The Pour Over Today - TPO Explains: What the Federal Reserve Actually Does

Episode Date: February 7, 2026

Readers of The Pour Over pick a topic to have explained, and Jason and Kathleen have to get Joe to understand it in less than 30 minutes… This week, they’re explaining The Federal Reserve. Looking to support us? You can choose to pay⁠ ⁠⁠⁠⁠here⁠⁠⁠⁠⁠ Check out our sponsors! We actually use and enjoy every single one. ⁠Cru⁠ ⁠Wild Alaskan⁠ ⁠HelloFresh⁠ ⁠Safe House Project⁠ ⁠Gloo⁠ ⁠QAVA⁠ ⁠CCCU⁠ ⁠Filament Bible⁠ ⁠Upside⁠ ⁠Mosh⁠ ⁠LMNT⁠ ⁠Not Just Sunday Podcast⁠ ⁠Bible Gateway Plus⁠ ⁠TPO Corrections Page⁠

Today's episode is brought to you by our lead sponsor, Crew. Oh, Jason, it's Super Bowl Week. So my question for you is, what, like, Super Bowl dish is a must have at a Super Bowl party? Alipino poppers. But here's the thing. I have never made them. But that's, to me, that, like, makes the Super Bowl party if there's good jalapeno poppers. Yeah.

How are you? That's a must have. I'm going classic wings. Like you need wings at a Super Bowl party. And actually a small group member years ago made really good wings. And I was like, can I get the recipe? And she's like, you're going to laugh because this is the most simple thing. And it really was.

It was like Frank's Red Hot, I think was the sauce that she used. And she just bought like frozen chicken wings from Aldi and like put him in the oven. in and then had them heat up a little bit and then put him in a slow cooker with the Franks Red Hot. It was super easy and I did it and it is really good. Oh, you can, that'll be happening this Sunday? I think we haven't gotten, usually there's a Super Bowl party we get invited to, but we have not heard from them. And, you know, it's this awkward like you don't want to force the issue or also act like you're invited when you're actually not. You need to wait upon being invited.

So our usual, and I will throw them under the bus, the Drescans, they have hosted a Super Bowl party forever. It was the first thing we ever did with Veritas, our church, was the Dresen Super Bowl Party. They left our connection group, and the only stipulation with them leaving our connection group to go start this other one was we would still get invited to the Super Bowl party. And they decided to take this year off. So we're going rogue. Did they make jalapeno poppers? No. I feel like they typically showed up. And Nate makes jalapeno poppers with some regularity, you know. And so, but they just feel like such a great football snack. But yeah, yeah. Yeah, so we'll see. It might be a jalapeno popper-less Super Bowl that's not at the Drescens. And, you know, why even watch? Yeah. This is a great opportunity for some listener interaction. So please drop in comments. What is your

your go-to thing that must be at a Super Bowl party or that you make and bring to Super Bowl Party. We'd love to hear it. And with this very natural transition, let's start talking about the Federal Reserve. Yes, folks, today's episode, we are going a little shallow, deeper dive on the Federal Reserve. That's the topic for today. Yeah. So, Joe, let's see how you do with this first question. It's a doozy.

what is the Fed okay so this is what I know the Fed is like its own independent entity like that's kind of the point like with checks and balances and the Federal Reserve from what I understand controls interest rates which is a lever to stimulate or slow down the economy based on inflation, and I think like job unemployment rates. So just kind of this entity that has levers to pull to impact our economy. And we could, this is a huge topic, but I think we literally could stop right there. That was, you did, you did a great job. So yes, the Fed, it's the central bank of the United States. It is an independent government. It is not independent from the government, but it is independent within the government.

And we'll, yeah, they have a dual mandate from Congress. And so that dual mandate is to keep inflation low and employment high. And we'll talk about how those two things are in conflict, like there's tension between them. And so they're constantly kind of tweaking things to try to maximize. both but knowing that there's that there's tradeoffs. The interest rates is a key way, like a key lever that they pull. The other is money supply, so they can create and destroy money in a kind of fascinating power. And then part of what's confusing also is it's this like kind of hybrid public, like government

and private sector thing. So it just lives in all these different spots of tension. Like, is it a government agency? Is it private? Are they doing this or that? And yeah, so there's a lot to it. When you say create and destroy money, what I'm envisioning, especially with the destroy money,

is someone like lighting dollar bills on fire? Yes, it is, it's it's not that, but it's almost weirder than that, you know. No way. Let's jump to it. So let's jump to the fact that they manage the money supply. So this is what kind of breaks my brain and you just got to embrace it. So I'm going to start with saying there are really two types of money.

There's cash, physical money. Actually, I have a dollar bill here. And you can see at the top it says Federal Reserve Note. Okay. So this is currency that is issued. It is printed by the Treasury, but it is printed at the request or at the direction of the Federal Reserve. And it says it is, this note is legal tender for all debts, public and private. Okay?

So you have cash. We understand this physical, usable by the public. You then have central bank reserves. And this is digital and it is only available to banks. Okay. So it is, think of it as like a, and it's one to one. It is completely you can, the bank can at any point say, hey, we want one less digital or, you know, central bank reserve dollar and we want one

cash and the Fed will do that. It's one to one. But the Fed can just create these digital bank reserves. And so typically the way they go about that is they will buy treasury bonds. So a bond issued by the government, they'll buy it from a bank and they'll say, hey, you used to have this bond that was giving you, you know, like 10 bucks a month. We now own that. And we've just credited your account. with, you know, $120 in central bank reserves. So they, it's called a keystroke. Like, they didn't have that money before. That money just didn't exist.

And now it exists. Now a bank has it. And that bank can go and loan that out to Joe, who wants a car loan or something. And they have created money and infused money into the economy. And then the flip side is, if this. they, if they sell that bond back to a bank and they're saying, hey, you take the bond and we're going to take, you know, digital reserves for you, they don't have like a savings account. They can create money. So when they take that back or when someone pays them interest, that money just disappears. Like it's just out of circulation. So that is, they do not, they do not print money, except they sort of do because they do.

correct the Treasury to print money. But the way they manage the money supply is they infuse or disappear this digital bank reserve. Wow. That's a pretty crazy concept. And when they do this with banks, do the banks have any say? Or when they do this keystroke, will the bank just say, okay, we just have to do it because the Fed said so? No. That's a super important. distinction. The Fed, the Fed manages the market by creating these conditions and the incentives. But the reason they would, like the reason the bank would sell is because the Fed is buying it at an attractive rate, you know, and the reason they would buy it back is because the Fed is selling it at an attractive rate. But right now, they have like $6 trillion on their balance sheet. So they can, they can move the

market. You know, if they start to say, hey, we're selling bonds at this, no one has the supply that they have. So because of that, they can, they can, yeah, dictate how much money is in or out of the economy. Let's talk a little bit about the structure of the Fed because it's going to, there are things I want to say that don't make sense if we just don't even understand, like, what the Fed is. Okay. Sounds good. Okay. So there's a three-part structure. The first is the board of governors. This is what you hear about frequently. There are seven governors. They're appointed by the president, confirmed by the Senate. And one of them is appointed by the president to be the Fed chair. Okay. So right now it's Jerome Powell. President Trump just appointed someone new, Kevin Warsh, and he will take over in a couple months. assuming he's confirmed by the Senate. So these governors, their office is in D.C. They are, you know, political appoint. They're not political, but they're appointed by political positions. And they,

to try to keep them from being political, they have 14-year terms. So very long, you're for sure going to be interacting with multiple administrations, like it's more than eight years. And except for the Fed chair who's appointed to a four-year term. And they have to be one of the seven governors. So there are seven governors, one, you know, every four years, one of them can be the chair. And you can hold the chair position multiple times. You cannot hold a Fed governorship multiple times. If you complete someone else's term, then you can get like your full own term. But you cannot, there's no, there's no 28 years on the Fed board. Hey, it's Zan from the pourover.

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Go to wildalaskan.com slash TPO for $35 off your first box of premium wild caught seafood. That's wildalaskan.com slash TPO for $35 off your first order. The Fed Board sets overall monetary policy. So think things like, we should target 2% inflation. That is coming from the Fed Board. They also regulate and supervise major banks. So they'll set like, hey, you need to have this much cash in reserves and stuff like that. And then they oversee the next part of the three-part structure, which is the three-part structure,

which is the 12 regional Fed banks. Okay, so you have this kind of governing leadership body, and then you have what feels much less like government and more like a private sector bank, and there are 12 of them kind of spread out across the country. Let's see. There's Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco.

And when you have a dollar bill, like, those are, the areas that I would see on that dollar bill, correct? You know, I don't know. I kind of doubt it because the dollar bill or like coins, it's going to be like the mint, the location, so that's within the treasury. I'm looking at this dollar bill. I don't see, I don't see St. Louis or something on here. But the, so the regional.

banks, they are in those locations, and their responsibility is like, think of them as like boots on the ground in these different regions. This is a check on saying, hey, we don't want, you know, the elites only on the East Coast controlling all the monetary policy. We have these integral to the system, 12 banks that are throughout the country. So they do surveys and interviews with business owners. This is where a lot of economic data comes from. And so the board of governors isn't just hearing like, oh, unemployment moved 1.1 percent. They're hearing, oh, small West Coast manufacturers have stopped posting jobs, but it's doing better in other regions and things like that. So that's part of it. It's economic data. They also supervise local banks. They'll like review portfolios and make

sure the banks are solvent. We had, do you remember when Silicon Valley Bank went belly up a year ago or whatever? So in theory, the San Francisco Federal Reserve could have and maybe should have audit or reviewed them and gone, hey, man, your, you know, your portfolio is way out of whack. You have a bunch of exposure to tech companies and they all run in the same circle and this is like kind of a recipe for a run on the bank where everyone just wants to withdraw at the same time and you can't manage that. So that's a role that the local banks do. And then the other, and this is really fascinating, they operate the nation's payment systems. So every time a check clears, every time there's an electronic funds transfer, that all, like the regional bank, federal reserve

Bank has some hand behind the scenes and making sure like, okay, we've correctly taken money out of this account and added it to this account. And so they, they are like the pipes for enabling money transfers. Wow. Okay. Now you have the third. So we have the board of governors. We have the 12 regional banks. And we have the Federal Open Markets Committee, FOMC. And this committee, committee is made up of the seven governors, the president of the New York Fed, and four of the remaining 11 bank presidents that rotate. And these people on the FOMC vote to decide what interest rates should do. So every time you hear like, hey, there was a Fed meeting and they decided to raise rates, that was the FOMC making that decision. That was helpful. The FOMC, the FOMC,

making that decision happens how often? What's the cadence there? Yeah. It's pretty regularly. I don't have the exact answer. I want to say like every like six weeks or so. I mean, many times a year. And they can also call emergency meetings and say like, I'll shoot, the economy's collapsing. We're just going to raise rates, you know, or lower rates. Yeah. But they, so specifically. Specifically, they determine what the Fed fund rate is and they reevaluate it constantly over and over. They're looking at all the economic data to make that decision. Well, that being said, what is the Fed Funds rate? So the Fed Funds rate is the surprisingly indirect way that the Federal Reserve influences basically the entire economy.

We talked about a little bit about the monetary supply. they do that and they're constantly kind of doing that. Historically, they haven't done that as much. The lever that the Fed pulls to influence the economy is this one interest rate. And the Fed funds rate is how much banks charge one another on overnight loans. So let me explain why this is a thing. And again, the Fed has its hands kind of all the way through. So the Fed requires banks to hold enough in reserve to make sure that they have enough money for withdrawals and, you know, everything that they need money for.

Some days, some banks are short on reserves. You know, there are more withdrawals or more activity than they expected, so they don't have enough money. And other banks have extra money. And so they just kind of, you know, loan each other money to make. sure that the money is properly spread out and everyone has an appropriate reserve. Well, the Federal Reserve is through their different methods influencing and dictating how much the banks are paying in interest. And it sets the, it's like the first domino of everything. Because if the banks are being charged 4% interest on things, that means they need to loan it out to you for more

than that. And so it's when when rates go up, borrowing is more expensive and people and businesses can then buy less stuff. And so the economy slows down. And if rates go down, then borrowing is cheaper and businesses and people can borrow more money and buy more stuff and the economy speeds up. So it's the first domino and it just like they make this one change and it ripples throughout the entire economy and it's felt very very quickly relatively quickly the way you described what happens when the rates are lower businesses can buy more things it's happier on the personal side because mortgage rates can lower along with that if there are lower rates so if it's Isn't that better?

Like, shouldn't we all just go for lower rates? Yeah. You sound like a politician running for reelection, Joe. So remember the Fed has this dual mandate. So they want to keep inflation low. And if you lower rates and the economy is speeding up, people are spending more borrowing and spending more money, then that raises inflation. And they don't like inflation. We can talk a little bit about that, too, like why 2%.

But on the flip side, when you, so lower interest rates mean higher unemployment and higher interest rates mean lower inflation. So if the economy, like if the job market is not doing well and they're like, man, the economy needs a boost, they can lower interest rates and kind of stoke the economy. But if things are running a little hot or, you know, it looks like they're having two much fun and inflation is starting to go up, then they raise interest rates and that cools the economy and hopefully lowers inflation, but people will also lose their jobs. And so there's just this constant tension. Yeah, that'd be a really hard balance, I would imagine if I was in that

position to maintain the balance. Right. And so it leads well into why the Fed is independent. And I joked about the politicians, but the politicians, presidents, famously, they want lower rates specifically before an election because the economy will do better and the consequences of the economy doing better won't be felt for, you know, months or years. And so that is why the topic of the Fed's independence is so critical. And every president complains about the Fed chair that they appointed. That's just famously, they appoint this person and they're like, ah, they won't lower rates. The economy is their problem. But it is the role, and by design, that the Fed is independent so that they can make the tough decision that no one really wants to make

and keep the economy stable for the long term. There was actually William McChesney-Machesney- Martin, a former Fed chair, said it's the Fed's job to, quote, to take away the punch bowl just as the party gets going. And no one likes that person, but that's the role. And that is part of why their independence is so kind of sacred. Sounds like one of our coworkers, Nate, who wants to do that all the time, right? Right. He's always stealing the punch bowl. Yeah, he'd be a good Fed chair. We should, yeah, nominate him. Jason, when I'm like reading news stories that you've written, you guys have written around the Fed, there's this 2% number that's usually associated with the Fed. So like what is this 2% that I read about?

So it is kind of hysterically completely made up. Like it was so it started in the 1980s and New Zealand was the first one that was like, hey, we should like, we should. have a target inflation amount. And sort of naturally, you would assume zero feels like the right target, you know, but New Zealand was like, no, zero is the wrong number and I'll explain why in a second. And it should be a little bit higher and we think 2%. And it was like as calculated as that phrasing as best I can tell. And then it sort of worked and kind of was proven out and has since spread everywhere. And like, to my knowledge, every major central bank or credible central bank, it's like, oh, yeah, 2% is the target. So if you think about, like I said, zero makes sense of,

hey, this, this dollar that I have should be able to buy the same amount in a year as it does now. Like, that feels right. But the problem is it is always fluctuating. Like you can't, you can't just dictate that. The market has effects. And so let's use some extreme examples so we can understand. Imagine 100% deflation. So I can either use, spend this dollar and get one apple today, or I can wait a year and I can buy two apples with this one dollar. So in that, in the deflationary environment, consumers delay purchases. It incentivizes, it incentivizes, saving. You just like, if you stick money under your mattress, you're a genius. It's going to be worth more tomorrow. Like, keep doing it. And so when consumers delay purchases, then companies,

the demand goes down, companies cut production and they invest less in innovation and new plants and all that stuff. Wages stagnate or start to go down, which then causes demand to fall. and you get in this loop of just nothing is happening and everyone is just, you know, gripping their money very tightly and the economy shrinks. Now, let's go the flip side, 100% inflation. You can either buy one apple today or you can buy half an apple in a year. And in that scenario, like price is, price as a signal of what is important kind of goes out the window. It's hard for competitors or entrepreneurs to figure out, like, hey, is this,

is this a good business? And prices are high because there's a lot of demand, or is it just like, yeah, prices are always high and they're just always going up? And it erodes savings very quickly, and it disproportionately impacts people who are on fixed incomes or have low ability to negotiate pay. And so it just kind of like perpetuates this economic divide. And it all, it all. It also just feels bad. Like it creates kind of panic amongst consumers and people don't think things through. They don't make long-term investments because they're like, this money just won't be worth anything. Like you just spend it today and I'm not going to make prudent long-term decisions. So of those two, what has been found is deflation is much harder to get out of, you know.

and like when when that happens it's it's just a really hard cycle to break whereas low inflation incentivizes stops people from saving money and causes people to invest money which then instead of sticking the mattress under the you know the money under the mattress you invest in your friend's business and there's more economic production that happens and so they found it's like a little bit of inflation causes people to take some risk and grow the economy and do things and still feels predictable. It's like, you know, you're generally going to still be able to buy an apple in a year and you're not going to freak out about that.

So, but it's just kind of wild that the number is admittedly, it was just arbitrary. It was just made up. And then they're like, yeah, it works, you know. So the difference between two and three or one and a half is kind of all made up, you know. Man, maybe those Kiwis in New Zealand, maybe they. they knew what they're talking about. We just don't give them the credit that they deserve. Wow.

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how it works or how it's supposed to work and the theory behind why the fed exists it is is an incredibly contentious institution. And there are tons of, I mean, if you read through the accusations and feelings on the Fed, they range from what I'll say is like pretty clear conspiracy to just valid criticism of this is, you know, hey, the best system that humans have found out, but still broken and flawed. And it's, it feels. feels a little bit like a referee in the Super Bowl. Like if a bad call is made, half the people are like, oh, well, he's, did he take a bribe? You know, like, was he in the betting markets and trying to change it? Or is he just bad at his job, you know? And that's a little bit how things with the Fed go. I mean, there's, there are conspiracies. I'll call them conspiracies, uh, that the Fed was involved in assassinating JFK because he was going to like take away some of their power. There's also like, deeply rooted fact that the previous attempts at creating a central bank is what caused the divide and created the first political parties. And so if you don't like political parties, you can

sort of blame the Fed for that. Yeah. And just general criticisms of we have this very powerful influential institution that in order to be effective has to, be independent and not, you know, be able to resist political pressure. But that also means there's just this, I mean, sort of accountable, but like barely accountable institution that has enormous power. And we're just kind of trusting that they're trying to do the best for the economy and not find ways to help their friends get rich or help themselves get rich or tank the economy for other reasons and stuff like that. Yeah, so the Fed is independent and the governors can be fired for cause,

but they are famously, and this is playing out in the news now, famously difficult to fire because it's explicitly said, hey, cause does not mean like they did a bad job. You can't just disagree with their policy decisions. You can't be upset that the economy crashed. They need to be able to do whatever they want. It's like, yeah, if they're found to be embezzling, you can kick them out for that. But they're famously fire, hard to fire.

And so you have, I don't know, do you have the secretive cabal that's running the world or this well-intentioned institution that's keeping the economy to float afloat? and there are people on both sides of that debate. You know, I asked for fun facts, not not-so-fun facts. Yeah, that's true. There's interesting facts and sort of a catch-all of what I did a poor job of making clear earlier in the episode. I'm sure we're going to hear about Kathleen's review of your not-so-fun facts next week. That's right. And, you know, leave comments about all the horrible things that the Fed has maybe or maybe not done that I didn't include.

so we can, you know, keep proper accountability. Yeah. That's right. Yeah. All right. Well, let's move on to Christian perspectives. Yeah, you know, so this one leads in well from what I was just talking about. Honestly, all the economics of it, I know I went to business school.

It's a lot. It's pretty dense. And I generally understand how some of it works. but thinking about the political pressure and yeah, the bad decisions that have had huge impacts, as I was reflecting, it was just like, you know, the system can be broken, but that doesn't mean all the players are evil and are, or malicious. And so a reminder for me to have grace and be loving and say, hey, I want to be someone who is working towards solving these problems out of a desire to help others

and also in a way that is respectful and kind and honoring to God and how I am speaking about and treating the people that have maybe caused the problems intentionally or not. So that was the tension I felt of how can I be loving to people who are a part of a system that is sometimes working and sometimes not and love them regardless. Yeah, there you go. Above all, love. All right. Well, thanks, Jason, for this quick snapshot of something such a big topic of the Federal Reserve. All right, well, thanks everyone for joining us on another episode of TPO Explains. As a reminder, you can watch this episode on YouTube and Spotify.

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