Marketplace - The Federal Reserve’s political independence matters

Episode Date: March 6, 2024

One of many differences between President Joe Biden and and former President Donald Trump? How they talk about the Federal Reserve. While the central bank is supposed to be nonpartisan, that hasn’t stopped politicians from trying to influence it. In this episode, the Fed’s delicate political independence. Also in this episode: the cooling — but not cold — job market, an end of an era for middle-class retail, and a review of the IRS’ Direct File tax-filing system.

taxes, junk bonds, and the business side of global warming. We report, you decide, from American Public Media. This is Marketplace. In Los Angeles, I'm Kyle Risdell. Wednesday, today, 6 March. Good as always to have you along, everybody. Two items to top the program today. One, Jay Powell took a quick trip up to Capitol Hill today,

delivering the Fed's semi-annual monetary policy report to Congress. A couple of granular tidbits in what the chair had to say. Financial regulation and bank capital reserves, to be precise. Nothing really earth shattering, or we'd have told you. Item number two is this. It is not, to be clear, news. The 2024 presidential field is all but set, which means, thanks to former President Trump, the central bank is all but certain to become a political punching bag once again.

So Matt Levin gets us going today with this primer on the political independence of the Federal Reserve. Don Cohn worked at the Fed for over 40 years. He says that Fed officials really didn't bring politics to the office, except for that one guy with the Obama bumper sticker on his car. Except for that one guy with the Obama bumper sticker on his car. So it is interesting to me that you clock this, that you noticed that there was an Obama bumper sticker on his car. That should tell you, Matt, is it was highly unusual. While Fed governors are appointed by the president and approved by the Senate,

they serve 14-year terms, and you basically have to have a major scandal to get thrown out. Congress set it up this way partly because they don't trust themselves to run monetary policy. Politicians are worried about the next election, so they're going to push the economy forward in advance of that election. Rather than doing what's good for the economy in the long run. That being said, politicians have tried to influence the Fed. Peter Conte Brown at UPenn's Wharton School says Trump wasn't the first president to publicly attack a Fed chair. J.W. Bush didn't have a Twitter account, but he did have a press conference and he even called out for the clap back to Alan Greenspan in his State of the Union, where he said interest rates are far too high.

Greenspan was unmoved. But Sarah Bender at George Washington University says it's a mistake to think the Fed is completely immune from politics, especially when Congress can audit them or saddle them with more responsibilities. especially when Congress can audit them or saddle them with more responsibilities. The Fed needs to make sure that they keep Congress on its side, even though the Fed has to make these pretty tough decisions. That may be why Jay Powell answers all those questions from Congress pretty politely, even if the questions themselves can be pretty impolite. I'm Matt Levin for Marketplace.

Speaking of questions to the Fed chair, Mr. Powell was asked at one point this morning whether he and his colleagues were actually going to make an announcement that there had been a soft landing in this economy. No, was the short answer from Powell. But on the way to that glide path, the Fed has been and is going to be looking real hard at the labor market. The February unemployment report comes out on Friday. JOLTS was this morning. That is, of course, the Job Openings and Labor Turnover Survey. Turns out the openings number didn't really move much, but people leaving their jobs to find new ones, that number is now below where it was in the before times.

Before, if you remember this, the great resignation. Marketplace's Mitchell Hartman spent his day talking to people about what the labor market might be trying to tell us. We started to see a slowdown in the middle of last year as post-pandemic hiring faded and higher interest rates started to bite. But then in December and January, the economy added nearly 700,000 new jobs in just two months. Who knows why? Honestly, maybe the weather? But in any case, economists don't expect the trend to continue.

Nick Bunker at Jobsite Indeed, which is a Marketplace underwriter, says most of the evidence points to... A gradual cool-down in the U.S. labor market. Now, that doesn't mean it's getting frigid. Job postings are still higher than pre-pandemic, but compared to, say, two years ago, employers are facing less competition when they're trying to hire workers. So there's fewer job opportunities right now and less wage growth. Meanwhile, consumers are a bit more on edge these days. We did see an uptick in the percentage saying that they were concerned about the job environment.

That's the conference board's Dana Peterson reflecting on the group's latest pulse-taking of U.S. consumers. That could reflect the fact that real incomes may not be rising as quickly. And so people are thinking to themselves, well, I definitely need to work. But then they're also hearing bad news about some big layoffs among a variety of companies. The conference board also surveys company CEOs, and Peterson says their plans for employment shrinkage in the coming year are a bit worrying. One in five CEOs think they're looking to shed workers. That's a warning signal, especially since most of last year they were holding on to workers. I think there's something in the air from CEOs that consumers may be picking up on. So far, though, layoffs aren't a big concern, says Robert Frick at Navy Federal Credit Union. Unemployment claims are still really low, and even long-term claims

aren't very high. So what's happening? How can all these people be getting laid off, and yet all these other numbers look just fine? The answer, he says, they're getting new jobs pretty quickly. I'm Mitchell Hartman for Marketplace. Wall Street today, traders shook off that case of the yips they had yesterday. We will have the details when we do the numbers. The list of retailers in this economy that are downsizing is not short. We told you last week Macy's is going to close nearly a third of its stores. Gap, Foot Locker, Bed Bath & Beyond, a version of the same. That's a whole lot of household names.

And this winnowing is often called the retail apocalypse. And there is blame aplenty to go around the Internet overall, Amazon specifically, same-day shipping, you name it. There is, though, another slower and steadier disruptor that's been eating away at retailers' bottom lines for a while now. The shrinking middle class, as Marketplace's Kristen Schwab explains. Back in the day, New York Macy's had a department store rival just down the street. That's an old jingle from Gimbels. In the early 20th century, the two department stores were vying for a particular kind of customer. The white middle-class consumer.

Vicki Howard is a historian and author of From Main Street to Mall. She says after World War II, that target demographic got bigger and moved to the suburbs. So shopping malls chased out those suburban consumers. The mall industry exploded, though not every department store got it right. Gimbals went out of business in the 80s. But while most department stores were growing, their target market was quietly shrinking. In 1971, 60 percent of Americans were middle class. Today, it's about half of Americans. Brandon Speck, a retail analyst at CoStar, a commercial real estate research group, says that's a problem for retailers like Macy's. If your business is selling middle market apparel in a 200,000 square foot box, you're struggling.

That's true for most of the big department stores that still cater to the middle class. Meanwhile, luxury and discount retailers, they're growing alongside lower and upper income Americans. Speck calls this the barbell effect. Where you're seeing a lot of growth at the top, you're seeing a lot of growth at the bottom, and then this hollowing out in the middle. In 2022, 95% of luxury brands saw an increase in profits. Meanwhile, Speck says dollar stores are thriving. Dollar General plans to open 800 stores this year.

And in a lot of ways, it's the shrinking middle class, but it's also the shifting value proposition sought out by the middle class. He means the middle class isn't just getting smaller, but that the people who are left in it are shopping differently, especially as necessities like groceries eat up more of their paychecks. For instance, Walmart says in the last couple years, it's gained more middle and high-income shoppers. Doug Stevens, founder of the consultancy Retail Profit, says consumers are trading up and down. You know, they're buying their household supplies and, you know, maybe underwear at Walmart in order to save enough money to take a luxury vacation or buy a Louis Vuitton handbag. He says increasingly, these extremes are shaping retail and forcing brands to reinvent. Macy plans to invest more in its upscale brands, Bloomingdale's and Blue Mercury,

as well as its discount brand, Macy's Backstage. Stevens says this divide is also happening in grocery. High-end Whole Foods and budget-focused Aldi are both growing. That middle ground no longer really exists, you know. And if it does, it's tenuous and it's unremarkable. Why bother? He says the legacy brands that were built for those consumers need a new legacy to survive. You know, it began with the baby boomer and it's sort of hitting its

denouement with the decline of baby boomer spending. So the market's really trying to figure itself out now. He says department stores aren't facing an apocalypse. Instead, they're facing the end of an era. I'm Kristen Schwab for Marketplace. OK, now, bonds. Bonds are a fancy way to say IOU, right? Governments and companies issue them all the time to raise money. When the U.S. government does it, they're called treasuries, and they're considered just about the safest place you can put your money. When companies do it, well, some of them are better, that is to say, safer than others. You've got your investment-grade bonds, not all that risky. And then you've got your junk bonds, which are risky, that is. And in some ways, those junk bonds can be a canary in the economic coal mine.

Marketplace's Sabree Beneshaw explains what we're talking about. Whoever named junk bonds junk bonds really did not do them any favors. It doesn't mean that these companies are bad companies. Elizabeth Hahn is head of U.S. default research at Fitch Ratings. Junk bonds refer to a credit rating that a company is given. It's not necessarily a particularly bad credit rating. It just has to be less than really good. Companies that are in the junk bond space tend to have a little bit more leverage.

So a little more debt or a lot more debt, which could mean the company has fallen on hard times. This happened to companies like Ford during the pandemic. It returned to investment grade just last year. But also some industries just have higher debt. Think real estate, where you take out loans to build a skyscraper, or mining, where you have a lot of equipment to finance. Some companies just need to operate, you know, with slightly more leveraged credit profiles or, you know, with slightly more leveraged credit profiles or, you know, slightly lower margins. So Han doesn't actually like to use the word junk.

I always like to say high yield. That is the official name, high yield, because bonds from these companies pay out more, sometimes a lot more than treasury bonds or investment grade bonds. They pay out more because they do carry a higher risk of default. Like if something goes wrong, they might never pay back the bond. They're really on a knife's edge. Bob Elliott is CEO of Unlimited Funds, an investment firm. If the economy continues to be strong, those companies will continue to pay the elevated yields.

But any hiccups in the economy, and these are the types of companies that will first feel the pain. They are starting to feel some pain. We've seen a decline in the amount of income those businesses are earning relative to the amount of interest payments that they need to pay. That is largely because the Federal Reserve raised interest rates so much. That is largely because the Federal Reserve raised interest rates so much. Companies have been doing all kinds of gymnastics to procrastinate issuing new bonds at these higher rates. But some companies have had to, and it is expensive. Elizabeth Hahn at Fitch again. We saw a 3% default rate.

That is about average. But we are forecasting that rate to go up. We have forecasted between 5 and five and a half for 2024. Yeah. But Hahn says that increase is driven by a relatively few companies with a particularly large amount of debt. Steve Lively is co-head of bond ETFs for BlackRock. The companies in the traditional high-yield bond market are actually a better credit quality

than they were, say, 10 years ago. Some of that is because more troubled companies now avoid the bond market and get funding elsewhere. And investors do not seem to be too worried about the junk bond market. Usually, the more worried investors are, the more money companies have to promise them to get them to invest. That extra return is at multi-decade lows. So that's telling you the market believes that the economy is fairly strong. Now, will all that change in 2024? Watch the junk bond market.

In New York, I'm Sabri Beneshour for Marketplace. Here's what ought to change in 2024. You ought to listen to our podcast more. Marketplace.org is where you can get that. Or, of course, you can follow us on the platform of your choice. Coming up. You should be able to file your taxes online without using a private company. Should. But first, let's do the numbers.

Dow Industrials up 75 today. Two-tenths percent finished at 38,661. The Nasdaq took on 91 points, about six-tenths percent, 16,031 there. The S&P 500 grew 26 points, about a half percent, 51 and four there. We heard earlier from Kristen Schwab about the end of the middle-class retail era, so let us look into some of the stores she mentioned. Shall we? Macy's, the once iconic department store brand, lost 1.3% today. The Gap, which owns Old Navy and Athleta, shed 4.7% Foot Locker, which today reported a loss over the quarter covering the holidays. Dived. Dove? Dived? Dove. Dove. 29.4%.

I'm sticking with Dove. Bed Bath & Beyond, now owned by Overstock.com. The combined company trades under the name of Beyond Inc., up two and seven tenths percent today. Bonds up, yield on the 10-year T-note down 4.10 percent. Definitely Dove. You're listening to Marketplace. I'm Kai Risdahl. The Federal Reserve's Beige Book came out today. It's a periodic and anecdotal look at this economy. Here's an item from the Federal Reserve Bank of Minneapolis. It's a quote, Unseasonably warm weather hurt businesses catering

to winter activity. Firms in retail, accommodation and entertainment saw lower revenues across the district. Most guests, said a hospitality company in Michigan's Upper Peninsula, canceled due to lack of snow. This is having a devastating effect on local businesses, which if you're running one of those local businesses in the upper Midwest or in the Northeast where it's also been unseasonably warm, that means you've got to think creatively. Marketplace's Henry Epp is on the winter tourism adaptation beat today. On February 12th, Kelly Probst and her board made a decision. The nonprofit's Copper Dog sled dog race in Michigan's Upper Peninsula would not happen this year.

There just wasn't enough snow. Looking at the forecast, looking at what our trail conditions were at the time and what was required for us to run a safe race, and it was just, it was apparent it just was not going to happen. Normally, this race attracts mushers from around the country and thousands of spectators the first weekend of March. Calling the race off three weeks ahead was a gamble, Probst says. But on race day, she was right. The weather here was in the upper 40s, sunshine and wind. Terrible conditions for snow. Making that call early, though, she says, saved the organization tens of thousands of dollars. On banners and pennants they didn't

print, hotel rooms they didn't fill. And there's a good chance they'll have to make tough calls like this in the future. Reliability is a thing of the past increasingly. Justin Mankin is a climate scientist at Dartmouth College. As the climate warms, he says, winters just don't have as much consistent cold and snow as they used to. And so what that means for the winter sports and winter tourist and business model is that it's getting squeezed into a shorter season. And so businesses are trying to squeeze revenue out of every snowy day. Lindsay Delorier is president of Bolton Valley, a ski resort in northern Vermont. She says they've brought in new snowmakers.

Being able to make more snow faster, more efficiently, has been incredibly important to us. They've also invested in summer options for additional revenue, a wedding venue, and mountain biking trails. In northern Michigan, Kelly Probst held a scaled-down dog race last weekend. Instead of a miles-long trek, they hauled in snow to create a short track and held what she calls drag races. He put two teams up against each other with two dogs and raced them down the road, and it was wildly successful. There was food, bonfires, a beer tent, a smaller crowd than normal, but it was fun, she says.

And now they know what to do in future years if there's not enough snow. I'm Henry E list for this weekend. Full disclosure, taxes have been on my to-do list for the weekend for about a month now, but you know how it goes. For all you self-filing taxpayers out there, there's a development that might be of some use. The Internal Revenue Service has released a pilot of its new Direct File program, the long-awaited free in-house IRS tax filing software. Dylan Matthews got a chance to check it out. He wrote about it for Vox. Dylan, good to talk to you again. Thanks so much for having me. So give me your gut reaction to direct file. What do you think?

I give it like a solid B. So I think as software, it's very clean. It looks very nice. It's very easy to use. What it doesn't have is a lot of features. But if you have a simple tax situation, it can handle it. Why has it taken the IRS so long to do this? Because there are private competitors, as we'll talk about in a moment, that have been in the market for a very, very, very long time. So the reason it's taken so long is those very private competitors. I think the first ideas for doing internet tax filing came around in the late 1990s when the web was still very new. The George W. Bush administration had

a serious plan that they put together to do online tax filing for everybody. By that point, though, H&R Block, TurboTax gained enough market share that they had a serious influence. And they spent a lot, hundreds of millions of dollars over the years on lobbying to ensure that there was not an IRS software competitor to their services. To try to justify that, they helped set up something called the Free File Program. So this was an idea where they would offer to provide free services to people below an income threshold so that the sort of lower income people wouldn't have to pay. But you have to go hunting and pecking on the IRS website to find that, right? You do. So I think a revealing statistic here is that fewer than 3% of eligible taxpayers have

used that program. And that's partly due to these companies that they've done things like try to hide from Google. Is it technically hard for the Internal Revenue Service to do this? I mean, what are the other than the lobbying and the hundreds of millions of dollars, which is not to be understated? I don't want to blow that off at all, because that's actually a not small political issue about how the government works. But are there technical reasons why the IRS hasn't been able to do this? So it might be a little more complicated than people assume. For one thing, you need this to be really secure and for the privacy protections to be really strong. The other thing that I think makes it tricky is just how complex the tax code

is. I went to the treasury department and met with a few developers who were working on this, and they showed me this giant, it was maybe like five or six feet wide, map that they made that they called the fact map. And the map was of every fact you need to know about someone to do their taxes. Hundreds and hundreds of facts. How many kids, how much time did you spend with the kids? On and on and on. And this is before you get into things like deductions for mortgage interest, where everything gets even more complicated. The specter here, and you talk about this in the piece, is healthcare.gov. The last thing the government needs is another website that rolls out and falls flat. Exactly. And I think

that came up a lot when I talked to these developers as an example of what they didn't want to do, that that was a website that had to roll out for the whole country all at once and didn't have time to experiment and test. And it was a complete disaster. Six people got healthcare on the first day that it was up. And is that actually right? Six people? That is literally true. That the six people went from going to healthcare.gov to being enrolled in health insurance as of the end of that business day. So that's what they didn't want to do. Right. So let's get back to where we started. You give it a solid B. You do say at one point in this piece, this cannot compete with TurboTax. So let's take the best lens on this that we can.

Good start maybe for the IRS offering its own free direct file system? Yeah. I mean, I think I, uh, many of my old teachers graded on a curve and I'll admit that I'm grading on a curve, uh, here to a degree, but I think one of the more modest goals that the people involved in this told me they had was you should be able to file your taxes online, uh, without using a private company. And I think they did meet that goal for a significant number of people. And that that's maybe a more accurate way of looking at what they're trying to do. The subhead on Dylan Matthews' piece says,

it's not perfect, but it's a start. Dylan Matthews is senior correspondent at Vox. Dylan, thanks a lot. I appreciate it. Thank you. Marketplace is supported by BuySide from The Wall Street Journal. BuySide's reviews and recommendations help consumers decide how to spend their time and money at wsj.com slash BuySide. And by Sonar. Used by millions of developers, Sonar ensures that all code, including code written by AI, is secure, reliable, and maintainable. More at sonarsource.ai.

And by Microsoft Visio, helping users create powerful visuals to bring their best ideas to life with ready-to-use templates and thousands of customizable shapes. Microsoft.com slash Visio. This final note on the way out today, yet another product we need because why? Binance, the world's biggest cryptocurrency exchange, is, you might remember, in some trouble. The company and a co-founder have pleaded guilty to money laundering and paid four plus billion dollars in fines. But the marketing shop at Binance, working overtime. In recognition of International Women's Day, I'm not making this up, Binance has come up with a perfume that's called Crypto,

all caps, Ode to Binance is what it says on the bottle. It's a gimmick, yes, but come on, man. Our media production team includes Brian Allison, Jake Cherry, Jessen Duller, Drew Jostad, Gary O'Keefe, Charlton Thorpe, One College Toronto, and Becca Weinman. Jeff Peters is the

manager of media production around here. I'm Kyle Risdell. We will see you tomorrow, everybody. This is APM. All over the country. We need to improve reading in Wisconsin. Schools are changing the way they teach reading. 8 p.m. with everyone I meet. Sold a Story investigates how teaching kids to read went wrong. New episodes of Sold a Story are available now.