No, the Fed should not stop paying interest on reserves
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You know how you always want to know about everyone else's money? On the podcast, What We Spend, guests will, for one week, tell us everything they spend their money on. My son slammed $6 worth of blueberries in five minutes. And everything that makes them feel. I want to own a house. I want to have a child. But this morning, I really wanted a coffee. Because at the end of the day, money is always about more than your balance. Listen to and follow What We Spend, an Odyssey original podcast. Available now wherever you get your podcasts.

Once again, how people are feeling about this economy is pretty much everything. From American Public Media, this is Marketplace. In Los Angeles, I'm Kyle Risdell. It is Thursday today, the 12th of June. Good as always to have you along, everybody. There's a bunch of data points I could rattle off to get us going. Wholesale inflation is fine. Continuing claims for unemployment benefits are up. The dollar is getting whacked.

But we're going to go instead with one of our standbys, the reality that all the data in the world doesn't matter until you know how people are feeling in their economic day-to-day. Marketplace's Kristen Schwab has a series she's been doing for us. It's called Lived Economies, how people from all over this country are living and spending and how they are feeling about it. Here she is with today's installment.

Long Island is the birthplace of suburban America. And you can still sort of feel that when you drive around here in Farmingdale. Vinyl-sided houses, freshly cut lawns, and American flags. Bill Thompson looks over at his neighbors. You look down the block here, and everybody that owns a house has a union affiliation, okay? This guy over here, Joe, he was Verizon. He gestures down the street. Electrician, police officer, police.

Truck driver, Long Island Railroad. Lots of blue-collar jobs. That includes Bill, who is a sheet metal worker, mostly installing ductwork. His wife Catherine was a nurse. She taught nursing as well. Good, steady careers that have led to a comfortable retirement. Between pensions and Social Security, their income is about $150,000. And that's without tapping into other retirement and savings accounts much.

In retirement, Catherine volunteers 10 hours a week for AARP. She loves to garden. So the clematis is just blooming up top there. The purple flowers just opened up. That's today. Bill is into woodworking.

We're in the living room staring at what is very much, and I cannot overstate this, a full-size, fully operational grandfather clock. Bill built it from scratch out of cherry wood. The two can enjoy their hobbies without really thinking about how much things cost.

I think that's kind of one of the nice things about financially where we are is that we don't really have to worry. You just buy it to be able to do what you want with it. You know, even the traveling and everything, we just book the tickets. In the last handful of years, they've been to Alaska, Hawaii, Seattle, and Paris. Between vacations and visiting family in New Mexico, they spend about $20,000 on travel a year. We really...

or not super big spenders, but we don't have a budget either. It's really a very good life that we have. At 69 years old, Catherine and Bill are in the demographic that has helped prop up the economy, despite the pandemic and inflation. In the last five years, people over 60 have increased their spending more than other age groups.

possibly because their wealth has been buoyed by stock market gains and rising home values, and older Americans are often less impacted by interest rates. Catherine and Bill feel really lucky because they think they're the last generation to live a prosperous blue-collar life. That's become especially apparent to them watching their two sons, who are in their 30s. I am very concerned.

about my son and his wife. The son that lives nearby on Long Island, his job doesn't offer health insurance. Their other son and his wife live in New Mexico. They have two kids and one has serious disabilities. She's going to have to have help from other parts of society.

I don't feel good about your prospects for the future. It takes me a second to realize Bill is literally talking about me. I'm around the same age as his sons. It's his way of saying they are not worried about their economy. They're worried about the economy with a capital E.

They talk about the state of health care, threats to Social Security and tax cuts for the super wealthy and how one of the only ways to get ahead these days is wealth that's passed from one generation to the next.

Bill and Catherine spent something like $300K putting their kids through college. They helped one of their sons buy his house, which needed a total renovation. What we see now with these kids, and it's not just our kids. We have, of course, a lot of nieces and nephews on both of our sides. They're renting an apartment for $2,600 a month, even with a good job. How do you save money?

Save to buy a house or put your kids through school or enjoy building grandfather clocks in retirement. They say it's hard to imagine their sons getting to where they are today without a little help. In Farmingdale, New York, I'm Kristen Schwab for Marketplace. About 30 miles west of Farmingdale as the crow flies, right at the corner of Wall Street and Broad and Lower Manhattan, traders were mostly happy. Today we'll have the details when we do the numbers.

I mentioned at data point from Challenger Green Christmas on the program yesterday, the number of government workers who've been dismissed in one fashion or another since the beginning of the Trump administration. 285,000 people put out of work, the earliest batch of which, and one of the biggest certainly, was virtually the entire workforce at the U.S. Agency for International Development, USAID. And along with the people getting cut, so too were USAID contracts, north of 90% of them.

Among the many organizations that counted on that money to do what they do is Save the Children, which works across the country and internationally on child health and development. Yanti Sarepto is the president and CEO of Save the Children U.S. Welcome back to the program. Thank you for having me back. How much has your life changed since the funding freezes, the dismantling of USAID, and all the rest of it?

Oh, just a little. Look, it's been, I would say, an industry-wide upheaval. We had expected some change with an incoming administration. That is not unheard of. We see it here. We see it in other countries.

But I spoke to a lot of people in this sector, inside D.C., about this. No one had expected this level of disruption so brutally quickly, but also to this extent. Well, wait, go back to those conversations you say you've been having inside Washington. What do they tell you, the people you've been talking to in the administration, about the reasons and the logic? Yeah.

Well, it's been really chaotic. Let me be clear, it was hard to find people who actually were there because, of course, at the same time that funding was stopped, people were also let go, right, and dismantled. So it was very hard to find people who were actually still there who were able to give us answers. So that's why a lot of the uncertainty and the not understanding of us and many of our peer organizations who were in the same boat happened.

We had programs terminated, which were then un-terminated, if you like. So one day we were told, stop it. The next day it was, no, no, no, you can actually continue. And then the next day it was re-terminated again. So it was in the middle of trying to deal with which programs must we keep alive, where we must find alternative sources or we bridge a gap with our private funding that we're lucky enough to have.

That choice making had to happen. At the same time, we were trying to figure out in real time, are we going to get paid for work done previously? And which programs are now actually either terminated or are they exempted? So it's been, yeah, it has been an interesting exercise in spinning plates. Well, so on that topic, you know, your job as president and CEO is strategy and growing your organization and serving more people. Right.

How much of your time now are you spending spinning the plates as opposed to doing what your actual job description and I imagine the board of directors want you to do? Well, the board of directors definitely wanted me to address this crisis, as you can imagine. So first and foremost, yes, of course, in the first few weeks, it was crisis management. It was responding to whatever was coming at us.

Now, I think we're getting to a place where we're still responding because it's still not clear for some of the programs that were not terminated, whether they're going to remain. So there's still a bit of response going on. But we are also in a rebound phase, right? We have made significant cuts to our organization. As you can imagine, we let go of 38% of staff in the U.S.,

We have let go of between 25% and 30% of people globally, right? Mostly in the countries where the work happens, right? So the dust is settling on those terminated roles. We're reorganizing ourselves to make sure that our teams still make sense. And we have identified which...

are the most critical sort of life-saving interventions that no matter whether US government funding is going to continue, we would have to find new funding mechanisms and sources for. So this is the rebound phase and then we'll get to reform where I'm actually quite excited because look, this whole crisis, I don't like how it's gone down. I abhor the way in which this was done and the impact this has had on the world's most vulnerable children.

But given that we are where we are, we also have to radically accept that this is what we now have. And can we use the moment to really step into some of the opportunities it gives us? Well, so let's talk about the opportunities and what that reform that you mentioned might look like, because clearly you can't keep doing what you were doing six months ago.

No, absolutely true. And we knew this industry wasn't perfect, right? We knew there were Byzantine structures, a lot of administrative bureaucracy, unnecessary layers. What this industry really lacks, of course, is market signaling. In the private sector, if you deliver a product that doesn't work for consumers, they're going to walk away from you. And you know it very quickly whether you have a hit or a miss.

And then you have to adapt, right? And there are financial incentives to do consolidation in the industry. Mergers and acquisitions, joint ventures. Your corporate background is showing itself here. It's fascinating, actually.

Well, it is interesting that I always thought in the corporate sector there were a lot of those deals done. And by the way, not all of them successful, let's also be clear. But in this sector, I found the spirit of collaboration to be unbelievable. It's genuine, it's authentic. I've seen it in areas of conflict where organizations really try to help one another without trying to get anything back for it. But interestingly, that spirit and that culture hasn't translated into collaboration.

distribution deals or joint ventures or other types of strategic partnerships that would really create value because the financial incentives just weren't there. And hence, the muscle and the capability hasn't been built in that way. I hear you, despite everything, being somewhat hopeful.

I am. We have to take this opportunity. If we don't do it now, then it would really be on us, right? We can't control how governments look at development assistance or international assistance, but we can very much control how we as an organization and even as an industry do better in terms of our efficiency, using each other's strengths and assets more deliberately, and also be more tight in our priorities. Something that

businesses, I think, have always been better at. And for us, it's hard. When you advocate for children's rights, it's very tempting to think you can solve everything for all children. And I think this crisis is prompting, I think, forcing us to be more precise and to be also more humble and say, these are the bits that we're really good at. We're going to continue to drive hard for it. And these are some areas where we're going to leave it to others.

Yanti Sarepto. She's the president, the CEO also of Save the Children U.S. Yanti, thanks for your time. It's good to talk to you. Thank you, Guy. Good to speak. As Republicans in Congress, the Senate specifically, scramble for ways to make the president's big tax cut bill add a little bit less than $2.4 trillion to the national debt as it's now written. One of the ideas being floated is to have the Federal Reserve stop paying interest.

One of the things the central bank does is act like a bank for banks. It's complicated. Sabri's going to explain in a minute. But much like a commercial bank, the Fed pays interest on its clients' deposits, clients being big banks, those deposits being called reserves at the Fed. Anyway, Senator Ted Cruz, Republican of Texas, says not doing that could save over a trillion dollars over 10 years. Sabri's going to explain what would actually happen.

The Federal Reserve pays interest to banks on their reserves for one big reason. To move up or down interest rates in the economy. Seth Carpenter is Morgan Stanley's global chief economist. No bank in its right mind is going to make a loan to anybody for less interest than it's getting from the Fed. It's a question of at what rate banks have an incentive to lend money.

The Fed controls interest rates as best it can because that's how it fights inflation and keeps people employed. So what would banks do if the Fed just stopped paying them interest? They would try to shift their short-term assets out of reserves and into other short-term things. Bill English is a professor of finance at Yale. Banks would say, get my money out of this zero-interest hellscape. Let's put it into something else like treasuries. And by doing so, they would be...

bidding very aggressively at, say, auctions of Treasury bills, they'd be pushing down the interest rate on Treasury bills. Banks would pile into that asset until its return fell to something like zero. So like a school of piranhas, banks would pick interest rates down to the bone. That would keep rates for the rest of the economy far below what the Fed considers healthy.

In reality, the Fed would not let that happen, says English. It has other ways of paying interest to banks and other financial institutions, and it would have to use them to control rates.

James Klaus is a fellow at the Anderson Institute. The Fed doesn't directly use tax revenue to pay interest. It uses profits from all the treasuries and other investments it has. But maintaining control over interest rates would involve selling many of those investments. So if you reduce the size of the balance sheet, you're also reducing volatility.

than that income of the Federal Reserve on average over time. That's less profit to share with the government. So Klaus says ending interest payments on bank reserves wouldn't end up saving much, if any money at all in the end. In New York, I'm Sabri Beneshour for Marketplace. Coming up.

And, like, we literally just sat and we watched it, you know, as the tree fell through the house. Storm season has arrived. First, though, let's do the numbers.

Dow Industrial is up 101 points, about a quarter percent, 42,967. The NASDAQ gained 46 points, also a quarter percent, 19,662. The S&P 500 picked up 23 points, four-tenths percent, 6,045. Boeing down four and three-quarters percent today on the news out of India. Oracle shares up 13 and a third percent after the company raised its annual revenue growth forecast based on growing demand for its cloud business from companies using...

artificial intelligence. Some oil company stocks dipped after the U.S. announced it was moving personnel from the Middle East ahead of 10 stocks with Iran over that country's nuclear program. Valero down four-tenths percent. Halliburton fell almost one percent. You're listening to Marketplace. Trust isn't just earned, it's demanded. Whether you're a startup founder negotiating your first audit or a seasoned security professional scaling your GRC program,

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But most importantly, we have an unwavering commitment to help keep you up and running. Call, clickgrainger.com, or just stop by. Grainger, for the ones who get it done. This is Marketplace. I'm Kai Risdahl. If you're hankering for more artificial intelligence in your daily commerce,

Amazon's got you. The company, which we should say advertises with us, is launching an AI video ad generator for sellers here in the United States. One click, it'll turn a still image of any product into a customized video showing said item in action. The latest big tech move to push farther into the business of generating ads, not just selling them. Marketplace's Megan McCarty Carino has that one.

Amazon has had an AI image generation tool for ads for a couple years now. You know, when you're shopping for a watch and see suspiciously similar photos of it superimposed on different backgrounds? The new video tool kicks that up a few notches, says Kabir Bedi, the head of product for generative AI at Amazon Ads.

You want someone wearing the watch. You want to show how a human sees the time by moving their wrist with the watch. All set to music with animated text pulled from product descriptions and reviews. We, through this tool, want to lower the barrier of entry, and that's exactly what's happening. Meta is doing something similar, and Netflix has teased using generative AI to tailor ads to the worlds of its shows.

Computer automation is eating digital marketing. Garrett Johnson is a professor of marketing at Boston University. He says AI could improve ad targeting. It's very easy to have, instead of just one message to consumers, to have a pool of 10 messages. And for the AI to find the consumer that's best matched to that,

Northeastern professor Kuhn-Powles, who worked with Amazon ads, says he's less worried about the melting faces and extra fingers that often showed up in early AI videos and more about them becoming forgettable. In the beginning, it may seem very cool and insufficient, and it can also sometimes even be more creative. But the danger is that things will look all the same. Though he says that can be a problem with human-made ads, too. I'm Megan McCarty Carino for Marketplace.

We're just a hair shy of two weeks into Atlantic hurricane season, quite possibly the last one for the federal agency that helps communities recover from natural disasters. President Trump says he's going to get rid of the Federal Emergency Management Agency and let state and local governments and nonprofits handle things.

Marketplace is Amy Scott from our climate podcast, How We Survive. Spend some time with an organization in Houston, Texas, to see how that might go. Gwendolyn Como stands at the end of her driveway in a black WWE t-shirt and matching shoes. She's a wrestling fan. But right now she's watching a different kind of spectacle, the gut renovation of her little beige house.

They putting up a roof, and they trying to do the kitchen and one of the back rooms.

Back there, that was damaged also. Como has lived in this home in northeast Houston's Huntington Place neighborhood for decades. That is, until May of last year, when a derecho, basically a straight-line windstorm, tore through Houston, causing more than a billion dollars in damage in the region and toppling the pecan tree in Como's neighbor's yard. Oh.

Wow, were you home when it happened? Oh my goodness.

The wind was blowing at probably about 100 miles per hour. That's Gwendolyn's son, Kevin Como, who lived with her at the time. And, like, we literally just sat and we watched it, you know, as the tree fell through the house. I heard the noise. It was like a real loud thump, like a, you know, thundering noise. And when I walked back into the kitchen, all I could see was the tree landing to the house.

I came to meet the Comos for a firsthand look at how the changing climate is affecting Texans. Because while Texas is this country's top producer of crude oil and natural gas, it's also prone to the kinds of disasters climate scientists say are getting worse because of emissions from burning fossil fuels. And

And while it's difficult to attribute any one storm to global warming, studies show it has created the conditions for more frequent and intense extreme weather. After last year's derecho, FEMA put Kevin Como up in a hotel and Gwendolyn went to stay with her sister. Because they had no insurance and FEMA assistance wouldn't cover the full cost of repairs, they couldn't afford to fix the house.

The estimates that I received was almost like I should just tear the house down and just rebuild.

I was just like, there's just no way. So Kevin had to get creative. He looked around and finally linked up with a grassroots organization in Houston called West Street Recovery. The group was formed during Hurricane Harvey eight years ago by neighbors rescuing neighbors from the floods. Andrew Barley is now the group's co-director of home repair. Most of my community members that I serve call me by my last name, Barley.

Barley started out with West Street doing water rescues during Harvey, and then learned how to build. Since then, the group has repaired around 350 houses damaged by major storms in historically disadvantaged communities. Barley is overseeing the renovation of the Comos house. He estimates it'll cost about $65,000. And they're doing more than just repairing the damage. They're future-proofing it.

For example, there's PVC piping underneath the house right now. We're going to switch all of this out with what's called PEX-A style plumbing. It's made out of plastic-like material that will expand when it freezes. As a lot of Texans experienced during Winter Storm Yuri, which caused widespread damage in 2021, the group sees itself as a stopgap to help communities that have struggled through neglect or overt racism.

And part of the ways we do that is by ensuring that we preserve what there is of community by preserving the housing stock that are in neighborhoods like this. The best way to do that is to upgrade all the materials we can as we work on the house. West Street has also set up eight so-called hub houses around the city where residents can take shelter during storms or heat waves and access emergency supplies.

Now, the group says cuts to federal funding will create a crisis in disaster recovery that nonprofits just don't have the resources to replace. But, you know, we carry on. We still have to do the work. And we still have to, the folks who live out here still have to make do regardless of what happens or what the government says or does. That self-reliance will be tested again by the next storm. In Houston, I'm Amy Scott for Marketplace.

You can hear more from Amy's reporting from Texas in the latest season of How We Survive. It's available wherever you get your podcasts, marketplace.org, platform of your choice. Just follow us there.

This final note on the way out today, I'm going to dip my toe back into the bond market real quick, following up on Sabree's story the other day about the U.S. 30-year bond, the long bond, and why it matters for what the government's going to have to pay to borrow all those extra trillions of dollars in the GOP's tax bill. Treasury held an auction today. 4.844% was the yield at sale for those 30-year notes. It's high, but it's good because it was below where people had been guessing it would be.

trillions of dollars at that rate. John Gordon, Noya Karr, Amanda Petran, Stephanie Seek, are the marketplace editing staff. Amir Bivawi is the managing editor. And I'm Kyle Risdahl. We will see you tomorrow, everybody. This is APM. Hey, David Brancaccio here. Over the last few months, you may have heard me talk about the home that my family lost in the California wildfires this year.

Well, I recently chatted about rebuilding our Altadena, California cottage with the team over at This Old House Radio Hour, a radio program and a podcast from American Public Media. So for a tale of new beginnings or if you need any tips for your own home improvement projects, this episode has you covered. You can find episodes of This Old House Radio Hour wherever you get your podcasts.