the cumulative toll of the last couple of years, and also this sense that things were just changing so, so, so fast that every time you went to the grocery store, your bill was going to be more expensive, that that sort of sense can really only be countered by an extended period where that is not happening to you, where you feel like you can go to the grocery store for six months straight and your bill will stay the same. That puts a bit of a ticking clock, and I think election day is basically exactly a year from when we're recording this, and if it stayed the case that everything just stayed stable in the meantime, maybe that would change voter sentiment on the economy between now and next November, but I don't think there has been a long enough runway for people to feel like that is happening yet.

Beckworth: Some things you simply can't control as president; wars breaking out in the Middle East, Ukraine, Russia. That's just beyond your control and that can affect inflation and then undermine this very process that you've outlined that's needed, maybe, to bring calm and reassurance to people. Okay, so we will keep an eye on that, what's going to happen in 2024, and how the economy's going to play into it, and we'll look forward to your reporting on that. Now, Rachel, I want to get to another really fun and fascinating area that you have reported on, and that's on commercial real estate, and I want to read an excerpt from an article. This article is titled, *How the ‘Urban Doom Loop’ Could Pose the Next Economic Threat.*

Beckworth: I'm going to read just the first few sentences from this piece, and I'll turn it over to you. You say, “In Indianapolis, the technology giant Salesforce is paring back a quarter of its office space in the tallest building in Indiana where it has been a key tenant for the past six years. In Atlanta, the private investment giant Starwood Capital defaulted on a $212 million mortgage on a 29-story office tower. And in Baltimore, a landmark building sold for $24 million last month, roughly $42 million less than it fetched in 2015. All across the country, downtown office spaces and shopping centers are at risk of becoming ground zero for a new economic hazard, the ‘Urban Doom Loop.’” What is this Urban Doom Loop?

Commercial Real Estate: The Urban Doom Loop

Siegel: No, it's not exactly cheery news. It's got a pretty heavy name too, but I didn't pick the name. The Urban Doom Loop is this idea that all of the empty office space, quiet downtowns that surround many of us, could actually trigger a more hazardous domino effect for city finances, city coffers, and the thinking goes somewhat like this: say you have an empty building, and the tenant, its employees, just aren't coming into the office anymore. So that company says, “I don't really need this lease anymore or maybe I need half of the size that I used to have.” Alright, so they pull out of their lease. Well, that means that the property owner isn't getting that rent, isn't getting that income.

Siegel: That might make it hard for the building owner to make good on its own debt payments, to be able to go to its bank and say, actually, I don't have these tenants anymore. I don't really have the ability to make good on my own payments. This can have, in theory-- It can seep. It can mean that suddenly that block downtown isn't as attractive because a lot of these buildings are empty and a lot of the coffee shops and lunch places around there have all closed. If this domino effect keeps going, it can have consequences in two ways. It can mean real consequences for the banks that need to make sure that it has payments coming through, and it can also mean that there is this additional consequence for the liveliness of a downtown, for a city's ability to collect property taxes, wage taxes, all these things that are part of a normal vibrant economy that revolve around business activity, often downtown. The idea is just this seeping effect from this new normal that many cities are experiencing.

Beckworth: That's the worst-case scenario you're describing there where the banks get hit hard. In fact, my colleague Tom Hoenig, former Kansas City Fed President, he also was vice chair of the FDIC, he's now at the Mercatus Center as well, he thinks that is the other shoe to drop, commercial real estate. It's just taking its time, but it will come, so if that happens, then we have financial instability, but the other big thing you just mentioned is it's going to really hit hard the city revenues, the tax base. Then, you can imagine this cycle just feeding on itself.

Beckworth: The cities have a hard time, you lose dynamism downtown. So, people who, maybe in the past, would've moved downtown, new young graduates, they're not going to move downtown. There's no restaurant, bar scene, so they're going to move somewhere else. This has potential big effects, and you mentioned a professor from Columbia University, and I'm going to let you say his name because I probably will mispronounce it, but tell us about his work.

Siegel: Stijn Van Nieuwerburgh has done a lot of work focusing on the potential hazards of this Doom Loop. He would be the first to make very clear that it's not inevitable, that there are many tiers of what this could look like. One of the things that was really interesting to me about his research and the conversations that we had is that this isn't just a New York/San Francisco problem. There's been a lot of attention that has gone to midtown in New York and all these tech companies that are struggling in San Francisco. His point, though, is really that midsize cities could be hit hardest with a big, bold, italic word for could. The thinking is that there's just less to offset that kind of blow in a smaller city, in a Memphis or a Minneapolis or an Omaha, where people don't necessarily also live downtown. They're not, of their own volition, going downtown to eat out on a Saturday night or to go to a show on a weekend, meaning that just midsize cities have even less of an ability to offset this kind of blow, distinct from places like New York and San Francisco, that had many other ways of trying to offset this kind of hit.

Beckworth: This all goes back to the pandemic and this big change toward remote working. I'm looking at an article in Fortune and this article's title is, *Remote Work Guru Nick Bloom Thinks We'll Never Go Back to the Office Full-time, but Maintaining Discipline is Important.* Nick Bloom is from Stanford. He's done a lot of work on working from home, working at the office, and in this piece, he argues that the work-from-home phenomenon has been like a Nike swoosh symbol where it was up high, it's come back down, but it's bouncing back up. So he thinks, “look, we need to come to terms with the fact that this is a permanent shift, it may not be as high as it was during the pandemic, but it's going to occur,” and then this particular article's like, “we need to figure out how to maintain discipline, working from home,” all those separate issues. But, for what we're talking about here, it has a huge bearing on commercial real estate.

Siegel: Yes, and there's a piece that maybe we'll talk about that I just reported on in Austin that stood out to me for so many reasons, because Austin is really betting on the opposite happening. But I’m currently sitting in my house, as I do most Mondays, and The Washington Post has definitely not managed to convince people to come back three days a week, and I know that we're not unique in that fight either.

Beckworth: Let's go back to your point about the mid-sized cities. You have a table in this article, and you give some examples of delinquencies. The highest is, on the chart here, you have Charlotte, 30% delinquency, Hartford, Connecticut, 29%, Milwaukee, 18%, Atlanta, 18%, Chicago, 18%, Buffalo, 15%, DC, 15%, Denver, 14%. They're all up, so some really high delinquency rates, higher than normal, which again, it could get worse, it could feed into that. You also give some really concrete illustrations of two other cities, Minneapolis and Washington, DC. Let's go to Washington, DC, because you just touched on that. Washington, DC, has all of these buildings, I don't know if they're owned or leased by the federal government, and a lot of federal workers have not come back full-time, so what's happening there?

Commercial Real Estate Delinquency: DC and Minneapolis

Siegel: Yes, and that's a good example of how individualized cities can be with how they navigate it, but DC has really struggled with exactly what you just described, this push and pull between federal workers who have not all come back to work, and so much of the city is just historically built on offices being full with federal workers in huge swaths of the city, and those are not necessarily buildings that others want to scoop up. They're huge buildings that go really deep and I imagine they're not the open-plan, hip tech offices of the age, but one of the things that I should just make sure to mention is that there's a lot that's yet to be determined with how cities confront this problem.

Siegel: That can depend on things like the unique circumstances in DC with all of these government buildings. It can also really come down to the wonky tax structures that different city budgets have. If they rely really heavily on property taxes or wage taxes, that might cause them to tackle the problem in a way that's distinct from a city that just has a different tax structure set up. There are some cities that are still drawing on stimulus funds that are helping cushion any blow, and maybe when they run out of those funds, they'll have to reevaluate things. There's a lot in here, and it definitely doesn't suggest that a wave is going to hit all mid-size cities at the same time, but I think it's also under this umbrella of, the economy was just shaken around and the pieces are still falling in a way that hasn't totally come into view yet.

Beckworth: In Minneapolis, you note that, “many of the stressed loans are concentrated in downtown buildings struggling to attract new customers. In March, 2021, Target announced plans to vacate a major complex there, cutting its lease of almost one million square feet, or roughly three-fourths of the space available in the entire building. The big box retailer held onto other leases in Minneapolis and said the 3,500 corporate employees who worked at City Center would instead transition to other major headquarters in town.” So, they're being hammered too.

Siegel: Yes, and that's another category of example where some of these cities might be particularly dependent on one company like that, a company like Target that has had a really large footprint, or if a company decides to move its headquarters or shrink down to only one headquarters, these are things that can also hit Minneapolis in a way that DC wouldn't experience.

Beckworth: One last thing from this article, and then we'll talk about Austin next, but you note in the article that two-thirds of total commercial real estate debt is held by regional banks. That was pretty shocking because we know the banks that went through a crisis this year were regional banks, so this doesn't bode well if they're not capitalized well enough or if still they have interest rate mismatch on their balance sheets, so powerful point.

Siegel: That was certainly my reaction and it's a question that I really spent some time looking into and was honestly surprised, I guess in a good way, that there has been a really serious look from the Fed's point of view, from the banking industry, from people who just focus on this in their own jobs, that the regional banks do seem intact, that this is not a surprise that a lot of regional banks are spread out, they're not all focused in the office space, for example. They might be more spread out between hotels or hospitality or residential. The debt isn't all coming due immediately. There are a lot of things, I think, in particular, after the banking crises from earlier this year, that put a lot of focus on making sure that this wasn't a glaring vulnerability for a lot of these regional banks. So far, a lot of the answers that have come back is that they're secure enough to be able to plan for any risks and also make sure that they're well-tested for them, but I still think it's something worth keeping an eye on.

Beckworth: Yes. Let's move to your Austin piece, and it's titled, *Austin's Office Market is Exploding, but No One is Moving in.* I'll just [read] a little quote from the piece, you say, "Austin’s challenges are Texas-sized." I note that because you are a native of Texas, so you can really speak with authority on Texas’s size. There's the famous saying, "Everything is bigger in Texas," right? So that includes commercial real estate challenges as well. I will also note to the listeners, I spent five years in Texas just south of Austin in a town called San Marcos. I taught at Texas State University, so we would do a lot of activities up in Austin as well, so this also hits near and dear to my heart, as a former resident of that area, but walk us through the challenges in Austin.

Commercial Real Estate Challenges in Austin

Siegel: Well, David, I have to maybe guess that Austin looks different from even just when you lived in San Marcos. It certainly looked different from the picture that my dad and his brothers painted from having gone to UT and waxing poetic about their beloved Austin. So I first came across this story actually talking to Julia Coronado, who you probably know from the Fed world, who lives in Austin, and at Jackson Hole, we were just talking about commercial real estate, and she had this mind-boggling statistic for how much new office space was going to be coming online in Austin. It was going to be equivalent to a quarter of the existing stock or something like that. The second thought to that statistic was that even the buildings that are currently standing there were empty, that you had empty skyscrapers already and that there was about to be a huge new influx of brand-new office space hitting the market as well.

Siegel: I did some research, pulled some market data, and it was true that Austin, by many metrics, really led the continent in terms of new office space coming online. So I went down there and was just floored by what the skyline looks like now. You can't turn your head without seeing a crane, it's really hard to drive around downtown, and the most glaring example of this is this 66-story skyscraper that just shoots out of the Austin skyline. People casually refer to it as the Facebook building. It's called Sixth and Guadalupe, but they call it the Facebook building because Meta, or Facebook, leased all 18 floors of the office space in this skyscraper.

Siegel: They were going to move in to every single office suite, but then they decided that they actually didn't want to do that, and they dumped all of it on the sublease market, which means that when this building opens up later this year, early next year, all of the office space is going to be totally empty. Facebook has found no takers. And this is happening over and over and over. There are all of these buildings that have either been dumped on the sublease market or they can't find any takers in the first place. And it's this huge question for what that means about Austin's local economy, if there is going to be this bounce back and it will turn out that this bet is the right one.

Siegel: It was just stunning to me that you could look around and practically see through buildings because there were no people on the inside, and this is just happening on a scale that is really-- I would love to write the part two to that story too to figure out if this bet that developers and local officials are making is the correct one, or if it's the sign of what happens when commercial real estate really outruns the economy and what happens as a result.

Beckworth: So Austin is the Field of Dreams, build it and they will come. At least they hope that's how it's going to work out, but you note in your piece that roughly 87% of the new office space is expected to be vacant. The other thing, you mentioned the 66-story building, but you also mentioned there's another 74-story building online, and there's just this backlog of projects that have been started and a massive amount of excess capacity for office space in Austin. So maybe they will come, but maybe they'll have a major commercial real estate bust as well in Austin.

Beckworth: So you mentioned it's changed a lot. Yes, it has, and I haven't seen the skyscrapers. It's been a while since I've been down there, but I did go back and visit, and one thing that hadn't changed, traffic was still really horrendous. They don't have the roads and transportation capacity to handle the traffic going through there. The other thing, though, that's interesting about Austin, and maybe you can tell us about it, is its history. Why did it grow so rapidly? You mentioned several stories in here. Maybe walk us through those stories, how Austin became such a sizable city.

The History and Growing Size of Austin

Siegel: Sure. It was built, really, as the opposite. It was a relatively smaller city, sort of a town-like feel to a city. The main players in town for a long time were the state capitol and the University of Texas. Those aren't small entities by any means, but there was a real sense that that was just enough. There was this slogan called, "If we don't build it, they won't come," because there was a real appetite to keep Austin tight-knit, to keep it small, to keep the skyline low so that you would be able to see the capitol from across the city. And that really changed in part because there were some major companies that decided to make a foothold in Austin, that moved their headquarters there. Indeed, the job site, famously has its headquarters there, Oracle, Dell. There is a history of some larger companies deciding that Austin was where they wanted to be, but this just got cranked up to a really incredible degree during the pandemic when there were a lot of people, especially who worked in tech, who could suddenly live anywhere, Austin is a wonderful place to be.

Siegel: That swarm really changed Austin. It sent rent prices absolutely soaring. It sent housing prices absolutely soaring. And it really changed the feel and culture of Austin. A lot of people will describe it as southern San Francisco because it has just been dominated by this tech culture, and more recently, a crypto culture. Just in the couple of days that I was down there, there was a conference going on called Permissionless II that dubbed itself the largest crypto conference in the world. I would just see people all over the city walking around with Permissionless II name tags. So this is increasingly the reputation and feel for Austin in a city that was just not built for either this size of population, the scale of buildings, and was really a very different place not all that long ago.

Beckworth: Am I recalling correctly a bumper sticker that says, "Keep Austin Weird?"

Siegel: Sure, yes, "Keep Austin Weird" is the longtime slogan for a place that, not only was true to Austin, but was really a signal to the rest of the state, too, that it was this liberal, hippie, the original Whole Foods. That is a lot of what my dad describes from his college and law school days, and the 74-story building that you mentioned is going to be the tallest building in all of Texas and it's just going to make Austin look really different.

Beckworth: Yes, so keeping Austin weird, if it's still weird, is going to be the tech bros, crypto crowd, not so much the hippies anymore. Yes, that was a striking thing, when I was there. Texas is a very conservative state, but the capital itself is very liberal which was interesting. So, another interesting fact, you note that it is now the tenth largest city in the US. That was pretty surprising to me, to read that in your piece as well, so the population has exploded there. Another interesting fact you highlight is that, I think it's in Texas, you can get a loan on a commercial property and develop it without actually having someone lined up to rent it or to buy it.

Siegel: Yes, it's incredible. This is actually not something unique to the last couple of years, this apparently has been the norm for commercial development in Texas for a long time, but it also means that there was just this ability for developers to plow ahead with these massive buildings without any sort of guarantee that they were going to have tenants lined up to move in, and the timing for developers, they say, really worked in their favor. They got financing, in many cases, for these projects when rates were low, either right before the pandemic or in the early days of the pandemic, that allowed them to just go full steam ahead.

Siegel: Now, financing has become so different and there's so much less of an appetite to fund commercial real estate projects that that has largely dried up. What was remarkable to me is that I got some data from a downtown developers group in Austin that essentially said that, at one point over the summer, there was still so much more demand that, if financing conditions had been different, there was such a long line of other projects that would have been rearing to go. My reaction was just like, where? Literally, where are they going to go? Also, who are they going to get to move into them? Because it just seems like this test of these buildings that are already coming online. We should give them a little bit of time to see what plays out, but so far, they're empty.

Beckworth: Another irony from this is that there's a glut of commercial real estate, so prices are dropping, and this is actually the situation we want with residential real estate. We want more homes, more multifamily housing built, so prices will come down. The irony is we have it in the wrong place, which is unfortunate.

Siegel: There were literal blocks in Austin with a sort of 80s looking type building with a huge “for lease” banner on it, and then right next door, a luxury skyscraper going up with no tenants lined up to move in. That is all happening at the same time that Austin really needs more housing. It's just that it's a lot of the wrong types of buildings in the wrong types of places, at least to solve the problems that we have in front of us now.

Beckworth: In the time we have left, Rachel, let's circle back to the Federal Reserve, and what are they thinking about this issue? Are they concerned that this could be a looming financial stability concern? Could it lead to a potential recession down the road, and what steps would they take, should it happen?

Siegel: Yes, so I asked Chair Powell that exact question, I guess it would have been a couple of months ago now, and he— maybe this is to be expected, but— did not say that he saw commercial real estate as a huge threat to financial stability. It's gotten some attention in the financial stability reports that the Fed puts out. I think this goes to the question we were talking about earlier about how exposed regional banks are, that that could be of the sort of avenues we could sketch out to what these risks look like. Any sort of vulnerability in the regional bank sector could lead that way.

Siegel: Again, as much as I've been looking into this, I have consistently been told that they do not see a bigger looming threat. However, I think that's why the threats that can be the nastiest aren't always the ones that you think you're prepared for. So I don't know what the exact monetary policy mechanism would be. In a lot of ways, what the Fed is doing is designed to slow this kind of development, to slow this kind of appetite for these types of loans, but as Powell says, he takes the economy as it is, and this is certainly one of the big factors they'll have to pay attention to.

Beckworth: Well with that, our time is up. Our guest today has been Rachel Siegel. Rachel, thank you so much for coming on the show.

Siegel: Thanks so much for having me.

Photo by Brandon Bell via Getty Images

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.