Here's Where It Gets Interesting - Everything You Want to Know About the Federal Reserve with Jeanna Smialek

Episode Date: March 1, 2023

Today on Here’s Where It Gets Interesting, Sharon welcomes New York Times Federal Reserve reporter Jeanna Smialek. Let’s face it, the Federal Reserve (not a prison), is a public-private partnership that’s a little hard to understand. What’s its history? Why do they make the decisions they make–like to raise interest rates–and how do those decisions impact our economy? How much power do they have over financial policy? Jeanna answers these questions with easy-to-understand explanations. Hosted on Acast. See acast.com/privacy for more information. To learn more about listener data and our privacy practices visit: https://www.audacyinc.com/privacy-policy Learn more about your ad choices. Visit https://podcastchoices.com/adchoices

Hey friends, welcome. So glad you're here with me today. Let me tell you, I get more questions about things related to the economy than almost anything else. And I think one of the reasons for that is because it is kind of obscure, kind of difficult to understand, but it is something that impacts our daily lives. So my guest today is Gina Smilak, who is a New York Times reporter. She covers the Fed and she has a new book out called Limitless about the Federal Reserve. So today we are going to talk all about inflation, all about the Federal Reserve, all about certain aspects of the economy. And I think you are really going to get so much out of this. So let's dive in. I'm Sharon McMahon, and here's where it gets interesting.

I am very excited to be chatting with Gina today. You write so clearly, you communicate so clearly, so understandably on topics related to the broader economy, but really your specialty is talking about the Federal Reserve. So thanks for being here. Yeah, thank you for having me. I know people are curious about the Federal Reserve, even if they don't know that they are. Because these topics about things like inflation impact their daily lives. Inflation is a kitchen table issue for people. So in order to really dive into the Fed, I would love to start with a conversation about first of all, what even is it? We can't just assume that everyone knows

what the Federal Reserve is. So can you help us understand what is the Fed? I regularly talk to people who think that the Federal Reserve is a prison. So it is not a prison. Oh, snap, a prison. It isn't, it isn't a prison. No, not a prison. The Federal Reserve is America's central bank. I like to think of it in the modern era as sort of the central organizing body for all things macroeconomic. So when you think about sort of the big trends that shape our daily lives, including how hot the labor market is

and how hot inflation is, those are sort of the Fed's two big domains. And they shape those outcomes by trying to sort of work in financial markets to make money either more expensive or less expensive to borrow. And so if they look around the economy, they see it's a little bit too hot. Inflation is too high. The job market is really, really strong. They can go ahead and make money more expensive to borrow, which slows down hiring. It slows down consumer spending on things like

cars and houses, and it helps to bring the economy back to some sort of steady equilibrium. Likewise, if they look around and the economy isn't doing very well, they can make money cheaper to borrow, and that helps to speed everything up a little bit. And then they also have a sort of secondary role, which I talk about a lot in my upcoming book, when the economy is very, very weak, and when markets are really crashing, they can step in and save them, they can make sure that things don't become a complete and total meltdown. And we saw them do that really aggressively in 2008. And we saw them do that again in 2020. And so they've got sort of this dual role, keeping the economy on a steady state and keeping things from going absolutely haywire in times of crisis. And

I think that's kind of the if you had to sum up the Fed in a nutshell, that's kind of the job. I think sometimes it's difficult for people to figure out, like, how does making money more expensive to borrow, lower inflation, right? Like that is kind of an obscure concept. And I would love to hear you address that in a way that makes it really easy to understand. Yeah, I think it is an obscure concept. And it's definitely hard for people to understand. But actually, when you kind of dig into it, it's more intuitive than you might think at first glance. So I think the easiest way to think about it is to think about how households make decisions. And so if I am a household, and I'm thinking about buying a

house this year, and I'm thinking about maybe buying a car because I'm getting into my 30s, and I feel like those are the things I ought to be doing. But suddenly, interest rates are a lot higher. The Fed has raised interest rates. It's going to be a lot more expensive for me to make those decisions. So maybe I put off buying the house. Maybe I decide not to do that. Because I'm not buying that house, I'm also not buying furniture to go in the house. I'm not paying a handyman to make all those repairs to the house. I'm not paying for painters to paint the house, etc, etc. Really, economic activity is just a lot slower because I decided not to make that decision. Now, you multiply that across the entire economy, and you can see how that would actually have a really big effect

on economic activity overall, especially when you consider that not only has it become more expensive for me to borrow, it's also become more expensive for my employer to borrow. So if my employer wants to borrow money to expand, to hire a new colleague onto my team, it's maybe less likely for them to do that in a world where interest rates are a bit higher. And so the job market isn't roaring quite as much as it is. I'm not getting poached by other companies. I look around and I realize that the job market isn't so strong. So I'm not asking for big wage increases. And so really, this higher interest rate environment just has this dampening effect across the whole economy,

where it makes spending, it makes hiring, it makes wage growth, all much more subdued. And that kind of feeds on itself and keeps everything very calm. And when demand is weaker, we know that supply sort of outstrips that demand. And so prices don't increase as quickly. Consumers aren't as willing to pay up to buy new goods. And when they're less willing to accept price increases, companies are less likely to make them. I would love to know more too, because I know this is something that, again, obscure topic. We know that the Fed is not a prison. It's kind of a central, the United States is central bank, and yet it is not really a government agency in the way that we think about like the Department of Energy or the Department of the Treasury. Those are government agencies and those are different and separate than the Federal Reserve System. So can you talk a little bit more about this sort of

public-private partnership that is the underlying structure of the Fed? Yeah, the Fed is a very weird structure. And I'm glad that you said public-private partnership, because I think that's actually the best way to think about it. So the Fed was originally founded in 1913, and then it was reformed pretty aggressively in the 1930s. And those original structures were really sort of a shared version of some sort of public-private partnership. You know, we had a lot of the power concentrated in Washington, but we also had 12 regional banks scattered around the country.

They are privately owned. So they're what we call quasi-private. Technically, banks are shareholders in these regional reserve banks. So they pay into them. That's how the structures are set up. They're organized like corporations. They do, however, in the modern era, basically operate in the public's interest and banks have relatively little to say in how they're run or how they're governed. But I think it's still the case that they're very much seen as sort of existing outside of the traditional government sphere. They have a less important role in setting monetary policy. Five of those regional central banks vote on policy at any given time, whereas

all seven of the Fed's governors vote at any given time. So we've got definitely weighted towards the public, which is what a lot of what my book is about. But it is just this very unusual structure for a government entity. And is the reason it was set up that way, exactly what you were saying a few minutes ago, when it went through a reform system in the 1930s, during the Great Depression, you had this skepticism on two different sides of like, well, look at what happens when the banks are in control of everything. We have this massive stock market crash. It's terrible for all of us. And then the bankers themselves, of course, a large control of the amount of money has an extreme skepticism of the government being in control of the money. So is the reason we have this public-private partnership because of that

tension over who should actually be in charge? So I actually think that that tension is definitely the reason, but I think it actually traces back to even a little bit earlier. So we got the Fed because we kept having these financial crises. We, unlike a lot of European nations, didn't have a central bank. We had tried to set up two prior to the Fed, and both times Congress ended up killing them because they were so skeptical of government control over money. Then sort of fast forward to the early 1900s, And just every couple of years, we were having a major financial crisis. People would run on the banks. Banks wouldn't have enough money to hand out. There was nobody to help the banks when that happened. And it was just a major crash and a major crisis. And so 1907, we have a major run on the banks, a big run on trust funds.

All of New York is just melting down over this. Money isn't pumping around the country the way it should, and it causes a recession. And people are really up in arms about this. It feels like just a stupid way to run a country and to run a monetary system. And so there's this real desire to have a central bank, but we've already seen two experiments in central banking in America fail because they gave too much power to the government. And so I think there was this idea that we needed to fix this system, but that if we gave too much power to the government, it wouldn't be durable. It wouldn't last and be renewed. And so a group of bankers had gotten together and drawn up this prototype that would have been mostly a private organizing body that became a central bank. That wasn't

actually tenable to pass through Congress, but Democrats took that, reworked it into this private public partnership. And so we get the Federal Reserve out of this amalgamation of ideas. And that is where the private public partnership originally comes from. Then in the 1930s, the weight is shifted a little bit. Initially, the power was very much sort of resided with those private entities. They were the much more powerful version of the Federal Reserve. When we get to the 1930s reform, you really see that power get pulled back to the public portion of it and away from the private portion. But the private portion, like we already have covered, sort of remained really, really relevant,

really important. What was the public reaction to the creation of the Federal Reserve System? Because, you know, you think about things like the Andrew Jackson presidency, where he was like, so, so, so opposed to central bank. And that was really like a huge part of his re-election platform. What was the public's reaction to this? Did they understand it? Was it something that they had broad support, like this public mandate behind it? Like, yes, this seems like a good plan. How did that play out in the public sphere? I'm so glad you brought up Andrew Jackson, because I think he's actually a perfect encapsulation of how people originally felt

about central banks in America, which is that they saw them as really this tyrannical institution. You know, he had this great line about how I will kill the central bank or the central bank will kill me, basically. He saw it as sort of antithetical to the whole idea of democracy and popular representation. But by the time we get up to the Fed's founding in the early 1910s, you're really at this stage where people have just been rocked by these repeated financial crises. And so when the Feds originally founded, it really isn't seen as this all-powerful economic entity. It's more seen as sort of a backstop that's going to keep the system from melting down every five years or so. And it's also seen as an entity that can really help sort of the middle of the country to make sure that it has money when it needs it. We don't talk about the money system a lot today, because it basically works. Yeah,

right. And it's so much of it is electronic. Yeah, yeah. And when you need money, you can pull it out, you know, or when you need to swipe your credit card, you absolutely can. If for whatever reason, you have a bunch of bills come due, you can go to the bank and get that cash. That was not true. In the early 1910s, you know, you would have to the bank and get that cash. That was not true in the early 1910s. You know, you would have situations where cash would be needed in one place and would get stuck in the other. You had these sort of what we call, what is now called liquidity crunches, and they hit the economy regularly. And so the idea was that the Fed could really help with that, could make sure that cash was circulating evenly, it could make sure that money was getting where

it needed, it could make sure that we didn't run into these crunches, just because it was harvest time, and suddenly everyone needed money. And so the idea was that the Fed was the sort of safety blanket for the entire financial system. And so I think it was much more popular than the previous two experiences, largely because of that, you can really see that in press coverage at the time. The only time that we might have encountered issue where we run into your bank having something is if you want a large number of bills in like a specific denomination. You know, like if you want $100,000 in 20s, you might need to call them ahead and be like, I'm going to need this. The fact that we have the Federal Reserve means that

we don't have to think about it. We don't have to think about that scene in It's a Wonderful Life where everybody's crowding the bank lobby and they're like, can I just have $17? Or, you know, can I just have $2 till next payday? We don't have to think about that anymore. But that was not the case for a very long time in this country. Yeah, bank runs were a very real, very big issue just simply because you couldn't furnish cash quickly enough to the places where it was needed. And so it really did help to prevent that. And I think it's also relevant and important to know that the Fed also has ways to prevent runs on other important markets these days. You know, it's not just cash,

the financial system has become way more complex in the time since, you know, your listeners probably don't hold all of their cash in a savings account, they probably have some of it in the bond market or some in a money market mutual fund. And the Fed also prevents runs on those instruments so that, you know, it's not likely that if your money was valuable and worth investing in today, that that money market mutual fund is just going to be worthless tomorrow. And that's largely because the Fed exists as a backstop. How does the Fed present bank runs? I think a lot of people like, again, we just take it for granted. What exactly are they doing to prevent it? Basically, I think there's one basic principle that it's important to know about the Fed,

which is it doesn't just hand out money willy-nilly typically in these financial crisis sort of situations. What it does is it lends money to anybody who needs it and has basically just a liquidity issue, which means that it just can't get it. It's totally good. It's a sound business, but it can't get the money right away because something crazy is happening. And so in those instances, the Fed can take good collateral from those institutions and lend against it and basically make sure the cash keeps flowing. And so that's what we've seen over the Fed's basically entire lifespan when it comes to banks. And much more recently in 2008 and 2020, that's what we've seen across a bunch of different markets, money market mutual funds during the 2020 crisis, we saw with the corporate bond market, a bunch of other bond markets. And so it's a really, you know, it's a

pretty bedrock position for them, where they are making sure that financial markets basically keep functioning, that they don't just devolve into panic when something goes wrong. In what way does the Fed impact the lives of ordinary Americans? Because I know some people listening to this are going to be like, there's a lot of financial jargon, money market, mutual funds, liquidity. I am just out here trying to buy shoes for my kid. In what way does the Fed impact all of our daily lives, no matter our current financial status? I think the first one, just to sort of keep on the topic we were just talking about, those sound like complex financial terms. But at the end of the day, if you've got retirement

savings, you're probably in those structures, at least in some way. And so it makes sure that those structures don't break down just because there's a panic and not because there's actually something fundamentally wrong with them. So we make sure all of our retirement savings are basically safe over really stressed periods in financial markets. On a much more simple level, the Fed's two big jobs are controlling inflation and fostering full and sustainable employment. And so the Fed, like we were talking about earlier, it speeds up the economy when it's too weak, it slows it down when it's too hot. And in doing so, it tries to make sure that we're not seeing our paychecks eroded by inflation month after month. It tries to keep inflation pretty steady,

which is its primary goal right now. And on the flip side, it tries to make sure that when unemployment shoots up, that it comes back down in a timely manner. I'm Jenna Fisher. And I'm Angela Kinsey. We are best friends. And together, we have the podcast Office Ladies, where we rewatched every single episode of The Office

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mondays we are taking a second drink. You can revisit all the Office Ladies rewatch episodes every Monday with new bonus tidbits before every episode. Well, we can't wait to see you there. Follow and listen to Office Ladies on the free Odyssey app and wherever you Inflation is such an important issue right now. A lot of people are curious. I'm sure you've heard the price of X is out of control. This episode is not necessarily about the price of X, but it's one example of like a consumer pain point where inflation has really hit an important product that consumers use on a regular basis that they've come to rely on. And we see prices go out of control. People are always curious about, first of all, what tools does the government have to actually address things like inflation, address the price of eggs, address what it costs to buy a house or to even pay for employee benefits? Can you give us like

a rundown of like everything the government can actually and realistically do to address inflation, which is really just the growth of prices? I think that you have to think of inflation as sort of different parts. So there's one kind of inflation, which is what I think we can think of as supply shock inflation, which just means that for whatever reason, we all of a sudden have way less of the thing that we previously were buying than we previously had. And so the prices jump out of control. The government in the short run can do very little to address supply shock inflation. And I think that kind of describes the egg situation right

now, actually, because what we've seen is we've had some real problems with avian flu recently. So chicken flocks are dying. That means that we have fewer eggs and that has pushed prices up quite a bit. So that's a great example of supply shock inflation. The kind of inflation that the Fed really can control and that the sort of broader government is interested in controlling is the longer lasting inflation. So I think that kind of inflation you can think of particularly in the services industries. So if you go to a restaurant and you have a meal out and you're noticing that the bill is a lot more expensive and you talk to a manager and they say,

hey, you know, it's because our labor costs are so expensive. Wages are climbing so fast. We have to cover them. It's our primary cost. And that's why your restaurant bill is so expensive. That's the kind of inflation the government has some tools to deal with. The way that we deal with that kind of inflation is basically by cooling down demand. So the idea is if it's suddenly more expensive to borrow and spend money, we're going to have less hiring, a less hot labor market, slower wage growth, maybe less inflation in those services industries. Likewise, you are not going to have as quick of wage gains. you are going to be less willing to pay ever greater prices for the things that you're buying. So maybe instead of

getting that latte in the morning, you make coffee at home. And so, you know, latte prices, as a result, nobody's buying lattes, latte prices come down. And I think one of the challenges that people have had in understanding this like persistent prolonged inflation that we've had, is exactly those two prongs of the inflation equation that you just mentioned, that what the Fed has the ability to control is all demand side inflation, which is trying to cool down demand by making it more difficult to borrow money or more expensive to borrow money. But the supply side inflationary issues that were greatly impacted by the pandemic, where we saw huge supply chain issues overseas, huge factory shutdowns in China, for example, to get computer chips to put in our cars.

So it drove up the prices of cars because there just were fewer goods to put in the cars. That portion of inflation separate issues, and that the Fed's power to address supply side inflationary issues is very, very, very minimal. It's at all really. I think that is an interesting point. I think one thing that's important to keep in mind about the pandemic issue, and this is something I write a lot about in my capacity as a journalist at the New York Times, is it was also partially a demand story. It was certainly a supply story. We definitely saw factories closing down. We definitely saw shipping routes not planning for a lot of spending. And so they really sort of took some capacity offline. But what we also saw was really unexpected, strong spending on goods. So people were stuck at home, they had a little bit

of money in their pockets because of unemployment insurance and because of some of the stimulus checks. And they took that money and they bought new couches. They bought all kinds of new things. Comfy clothes to wear at home. Comfy clothes. Exactly. Exactly. All of those sweatpants we bought, they came from somewhere. They clogged up the global shipping routes in the process. So there just weren't enough ships and there weren't enough containers to transport all the stuff that we were buying. And so that really did help to lead to some of the supply problems that we had that really helped to push up inflation and kind of get this inflationary experience started. And so there was a demand portion of this at the end of the day.

And so there was a demand portion of this at the end of the day. And so I think that's why the Fed has thought pretty much, the Fed did for about six months, try and look through this. They basically said, you know, this is a weird pandemic thing, we're not going to react to it. And then as it became clear that it was stickier, they said, you know, there is clearly a demand portion of this, we probably have a job to do here. There's something we can do to help wrestle this inflation lower. And these days, I think you look around and the inflation looks a lot less like supply constraints and a lot more like that sort of classic demand kind of inflation that we were talking about earlier. And so the Fed is very much trying to get a control on that. It seems counterintuitive to the average person that we would want the economy to be doing a little less well. You know what I mean?

Like, it seems, well, why would we take steps to make more people unemployed? Why would we take steps to make it so that businesses can't grow as quickly? Why would we want that? That seems bad. Well, shouldn't we? Isn't there a way to have our cake and eat it too? That's the question. Yeah. So I actually think that we have a pretty clear historical answer to that question. And history is not always the perfect guide, but we have been in a situation somewhat like this before. And that was in the late 1960s, throughout the 1970s, and into the early 1980s.

And back then, what we saw was a combination of wartime spending and repeated oil embargoes and pretty strong labor markets helped to push inflation up for most of the 1970s. The problem was that that high inflation base, which continued year after year, meant that when we got hit by a new oil shock, inflation kind of jumped into the stratosphere because it was already pretty high. Companies knew they could raise prices. And so you saw any kind of sort of external event happen. And they felt pretty comfortable just kind of passing that all along to consumers. It was a very inflation, what people at the time referred to it as was an inflationary psychology. There seemed to be an inflationary psychology that had taken hold.

And so we got into this situation where inflation was really capable of sort of ratcheting up on a dime. We had a situation where people were negotiating much higher, much more consistent wage increases in order to cover the inflation. And wages and inflation were just kind of spiraling upward. You know, with every passing year, you got inflation was a little bit higher. And so this happened throughout the 1970s. It was a pretty painful period. This was basically all the newspapers talked about at the time. You know, this was this was very top of mind. It was on the nightly news every night. People were very concerned about it because it just felt like no matter how hard you were working, you were always falling behind because everything was getting so much more expensive so rapidly. And God forbid you lose your job because if you're trying to live on savings in that environment,

your savings are just being eroded very, very rapidly. So this was not good. People did not like it. And a lot of the problem, a lot of the reason that economists now think the 1970s were such an inflationary period is we were never really willing to accept slower economic growth to try and get that inflation under control. You know, at the time, the Fed was just not very willing to constrain the economy that much. They were very worried about pushing the unemployment rate up. So you would see them lift rates, crack the job market a little bit. And then as soon as things started to weaken, they would cut those rates right back again. And so they let inflation continue year after year, it became very entrenched. And it ultimately took crazy double digit rate increases in the

early 1980s under Paul Volcker, which also sent unemployment up above 10% to get inflation under control. That was just an incredibly painful experience, like absolutely terrible. People sent two by fours to Paul Vol ringed around the Fed in Washington. Like across society, people really suffered under these policies. It was a really bad period. And basically, that was sort of the cardinal sin of monetary policy. Nobody ever wanted to repeat that experience. And so now the idea is, you don't want to get to that point, you want to slow the economy before things get so painful. And if you do that, then you can kind of keep everything at a sort of steady, happy pace. Or maybe it's not gangbusters every year, but it's never 1981, 1982 again. That's a really good point that I remember, you know, hearing from my parents, etc. What mortgage rates were like during that time period.

We're so used to like, oh, I got my three and a quarter percent. And it's not that anymore. But for a while it was, for a nice long while it was. But mortgage rates in the early 1980s were 16 plus percent. Like insane. By today's standards, that seems bonkers. This is a question I get asked a lot. And I wonder if you do too. What role is perhaps what you just mentioned that inflationary psychology, but what a lot of people today are calling corporate greed? What role does that play in today's inflation rates? So I think that's the million dollar question. We've actually seen consumer expectations for inflation remain pretty low. It's somewhat surprising, actually,

but consumers basically believe that the Fed is going to get inflation back under control. If you talk to people and ask them where they expect inflation to be next year, they'll tell you like two or 3%, which is pretty much where it used to be. That's back to normal. So consumers are still expecting some sort of's back to normal. So consumers are still expecting some sort of reversion to normal. I think when you hear from businesses, you get a more complicated and interesting picture. In surveys, they will typically say that they do expect inflation to go back to normal. But then on their earnings calls, they will talk a lot about taking price. So they still clearly do think that they have some amount of pricing power. It's

kind of become the buzzword in corporate circles is like how to continue to increase prices. And so I think that that is sort of the element of inflationary psychology that everyone's really closely watching right now. Like how long does that last? Can it last? Are we in an environment where consumers are just going to keep accepting these higher prices indefinitely. Because, you know, businesses can only do that as long as consumers are able to pay. And so it's just, it's a very interesting moment. And it's very, I think, hard to guess what happens next with that. You know, there's been so much talk about a huge recession, this like looming recession, looming recession, like, we've never had a massive global pandemic plus the full weight of the Fed combined before. And so what are your prognostications? So when we heard about the

January jobs report, which blew almost everybody's expectations out of the water. Like the US added over 500,000 jobs in January, it was expected to be under 200,000. Unemployment is the lowest it's been in like 50 years. It doesn't seem like we're about to crash. Am I wrong? You are not wrong. You are not wrong. It's kind of like a what recession moment. Where is the crash into the ocean here? Yeah. And it's actually we got retail sales data this morning, and they were like, very hot, very strong retail sales for January. We're seeing people buy cars again, which we were not expecting not to again, say that we're going to have to wait for time to tell. But I think there's actually a really interesting question

here, because it seems pretty clear that the economy is not in a recession. It seems pretty clear that momentum is actually holding up. I think the question is, can inflation moderate in a world where the economy keeps holding up like this? And I don't think we have a super clear answer yet. I think the Fed is pretty worried that the answer to that question is no, that they're going to have to slow down the economy pretty drastically, that they're going to have to do more to try and make sure that inflation comes back under control. And I think it felt like this like Goldilocks moment, like everything was happening that we wanted to happen.

And now it seems like things are heating back up again, like the porridge is a little too hot again. And if interest rates get cranked, much greater risk that we do fall into a recession eventually. I think the risk here is that we're in a scenario where you don't see the slowdown today, but it requires a more painful recession down the road because you don't see that slowdown today. And I think that's the real concern. But like I said, it really depends on what happens with inflation and what happens with the economy in the next couple of months, because the Fed's going to have to be making these decisions really in the first half of this year. So this is like a soon to be decided question, but I don't

think we have the answer yet. How much control does any given president, no matter who they are, how much control do they have over inflation, prices in the economy? I think people have this perception that the president is out there being like, the price of wheat is going to be 239 today. You know what I mean? Like that presidents are out there controlling commodity markets. I would love to hear from your perspective as an expert on this. How much control does any one president have on things like inflation and the prices consumers are paying for things? Very limited. I would say they can sort of do diplomatic things or use temporary fixes to try and make inflation better in the short run. We've seen some of that in the Biden administration. You know, we did see them tap the strategic

petroleum reserve, for example, to bring down gas prices. And certainly we've seen the oil price cap in the Russia's war in Ukraine implemented. And that's been aimed at some level at controlling price increases. So you can do those little things around the edges. You know, we've had a history in America where we have tried things like price caps, where you limit how much people can charge. Those were pretty disastrous. The Nixon administration did them. They didn't really work. You know, they worked temporarily to damp inflation, and then inflation roared back and really popped up as soon as they were taken

off. And so I think the lesson has been that as a president, you should leave this one to the Fed. It is better to let the central bank control inflation. And that's really sort of where we've landed in America. And it's pretty much the way that we approach these problems. The subtitle of your book, Limitless, is the Federal Reserve takes on a new age of crisis. What is the new age of crisis that they are going to be faced with? I think what we're really in, in this era is a time period where the economy has become heavily financialized, where financial markets kind of dominate everything. And I don't think that's going to be a surprise to any of your listeners. I think we're all really conscious of how things have sort of shifted over the last couple of decades. You know, business debt is way

up. We see private equity companies. We see a lot of companies that kind of operate on some sort of debt-based model. We see sort of the primacy of the stock market for a lot of large corporations. You know, they think about their investors very prominently. And I think we see, even for regular households, a lot of sort of risk-taking in financial markets. You know, I think we see even for regular households a lot of sort of risk taking in financial markets you know I think the sort of surge in Robinhood trading during the pandemic is just one example of what is a much broader trend where people are trying to figure out how they can make their savings pay back over time and so they are taking a little bit more risk in financial markets and the reason I think that that introduces this new era of crisis that the Fed is so important to, is it means that protecting markets in times of crisis, that making sure people don't have a

panic and run on these various savings instruments becomes much more important. It becomes a much bigger job. It becomes much hairier and requires a lot of moral trade-offs that I don't think existed before. And I think that you're really seeing the Fed grapple with that. They're trying to figure out how to be transparent as they are increasingly powerful because of this financialization. And that's sort of the tension at the core of this book. I sort of trace how they made decisions around the 2020 meltdown, which involved meltdowns across a lot of markets. There was so much happening at the beginning of the pandemic that I think people forget how much Wall Street just absolutely crashed for a few weeks there. But the reason that we can forget that, the reason we don't all remember this as the dual disaster that happened

at the start of the pandemic is because the Fed stepped in and saved all of those markets from completely imploding. And had they not done that, we could have been in a really, really bad position. And so I think it's important to examine what they did in that era, talk about what it means for the future, and be aware that it's likely that this could happen again. Should the average person view the Federal Reserve positively, in your personal opinion, your professional opinion? Should we look at the Fed and think they're doing a good job? Or should we be looking at the Federal Reserve, in your opinion, with suspicion or fear? I think that we should look at the Federal Reserve the way we would look at any part of government. I think

there's a lot of times where we kind of try and split in the camps when we're talking about politics. But, you know, people don't look at the Department of Education or the Department of Treasury or, you know, even like the House of Representatives and think like, good job, bad job. I think they think, what are they doing? How are they helping me? Are they setting policy in a way that I think is reasonable? And they kind of check into it. I think that's how we should look at the Fed. it. I think that's how we should look at the Fed. You know, I think like all parts of government, it should be regarded as a group of people who have been assigned a specific task by Congress, who are trying to carry out that task. And we should all be sort of conscious of what they're doing and making our own judgments on a regular basis about whether they're doing a good job. It's important to look at them, though. I think one thing that is a risk with the Fed

is that they are extremely powerful and they are accountable to Congress.. I think one thing that is a risk with the Fed is that they are extremely powerful and they are accountable to Congress. But I think that accountability only matters insofar as the public is somewhat conscious of what you are doing. And, you know, I think we are very conscious of what some other parts of the government are doing. You know, I think we keep a pretty regular, basically a regular heartbeat on what's happening at the Treasury Department, for instance. We basically know what happens with taxes and diplomacy. I think it's important to also keep that kind of spotlight on the Fed because what they are doing is so important to our everyday lives.

And so I think it's one of those institutions that no matter how much you think that they are good public servants trying to do the right thing for the world, you should always be skeptical and conscious of what's happening there. Hmm. be skeptical and conscious of what's happening there. This is another thing people don't understand, that the Fed is not setting the rate that you as a consumer are borrowing money at. They're not telling your credit card company, you need to charge 29.9% interest. Or if you go to the bank and you're like, I want to buy this used car, what is the rate that I will pay to borrow this money? That is not what the Fed is controlling.

Now, what the Fed is controlling impacts that rate that you're borrowing the money at. But tell everybody exactly what the Fed is controlling when they say that they're going to raise interest rates. Whose interest rates are they raising? Wall're going to raise interest rates. Whose interest rates are they raising? Wall Street's interest rates, basically. So they basically set interest rates in short-term money markets. And by doing that, they set the interest rate that kind of guides the rest of the economy. That trickles out as banks pay a certain amount to borrow and to lend. That trickles out throughout the rest of the economy. It trickles pretty

directly into things like mortgages. I think that's the place where you can see Fed rate increases sort of translate one for one almost most directly. So that's very useful. It's really interesting, actually, a lot. So the way that the Fed sets interest rates has changed quite a bit over the last 10 years. But I think the important thing to know is that this is basically finances interest rate, and then it trickles out into the real economy to affect all of us. But it does do that pretty quickly. The transmission is pretty quick. Gina, thank you so much for being here. This is very educational. And I think people are going to get a lot of information that they can then take to feel more confident as they read your stories in the New York Times, they read your book Limitless.

as they read your stories in the New York Times, they read your book Limitless. It always just feels good to feel confident in your own knowledge about something. So I really appreciate your time in helping us do that. Yeah, thank you for having me. I hope this leaves you with a better understanding what the Fed is and how the Fed works. You can find Gina Smileyk's new book, Limitless. The Federal Reserve takes on a new age of crisis wherever you like to buy your books. And you can follow Gina on Twitter at Gina Smileyk. It's J-E-A-N-N-A-S-M-I-A-L-E-K. Thanks for being here. Thank you for listening to Hearer's Work.

It's interesting. This show is written and researched by Heather Jackson, Sharon McMahon, Valerie Hoback, and Amy Watkin. Edited and mixed by our audio producer, Jenny Snyder, and it's hosted by me, Sharon McMahon. We'll see you again soon.