What The Actual Fed.

Summary

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Episode Overview

Podcast: Optimist Economy
Episode: What The Actual Fed.
Date: February 17, 2026
Hosts: Kathryn Anne Edwards (Economist), Robin Rauzi (Editor)

In this episode, Kathryn and Robin take listeners on a deep dive into the Federal Reserve (the Fed)—covering its history, functions, and why it matters right now, especially with Jerome Powell's chairmanship ending, the political crosswinds around new appointments, and growing public scrutiny. The goal is to clarify the sometimes mystifying workings of the Fed and highlight why current events make understanding it more important than ever.

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Key Discussion Points & Insights

1. Why Talk About the Fed Now?

• Jerome Powell’s Term Ending: Jerome Powell's term as Fed Chair ends in mid-May, and the President has nominated Kevin Warsh to replace him. Trump is pursuing greater control over the Fed amidst unprecedented political and legal pressure.
• General Confusion: Even well-read individuals find the Fed complex. Kathryn reassures listeners: “If you don’t know what’s going on with the Fed, you’re in amazing company.” (00:53)

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2. The Structure and Independence of the Fed

• Board of Governors: Seven members (six governors + chair); Governors serve 14-year terms, chair serves a 4-year term. Appointed by the President and confirmed by the Senate. Once confirmed, they are very difficult to remove.
• Chair Retention: Powell can remain as a governor after his chairmanship because his original appointed term runs until 2028 (07:10–08:44).
  • Kathryn explains: “If you were on the board and you became chairperson like Powell did, you can return to the board and fill out your term as governor. Nobody’s done that for a long time…” (08:08)
• Independence at Risk: Trump’s repeated attempts to gain control over the Fed (legal challenges, attempts to fire governors) are unprecedented and threaten this independence.

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3. What Does the Fed Actually Do?

• Origin Story: The Federal Reserve was established in 1913 to address frequent bank runs and provide stability to a highly decentralized banking system (10:38–12:47).
• Liquidity Explained: “Liquidity is your ability to convert your holdings into cash.” Kathryn provides concrete examples to demystify the concept (12:52–13:52).
• Discount Window: The metaphorical (and once literal) window where banks can borrow from the Fed in times of crisis (14:28–14:41).
• Relation to the FDIC: The FDIC (Federal Deposit Insurance Corporation) wasn’t established until 1933 and further stabilized the system by insuring deposits, but wasn’t part of the original Fed system (15:18–16:03).

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4. Key Moments in Fed History

• The Great Depression: The Fed’s early missteps (raising interest rates in a recession) arguably worsened and prolonged the Depression (18:29–19:26).
  • Memorable quote: “If it’s swing and a miss, it’s like, miss, miss, miss.” – Kathryn (18:24)
• Glass-Steagall Act (1933): Reorganized the Fed and created the Open Market Committee; introduced the FDIC (19:32–21:41).
• The Fed-Treasury Accord (1951): Freed the Fed from White House control over interest rates, cementing its independence (22:18–24:04).
• 1970s & Stagflation: The Fed lost credibility by tolerating inflation to support employment. Paul Volcker (appointed by Carter) forcefully raised rates, causing a painful recession but restoring confidence (25:53–26:39).
  • Robin: “And interest rates, like, 20%.”
  • Kathryn: “It’s almost like proof through pain that the US economy will be well managed…” (26:42)
• The “Dual Mandate”: Stable prices and full employment (Humphrey-Hawkins Act, 1978).

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5. Contemporary Fed Crises

• The Great Recession (2007–2009): Ben Bernanke, a Depression expert, lowered rates to zero and oversaw “quantitative easing” (buying securities to stimulate the economy). He also increased transparency and accountability via press conferences and policy guidance (29:54–34:25).
  • Kathryn’s anecdote about absurdly easy/hard access to credit in 2007 vs. 2009 underscores the tightness of the banking crisis. (31:35–33:37)
• Pandemic Recession (2020): The Fed responded quickly, and while the recession was brief, inflation soon became an issue, prompting rate hikes from 2022 onward (36:05–38:20).
• Current Challenges (2026):
  • Trump’s new contractionary fiscal and immigration policies increase recession risk.
  • Political pressure on the Fed to lower rates.
  • The pending Supreme Court case on the attempted firing of Biden appointee Lisa Cook, the first Black woman on the Board of Governors, and federal investigations into Powell himself (39:54–45:44).
    • Kathryn: “So everything’s going to come down to this Supreme Court case, which again, doesn’t inspire confidence…” (41:20)

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6. The Fed’s Real-World Impact and the Stakes Now

• Why Independence Matters: Credibility of the US central bank supports global confidence in the dollar as the world’s reserve currency.
• On Public Awareness: The best scenario is not thinking about the Fed. “It’s like liking your dentist. You just need him to be really good at his job.” – Robin (46:28)
• Current Situation Recap:
  • Senate Banking Committee may delay Warsh’s confirmation until legal proceedings on Powell are resolved.
  • What happens in the Fed will dominate news until at least May 2026.

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Notable Quotes & Memorable Moments

• “If you don’t know what’s going on with the Fed, you’re in amazing company.” – Kathryn [00:53]
• “It actually took me, I would say, a solid half decade to figure out what liquidity was… I still don’t get it.” – Kathryn [12:37]
• “Is this confusing on purpose?” – Robin [10:25]
• On the Fed chair: “It’s like liking your dentist. You just need him to be really good at his job.” – Robin [46:28]
• “You just kind of want the Fed to do its thing and do it well… it should go back to just Wall Street and financial companies are obsessed with the Fed and no one else cares…” – Robin [44:02]
• “If they do a good job in their independent position, you shouldn’t have to know about them, and we should have trust in institutions.” – Kathryn [47:14]
• “Why do I know the name of the Postmaster General?” – Robin, referencing SNL skit [46:31]

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Important Timestamps

| Timestamp | Segment | |-----------|-----------------------------------------------------------------| | 05:05 | Introduction to the Fed's current news relevance | | 07:10–08:44 | Explanation of Fed Governor and Chair terms, Powell’s situation | | 10:38–12:47 | History: Why was the Fed founded? | | 18:29 | How the Fed worsened the Great Depression | | 22:18–24:04 | The 1951 Accord, cementing Fed independence | | 25:53–26:39 | Stagflation and Volcker’s painful but successful strategy | | 29:54 | The Great Recession, Bernanke, quantitative easing | | 36:05 | The pandemic and the Fed’s rapid response | | 39:54 | Trump’s policies, Fed, and political tension | | 41:20 | Lisa Cook Supreme Court case, Powell investigation | | 46:28 | “It’s like liking your dentist…”—Should we root for Powell? | | 44:02 | The Fed’s ideal status: invisible to most people | | 47:14 | Why we shouldn’t have to care about the Fed |

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Conclusion & Takeaways

• The Federal Reserve is a deliberately independent, complex institution at the heart of the US and global economies.
• Its power, history, and independence are under unprecedented scrutiny and threat due to current political dynamics.
• Moments of great crisis—Depression, stagflation, the Great Recession, and pandemics—have forced the Fed to rethink its role, often painfully.
• The best outcome is a competent, independent Fed that fades into the background; when we all know its name, something unusual is happening.
• The coming months, as new appointments, lawsuits, and policy tensions play out, will be critical for the institution and the economy at large.

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For more:

• OptimistEconomy.com
• Reach out with questions or economic worries: [e-mail]

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End of summary.

Transcript

[A]

We should include how long this took me to do, like, how many takes. This is. For those of you listening, this is like, take 10.

[B]

I feel so much better.

[A]

Hello and welcome to Optimist Economy. I'm Katherine Ann Edwards, economist.

[B]

And I'm Robin Rousey, editor.

[A]

On this show, we believe the US Economy can be better. And we talk about how to get there one problem and solution at a time.

[B]

Today on Optimist Economy, we're going to talk about the Fed. So this came up because, of course, the Federal Reserve Chairman, Jerome Powell, his term ends in mid May. The President has just nominated Kevin Warsh to replace him. But I've just realized that I don't. The more I read about the Fed, the less I understand it. And so we're going to try to figure some things out so that you understand the stakes and what's going on in the months ahead.

[A]

I would argue that not a lot of people understand the Fed. So if you don't know what's going on with the Fed, you're an amazing company.

[B]

Good, because I have tried really hard in the last few days to figure it out. And like I said, the more I read, the less I know.

[A]

Yeah, well, we'll get there together or not. And you can just stop listening to the podcast. Like, there's lots of ways this could go.

[B]

There's lots, lots of options. This is what we get for trying to be, like, somewhat connected to the news.

[A]

All right, well, do we have any announcements?

[B]

I don't think so.

[A]

Okay, well, after announcements, we do.

[B]

Let's go straight to Retcon.

[A]

Straight to Retcon. Retroactive continuity where we clarify, correct and apologize. So couple retcons. One, Carter liked the show. My co author, who had done all the brilliant math stuff dealing with income inequality calculations, he listened and he said he really enjoyed it. Thank God I didn't tell him I was doing it. I thought I would surprise him because I know he listened to the show and then he said he liked it, and I was very happy. Second, retcon is actually a little harder to deal with, which is that in the prior episode, I said that I went to London and brought home biscuits for Robin, but I actually forgot to give them to her, so I also ate them. And she.

[B]

I think that you're taking responsibility for that. I think that we forgot to pick them up. We left them on the dining room table, and we might be at fault.

[A]

I just wanna make sure it's clear that it sounded like I was thoughtful enough to bring back cookies, but I was not thoughtful enough to make sure she got them, and then I was happy enough to consume them myself. So I don't want you guys to get. I think this is about being honest. This show is about honesty.

[B]

And shortbread. Okay.

[A]

Oh, Andy's saying we got thousands of letters about this.

[B]

Yeah, yeah. They all wanted cookies.

[A]

Our next section is called Terms and Conditions. This one, actually, we're gonna put into Terms and Conditions. Supposed to retcon, but I said that Vilfredo Pareto was a polyglot, and a listener emailed us to point out that he is, in fact, a polymath. And a polyglot is someone that speaks a lot of languages, and a polymath is someone who is good at a lot of different things.

[B]

In fairness, he could have been a polyglot, too. We don't know.

[A]

He probably was, but that's not what I was referring to. Me economist. Neither glot nor math. Robin, did you look anything up? This. And also, y', all, thank you for the email. I'm saying this a little sarcastically, but I actually like. We do love hearing.

[B]

Love that.

[A]

Yeah, totally loved it. And the guy, he was. He was like. I don't know if I should say anything. You should say something. This show is only. This show is as good as y'. All help us be with your feedback and comments.

[B]

It's true. I read a sentence that used buffalo as a verb, and I. Apparently, this is a perfectly acceptable verb, but I. I did not know that you can use buffalo, like, to mean bamboozled or.

[A]

Now I'm realizing I don't know what bamboozled means.

[B]

Like, to bewilder. The sentence example from Merriam Webster is, I'm not some newcomer that you can buffalo with that nonsense.

[A]

Okay.

[B]

During this debate, I refuse to be buffaloed by a flurry of irrelevant issues. I had no idea you could use that word.

[A]

Do you think it comes from the city or the animal?

[B]

I don't know if it comes from either. It just says it's a transitive verb.

[A]

I think it comes from the animal. But, listeners, prepare, because in our biggest Pilgrim, we will help you no longer be buffaloed by the Fed Merch team. If you're listening, I feel like some kind of buffalo logo is in order with like a. If you know, you know, don't get buffaloed. Optimist economy. Wow. It's really a wonder I ended up an economist. I meant for Madison Avenue.

[B]

How much coffee did you have?

[A]

A lot. We're going to take a very quick break, and we'll be Right back.

[B]

It's time for our centerpiece conversation about the Fed.

[A]

The Fed, yeah. All that enthusiasm through terms and conditions in Redcon. Meet the brick wall of the Fed. I think that Jordan Klepper on the Daily show put up a clip of Jerome Powell speaking. He's like, oh, so he's the human embodiment of hold music. Let's talk about the Fed. The Fed is in the news a lot for not good reasons.

[B]

You mean right now?

[A]

Right now. The Fed is in the news a lot right now for two reasons, neither of which are good. One, we don't know what's going on with the economy. People are generally worried that we're going to tip into a recession. And that's been a worry for a couple years. That puts the actions of the Fed front and center. And so what they say, what they do, what they're talking about, that comes up a lot. Second reason why it's in the news a lot is because the Fed is an incredibly independent institution and Trump doesn't like that. The current chairman of the Federal Reserve Board of Governors is Jerome Powell, who was appointed by Trump during his first term, 2017.

[B]

Yeah, yeah.

[A]

His appointment is coming to an end. And Trump has been making political attacks and legal attacks on the Fed in order to exercise more control over what the Fed does. This is unprecedented in the. The degree and scope. He's targeted one Fed governor for mortgage fraud and said she needs to be fired. He's brought a federal investigation against Jerome Powell, the chairman himself, and now he's just announced his new replacement on the Fed Board of Governors. And his ability to have majority appointee control of the Fed will all rest on whether or not Jerome Powell stays on the Board of Governors after leaving the chairmanship. So what the hell does all that mean? That is what we were talking about.

[B]

This is the first thing that I find confusing about the Fed. How is it that Jerome Powell has served two four year terms as chairman, but he could stay on the Fed board beyond that? Can you explain that to me?

[A]

Yes, I think so.

[B]

So I'm fact checking. Please, real time fact checking.

[A]

Someone pull up Wikipedia. An expert stalking. All right, the Federal Reserve has a Board of Governors. So no, in the beginning there was money. No, hold on.

[B]

Yeah, I mean, I.

[A]

Okay, we kind of feel like that with the. We have a Federal Reserve System. We will talk about how we get there in a minute. But the Board of Governors is the head of this system that sits in D.C. and then there are regional branches that are distributed geographically throughout the United States and have their own territory that they cover. The Board of Governors is truly a board of seven people, right? Six governors and a chairperson. The governors are appointed to 14 year terms. The chairperson is appointed to a four year term. Term. They're appointed by the President, they're approved by the Senate. And then once they get appointed and approved, there's very little power the President has over them. And as we're learning, it's not clear he has the ability to fire them. They're an independent institution. So the reason why Powell can stay is that Jerome Powell was appointed to the board in 2014 as a governor with a term that would run through 2028. While he was serving that term, he was appointed Chairman of the Federal Reserve by Trump in 2017. If you were on the board and you became chairperson like Powell did, you can return to the board and fill out your term as governor. Nobody's done that for a long time. Most of the time they get done with the chairpersonship and they're like, I'm out. But you can fill out your term. And then in like, it's also really weird. Like if you leave your term early, the person that replaces you fills out your term. It doesn't start a new one. I mean, I, I've told people for a while this is probably how we want the Supreme Court to work. Like they have age limits, they have term limits, meaning they, the Fed, they, the Fed, the Fed Board of Governors. Like, you know, it's a very apolitical board and it's shielded from political influence through their independence and not being able to be fired, which is what Trump is attacking. But the fact that it's every 14 years, it's going to be off with predictable presidential cycles. And then they're staggered. The 14 year terms, they're fairly staggered. Trump has had more appointees than, than usual because his two terms are separated by another term. So that means more people will come up and then someone just quit. So that's the Board of Governors. They meet like twice a month. They go over Fed stuff.

[B]

It's not, yeah, it's not the other board that we think of that sets interest rate policy.

[A]

They oversee the operation of the regional banks. They, you know, monitor the economy. They look at like the balance sheets and they basically review what's going on at the Fed, which we haven't said what's going on at the Fed yet. But I just want to be really clear. They shouldn't be confused with the Open Market Committee. The Federal Open Market Committee is. Or the Fomc Those are the meetings in which the governors, plus the president of the New York Fed, plus the presidents of a rotating set of regional feds, meet to determine what to do about interest rates.

[B]

Right.

[A]

And set monetary policy. This is so. It has. It's like. Is it. Okay, question from production.

[B]

Is this confusing on purpose?

[A]

You know? Yeah. So I think it would help to go back to understand what the Fed does and why we need the Fed. It would help to go back like to the beginning.

[B]

Exactly. I knew it.

[A]

So creatures came out of the slime.

[B]

Yeah, exactly.

[A]

And they wanted to consume things that they couldn't produce on their own. Should I just fast forward?

[B]

And so they created capitalism.

[A]

We're just going to fast forward to fiat currency. Okay. So the Federal Reserve was created by the Federal Reserve act of 1913. And the reason why the Federal Reserve Reserve was created was because we had a ton of banking panics. And banks at the time in the U.S. you know, in the 1800s, you had very few consolidated or large banks, and you had thousands of very small banks that served a very small geographical area. Well, if a bunch of people make a run on the bank in the sense that they just want to get the money that they've deposited out of it and the bank doesn't have that money, this creates a panic and the bank has to close and nobody gets their deposits back. We call this the It's a wonderful Life.

[B]

It's a wonderful life. It's a wonderful life.

[A]

Yes, exactly. You know, the bank has your like, quote unquote money, but it doesn't have your actual money. And if you go in, if too many people come in and demand their actual dollar bills and the bank doesn't have enough, it's a run. And the bank folds. And if enough banks do that, it's a panic. Because you hear about a bank folding in another town, and so you rush out to your bank to get your money. And it's a kind of a domino, cascading effect of bank panics. And there were a ton of panics throughout the 1870 or through the 1800s, into the early 1900s. And the panic of 1907 was particularly bad. So the idea of the Federal Reserve was that they were going to create a new way for banks to have liquidity by having this special not currency currency called the Federal Reserve Note. And when banks need money but don't have it, like in a panic, they can use the Federal Reserve notes. They have to get access to cash. I don't know if that makes any more Sense. It actually took me, I would say, a solid half decade to figure out what liquidity was like. No matter how many times somebody said it, I was like, I still don't get it.

[B]

That should have been our term and condition.

[A]

Yeah, it's really just like cash.

[B]

It's cash. Yeah.

[A]

Yeah. So I mean, liquidity is your ability to convert your holdings into cash. So you're walking down the street with your best friend. I come up and I give you both $10,000. Congratulations. Here's free money. Your friend is in the middle of buying a house, so she puts that towards the down payment, towards the house, and gets a slightly better mortgage rate. You don't have a house and don't want to buy one. So you take your $10,000 and you put it into the stock market. Well, a month later, I run into you both again and say, actually, it's not free money. I need my $10,000 back. Your friend can't access the money. She's put the cash into a relatively illiquid asset in which it's not easy to necessarily get the $10,000 out. You can't. You sell your stocks. You get the, you know, as much as you value you have of it, and you can sell your stock and quickly get liquidity. So a lot of times, what happens when things go south for banks, they don't have enough liquidity. They truly just don't have cash on hand. So we start the Federal Reserve bank with the Federal Reserve act of 1913 in order to stabilize very decentralized banking system that we have and prevent panics and bank runs and is incredibly successful.

[B]

Does it prevent them or does it just respond to them? I guess no.

[A]

It's like if there is a run on the bank and there's a worry about cash, they can borrow from the Fed discount window. You really just have to stop the first bank run in order to prevent a panic from occurring. And the way that you stop a bank run is like having a source of liquidity for banks that allows them to lend as much as they were before, but still have the ability to meet, you know, an excess demand for cash.

[B]

Can you explain the window?

[A]

The window. It's just.

[B]

Is it like a bank window? Like, it's like a metaphoric.

[A]

It's a metaphoric window.

[B]

Bank window. Okay.

[A]

Yeah, it's really just the window was what they called it when it was the Fed to the bank as opposed to. To a customer. I think it did start as an actual window.

[B]

Yeah. You would actually go up to the. You Would go from Pasadena up to the Federal Reserve bank in San Francisco and say, hey, I have some Fed notes. I need some liquidity. Help help a bank out.

[A]

Help a bank out. Fed window. Can I, can I, can I have some, some Fed notes? Can we do some Fed note trading.

[B]

So I get some liquidity?

[A]

Yep.

[B]

Okay.

[A]

Does it sound made up yet?

[B]

Well, how is this different from the fd? Like what the FDIC does in terms of insuring deposits. And I don't understand why you needed a whole new currency to do it.

[A]

The FDIC didn't exist yet.

[B]

Okay.

[A]

It doesn't come around until the Banking act of 1933, which also affected the Fed. But it's, it's not, it's not a currency because a currency means like you can take a Fed note and like, go down to your local 1913 Starbucks and buy a latte. It's not legal tender. Like, it doesn't work in the market. You need this kind of quasi currency, like currency reserve note. Because if everything was held in cash, it would affect the value of the dollar and cash was tied to gold.

[B]

Because we were all still on the gold standard.

[A]

Because we are all still on the gold standard. So the purpose of the Federal Reserve act was to come up with a way to get resources to banks that would not disrupt the otherwise flow of credit and would not disrupt the value of the US Dollar. And so they do this by creating a new not currency called the Federal Reserve Note that they trade through the discount window. So at this point, it's all brokered through the 12 regional banks. It's not really like the Fed. We think of the Fed of the Board of governors in D.C. but the Fed in this era is really about the regional banks. They're supporting their local economies and the.

[B]

And the regional banks.

[A]

The regional banks are holding a fair amount of gold, but they are lending through this Federal Reserve Note so that if you didn't have liquidity, instead of having to get the cash version of that, you can get the Federal Reserve Note of it and still meet your deposits. I mean, the Federal Reserve, even though it's a system, it is ultimately always reactive to whatever bad thing just happened. So that's the creation of the Fed. Don't have bank panics. We've got this now big old problem. They don't have a mandate when it started in 1913 that has any type of macroeconomic consequence or purpose stop local bank panics. It's just serve local banks to prevent bank runs and make sure that we have a way of Providing them with liquidity so that they don't have runs on banks and we stabilize the credit system in the US that is all they're meant to do. But they do understand on some level, especially as they kind of like, really get going in the 20s, that the rate that they charge at their discount window and the interest that they charge on their own currency as they lend, it does affect broader economic activity. So the Federal Reserve System is arriving at the notion that their actions can stabilize the macro economy. Sorry, I'm. I'm laughing because. Because then the Great Depression happens and they get, like, everything wrong. I mean, like, if it's swing and a miss, it's like, miss, miss, miss. And there are historians, especially economic historians, who will tell you we only had a Great Depression because the Federal Reserve did such a bad job as the stock market crashed. So one thing that they did is that, like, as the economy started to slow down, they started raising interest rates, which, like, we know to be like the opposite of what you want. They raise interest rates like, three times.

[B]

What was the thinking that they were.

[A]

Trying to, like, control.

[B]

Slow the planet?

[A]

They were trying to control, like, the exuberance and the hysteria.

[B]

Huh?

[A]

I mean, it's like, it's like there's an appeal of like, well, let's. Yeah, let's raise interest rates, slow things down a bit. People will just put money in banks. This is like, there was a real, like, if the people put money in banks and the interest rate's high enough, that'll stabilize everything and then we won't be, like, worried about stock market returns. And that was the opposite of what happened. And so much of the Great Depression was accelerated by the Fed making just incredible missteps and. And actually bent it or elongated. Both. Oh, man, they made it worse. They made it longer, I mean, because they, they were raising interest rates, I want to say, as late as, like, 1931. And at this point, there's still 12 of them. Right. It's the Federal Reserve System. They're not acting in coordinated, like, they talk to each other. There is a D.C. office, but, like, it's not like the same type of.

[B]

Jet in for meetings, right?

[A]

Yeah. It's not the same type of centralized decision making we have now. So the Fed as we know it comes from the Banking act of 1933, aka Glass Steagall, and Glass Steagall does. Well, I mean, it does a ton of things, but one of the things it does is it says that there's going to be an open market committee which had been loosely in existence before and it was going to be formalized and centralized and given the task of setting interest rates with a view to keep the economy stable. So it was actually given this like mandate of keep the economy stable. Make good decisions, make good choices. Fed what's kind of amazing is that Glass, Steagall Glass was the senator and he was a former treasury secretary and he was just like we need to make the Federal Reserve stronger. We need to have a strong central bank. Steagall was a House member from Alabama who said that big banks are what caused this problem. We shouldn't do anything to help out Wall street and we need to have a deposit insurance system in order to protect just like your Main Street American. And it took incredible convincing to get the Senate and Glass on board. But it was really Steagall that came out with it. And at the time most of the big central banks, any of the larger banks, the most people on Wall street as well as like the Senate Banking Committee, they all thought that it moral hazard scheme that if you put deposit insurance into smaller banks the larger banks would end up having to pay for it and the smaller banks would act irresponsibly. But Glass Steagall sets up the Federal Deposit Insurance Corporation FDIC which is funded by bank fees that are then used to ensure deposits so that there would be no run on the banks. And then the the Federal Reserve got a broader mandate to basically keep the macro economy stable.

[B]

So is team A get your act together and act more in concert with one another. But we've also created a secondary way to prevent bank panics.

[A]

Yes. Okay.

[B]

So at this point the Fed's job is just basically keep the economy stable by setting interest rates at your discount window. Okay.

[A]

And then monitor overall banking activity and lending activity so that in order like if, if they're going to lend to a bank they're going to like look at its books.

[B]

Okay. So there's a certain amount of oversight that they're doing on, on banks too.

[A]

Yeah, yeah. So after the Great Depression like the next seminal event in the Fed's history is stagflation, the inflation spike of the 1970s. And that was another one where the Fed.

[B]

Oh wait, so you're going to skip 1951.

[A]

Oh the accord. Yeah, yeah. I much history. Do our listeners like World War II. The US government has to borrow an incredible amount of money to finance the war that will disrupt all kinds of markets. It'll deal with long term like treasury notes in the 30 year, the two year, the. I mean all of these things are going to be affected by the federal government becoming an insatiable consumer of debt in order to finance World War II production and eventually armament and shipping people overseas, they basically tell the Fed, you have to keep interest rates at 2.5% because if you go up, it could cost the federal government so much more money to borrow. Well, if you keep interest rates artificially low and a bunch of people get jobs, you're going to see inflation. So not only did the federal government say interest rates are going to be really low and they have to be capped at 2.5, but we're going to have wage controls and we're going to have price controls, and this is how we are going to keep inflation.

[B]

Keep it tamped down.

[A]

Yeah, a reasonable amount of control. Control through World War II. So by 46, the wage controls and the price controls are gone. But they've basically said the Fed needs to keep interest rates at 2.5%, not because of the way it would stimulate the economy, but because how much the federal government was borrowing and because of, like, the market relationship between interest rates and treasury bonds. And by 1951, this comes to a pretty severe head and they sign, quote, unquote, the accord that the Fed is free to fight inflation.

[B]

And that's what really creates the. I mean, as you were just saying before, that the government was telling the Fed where to set interest rates.

[A]

Yes.

[B]

And that's the moment where the Fed gets its independence from. Right.

[A]

It is this pivotal moment in that the Fed can't just. It's not going to be a tool of the federal government, of the President of Congress. It has to put basically the macro economy first.

[B]

Yeah.

[A]

And it kind of breaks up this idea that the federal government is the best or is necessary in that management. Okay, so big hits we've got. 1913 were created. 1933, we get reorged a bit after a poor performance. 1951, we have listened to the federal government in order to make it through World War II, but now we are on our own working on interest rate policy. And with that newfound independence, like most teenagers, we go right into some terrible decision making. The fed of the 1960s and 70s makes some pretty incredible miscalculations about inflation. And if it is their job to manage it, they don't do a good job. There are volumes written about this period. I think I've tried to. I've tried so hard. I was walking the dog today and I was just like, speaking out loud of like, trying to workshop, like, how do you explain what went wrong with interest rate policy in the 1960s and 70s? And I think what happened over this period, probably the shortest version, is like, yes, they make a lot of decisions related to interest rates and inflation and unemployment, but the biggest miss is that they lose the credibility that they actually care about inflation. And it comes off this trade off of, like, we're willing to tolerate some inflation to help with unemployment. And then it could not have. They could not have done this at an absolute worst. If there was a period in which it would have been okay to show a little bit of tolerance for inflation. The 1970s was not it. You start off the decade, the US formally delinks and gets off the gold standard. By the end of the decade, we have a massive supply shock from oil and go into these, like, oil price wars. It quickly turns a situation from bad to worse. It gets to be like, catastrophically high inflation. And the Fed comes down through Volcker, who a lot of people associate with Reagan. He was a Carter appointee.

[B]

He was a Carter guy, yeah.

[A]

And Volcker's like, yeah, I don't know what to tell you, but if we don't handle inflation now, we lose the credibility that we will fight inflation in the future. And this very painful recession happens in the United States essentially to correct for the Fed's mistakes, get inflation under control.

[B]

And interest rates, like, 20%.

[A]

I mean, inflation is so high and interest rates have to get high enough. And it's almost like this, like, proof through pain that the US Economy will be well managed. And we get a lot from it. Prices stabilize and stay relatively low. Almost the entire history we've had since then, with the exception of this last inflation spike. I mean, that's 40 years of really reasonable prices. And in some ways, it's not the action of the Fed that helps control inflation. It's knowing that the Fed will act to control inflation that also keeps it in check.

[B]

It's like a strict parent.

[A]

Yeah, yeah, yeah. So all this is happening where the Fed is, like, in this, like, first person a plot. They're managing the economy, they're making choices, they're making decisions. They're learning a lot. They're growing as people. Congress occasionally tells them, like, hey, remember 19, you know, what is that, 68, 78. Sorry. The Humphrey Hawkins act is in 1978. And the Fed is told via congressional legislation, we need to have stable prices, full employment, and predictable interest rates. Over time, the interest rate, one, like, kind of goes away. And it's only in, like, the 1990s that you start to think of this as the dual mandate because it's really about inflation and unemployment. But as all of this is going on, lots of countries have lots of central banks, not just ours. And we start to get this like very robust body of evidence that an independent central bank that does not answer to elected leadership or non elected leadership is crucial to economic stability and growth and keeping inflation in check. And so it's not just our experience that shows this, it's the global experience during this time. Like if you gave elected officials and let them put their dirty little hands on interest rates, they would make them too low to juice the economy, to make people happy, to win elections, and you'd have higher prices for longer as a result. Speaking of grubby little hands, that is exactly what Trump is trying to do. And he says this is what he's trying to do.

[B]

Oh yeah, there's no secret about it.

[A]

Yeah. But before we get to grubby little hands from the Trump administration, we still have to get through yet another calamity in our economic history, the Great Recession. So last one Great Recession, last one, last formative to Fed history event Great Recession.

[B]

So there's this thing that happens somewhere in here and this is one of the things that I find hard to get my hands around about the Fed, which is there are these number of things that it does to stabilize the macro economy and that they move beyond just setting interest rates at the discount window to take all these additional steps. And I think that this is referred to often as the balance sheet of the Fed. So when does that start? I mean, it obviously is at a pretty high point during the Great Recession and again in the pandemic recession where the Fed isn't just setting saying like, okay, interest rates are going to be low, they're doing other things that they think will calm markets, stabilize banks, stimulate economic activity, keep people in jobs.

[A]

So the guy in charge of the Federal Reserve during the financial crisis is Ben Bernanke. And he has been a governor previously, but he's also an economist who specializes in the Great Depression. And he understands it like very well. And he in fact had said while he was a governor, the Great Depression was the Fed's fault. So this is like a, a moment for the ages to have spent your career studying the Great Depression, the Great Depression and then to basically have one like land on your doorstep. So Bernanke is in charge of the Fed. It's 2006. The next year home prices peak and start to slide. In December 2007 is the official start of The Great Recession. And the Great Recession is the deepest and longest since the Great Depression, which is why we call it the Great Recession. So he knows at least like some softballs here, he needs to immediately lower interest rates, which he does. And interest rates fall to zero. But there is still not enough movement in the economy. Banks have behaved abominably over this period. They have not done due diligence. They have almost no cash on hand. And so the Federal Reserve basically starts to buy stuff. It buys treasury bonds and it buys mortgage backed securities in order to get movement going through the banking system because.

[B]

Everything is just essentially frozen.

[A]

Everything is frozen.

[B]

So in other words, the banks weren't coming to the window to be like, hey, I need more money. The banks were like, we're just going to sit here, you know, and count our non money.

[A]

Yeah, they weren't lending. I mean they pulled back on economic activity. Like let me just give you an example of what I mean. In the summer of 2007 I've graduated college and I am about to move abroad and I need a credit card card. So I go down to the Chase bank at the corner and I apply for a credit card. And no job, no credit history. I've been on a credit card of my parents that I'm no longer on. And these heroes give me a credit card with a $15,000 limit. Okay. So then I come back, it's two summers later in 2009, I get a job and my best friend is in grad school in Atlanta and she has just gone to apply for a credit card and they gave her a $250 limit. That is what we mean by throughout the financial system it is just freezing up. They are not lending, they're not giving out money. And what the Fed does during this time through large scale purchases is they're basically trying to buy stuff off of banks books so that they'll stimulate the economy so that they'll actually go out and move money. So they bought mortgage backed securities and treasury backed securities and this was called quantitative easing. And then when they thought the market was strong enough, they sold the them again. I don't know, I mean people debate how much it was like Bernanke's brilliance or just his grounding in history that he met the moment. I had a friend who lived in Capitol Hill in the time and he said that he was walking his dog one day and he kind of came up behind a guy who was like both walking a little like plotting but also speaking aloud, full volume. And he realizes it's Ben Bernanke. And I was like, but did you say, listen to what he was saying to himself. It could be. So the economy, did he think we were going off a cliff? What did he think I should say? I have not read Bernanke's book. It was like a thousand pages longer than what I was prepared for. So I haven't read his book. I'm saving it. I will read it.

[B]

He wrote a book about the 2008 recession, but Bernanke is seen as being pretty successful in preventing that. I mean, it was a bad recession, but not turning into a depression.

[A]

Yes.

[B]

Even though it was the deepest and.

[A]

Longest in 50 years, probably closer to like 80 years. It was definitely the worst since World War II. But the one we had before that was the Great Depression. So it's really, it's the worst recession since the Great Depression. It was probably the closest we've ever been to sliding back into one. And the other thing that happened, which Bernanke was also instrumental in doing, was that he tried to change the relationship of the Fed with the public in the outside. Like he, they started to do things like tell people what they talked about, have press, like he started press conferences.

[B]

After the era, the public statements and.

[A]

They, they now release what's called, quote unquote forward guidance to let you know what the Fed is thinking about long term. They give summaries of the Open Market Committee release notes and then they'll also give you their economic projections for being somewhat inscrutable and confusing. This moves towards accountability are helpful. I mean, the Fed staff economists are truly elite. They are very good at what they do. They just want to be like in the action, providing the best information. And I would have loved to have been that. I am a little biased in that I would have liked to have worked for them. Still don't love the Fed as an institution or the fact that our economy needs one, but at the same time our economy does need one. And what we've learned over the Fed's history is, is the financial sector needs to have like the threat of the strong parent in order to believe that there is stability and credibility in the US financial system. And that for all the talk of the Fed not being necessary, if they make a mistake, we all suffer. And that to me is testimony to the fact that we need them in place, doing a good job. You know, I don't think central banks are appealing institutions given how anti democratic they are in a sense.

[B]

But what do you mean by that?

[A]

Well, I mean, it's not like we vote for them, we don't elect them. And then our elected leaders have.

[B]

I mean, they're appointed and confirmed, right?

[A]

Yeah, they're appointed and confirmed. But like I would if someone told me like, I don't know why you could like the Fed and not and then hate the Supreme Court, I'd be like, oh no, I kind of hate it. Both. One of them has been successfully politically penetrated and the other one has remained quite apolitical so far.

[B]

Far.

[A]

So far. Also I said that we had to get through the Great Recession. We also need to get through the pandemic, which is another economic calamity. Man, the hits just keep on coming. But the pandemic, the pandemic tees up. What is going on with the Fed today? Really? Well, so you. It's. We're not in history anymore. Now we're into present day starting six years ago. Oh my God. But when the pandemic started, the US Economy came to a sudden and screeching halt. Not in a way that could have necessarily become a depression because of deep underlying weakness revealed by the slowdown in economic activity, but essentially that economic activity was stopped for safety purposes. And then we had to turn it back on. This was in some ways the deepest recession since the Great Depression because of just how many people lost their jobs. But we also rebounded from it very quickly. It was a two month recession and we started to immediately grow out of. By April of 2020 we were on like the front foot, growing quickly, adding a lot of jobs and so on. By 2021 we are recovering jobs, but we haven't fully recovered them. And inflation starts to tick up and it starts to tick up really quickly. And the Federal Reserve says that they don't want to risk the like very.

[B]

Kind of fragile jobs environment.

[A]

Fragile jobs environment in which we still have high unemployment, we still have people we need to bring back into the labor force by cutting it off too quickly. So we're going to tolerate a little bit of inflation until we can't anymore and hope that it's just a blip. That's because of all the crazy stuff that's happening as we're coming out of the pandemic. It's not. And they have to raise interest rates, which they start doing at the start of 2022. We are now almost four years into this conversation of can the Fed raise interest rates to successfully lower inflation without causing a recession? That is a question we have had for four years. And towards the end of the Biden administration we were really close to Answering it, things looked really good. We had added jobs, the unemployment rate had fallen. It had creeped up a little bit, but inflation had fallen as well. It was under three. We were ready to go.

[B]

Coming in for that soft landing.

[A]

Coming in for that soft landing. And then, like Trump, take the wheel, maybe we won't do that. And he starts a contractionary economic policy that has inflationary components through tariffs, deportation, and the firing of federal workers. So pursuing three contractionary policies at the same time leads to a separate question. Same one second verse, same as the first. Is he going to cause a recession? Not like, is the raising interest rates going to cause a recession? But is Trump going to cause a recession in order to maintain, like, a relatively neutral position as all this goes on and to stay in a place to respond should a recession occur? The Fed has lowered interest rates a little bit from their peak, but then stopped and said that they were going to stop. So they lowered rates three times last year. And then they were like, that's it until we know what the is going on. Although they didn't say it like that.

[B]

Well, so they said it more or less like that.

[A]

Like more or less.

[B]

We'll be in a position where interest rates can go up or down depending on what happens. We just.

[A]

Yeah, because if interest rates are too low and then the economy falls, you.

[B]

Don'T have no tools.

[A]

Yeah, yeah. So they said, we're going to stop here. And they have been very reluctant to cut rates because they are still worried about inflation, which almost as soon as he got to office, Trump has been saying the Fed needs to lower interest rates. They're killing the economy. The economy needs to be boosted. And so he has been targeting kind of one at a time, the ability to take over the Fed. So who's this guy? Kevin Warsh comes in with a worsh, kind of a.

[B]

Not a maybe total surprise pick, but there seems to be a general like.

[A]

Well, could have been worse, could have been worse. I mean, the thought was like, there's more than one check on Trump here. One is that the Senate has to approve whoever he picks. And then the second is that if he picked someone that was truly crazy, the financial market would have revolted. And they want someone who's gonna be stable and independent. And so if he had picked someone who wasn't going to do that, you would have seen kind of like upset in financial markets. Now, the question mark is, what will Warsh be like? The guy knows what he's doing, and we have a lot of public records of how he votes on things and what he thinks about things. The question is less so, what has he done? But will he continue to be independent in the future? I don't know. I think that the US Is in an extraordinary position because so much of our economy rests on the Fed being independent. Yet so much of the next appointees success at being appointed will rest on Trump believing that he will do whatever Trump says. Which means our economy is kind of hinging right now on the ability of a handful of men to successfully lie to the President that they will do what he wants and then go out and do what they want because they're Fed chair. And I was like, that just seems like a gamble and it's a failing of the system that somehow this is where we are. The day after he announced him as Fed chair and was like, oh, yeah, he'll be independent. He made it like Trump made a joke that was like, and if he doesn't lower interest rates, I'll sue him. I've already told him that. I'm just kidding. It's like, no, you're not, man. You don't have a filter and you're not clever. Like, you absolutely told him you would sue him for lying if he doesn't lower rates. So everything's going to come down to this Supreme Court case, which again, doesn't inspire confidence about what happens to Lisa Cook, the Federal Reserve Board governor appointed by Biden, first black woman on the Board of Governors who he has tried to fire and alleged that she had mortgage fraud. And our friend Bill Pulte at the FHA said that she had lied on her mortgage application. And she said, no, I didn't, and you can't fire me anyway. Her case is before the Supreme Court, and when it went up for discussion, Powell was right there next to her.

[B]

I mean, the court watchers seem to think that she came out through that hearing pretty well, right?

[A]

Yeah, they. I mean, the Supreme Court has not expressed. What's the word I'm looking for? Backbone.

[B]

That's a word.

[A]

That's a word. Independence.

[B]

I mean, they have given Trump a lot of leeway to implement his policies, but they have seemed pretty concerned about the independence of the Federal Reserve when even as they're letting him fire the heads of other agencies. But they're always saying in the background, but this doesn't really apply to the Federal Reserve. The Federal Reserve is different.

[A]

So if the Fed stays different, the Fed stays different. This institution has been around a long time. It's not perfect. It has made mistakes, but it has also outlasted its detractors. And in the end, what makes it so successful as an independent agency is its necessity in our economy. And you can think of, if you think of the Fed as this, like, technocratic overlord over our economy, it's one thing, but really it's a technocratic overlord over the financial system. And it interferes much less in our lives and much more so in keeping credit flowing in the financial system. And because it's the central bank of the US it is the most important central bank in the world. And most countries have the dollar as a reserve currency. So what happens in the US Matters to everybody else. They've picked us because we are so stable in other things. So I think, I guess I just. I don't like all the interference at the Fed. I don't like having to talk about the Fed. I don't like how much we have to talk about the Fed.

[B]

I know. I mean, yeah, I think that's like, you just kind of want the Fed to do its thing and do it well and like, just.

[A]

I just don't have to think the background and I don't want to think about you. Like, it should go back to just Wall street and financial companies are obsessed with the Fed and no one else cares and, like, that's how it ought to be or maybe not. I don't know. I'm so tired of pretending like what is going on with the Fed is normal.

[B]

Yeah.

[A]

So let's, let's make sure we have a very clear understanding of the present day. The head of the fha, Bill Pulte, publicly accused Fed Governor Lisa Cook of mortgage fraud. He has not proven it. That's part one. Part two is that the Federal Reserve building is undergoing renovation. Renovations of a historic building on the National Mall are expensive, especially when a lot of the work takes place after the pandemic and the inflation spike. Powell, who gave a testimony in front of Congress in which he detailed the progress of the renovations to the historic building and even toured the renovations with Trump himself at one point to talk about what was happening. Now the Justice Department is investigating Powell for lying to Congress and essentially doing some type of book cooking related to the cost of the renovation. The nominee, Fred Warsh.

[B]

I think that we just do want to explain to people that eventually what will happen. We don't know when is. Kevin Warsh will have to go before the Senate for confirmation.

[A]

Yeah. Warsh has to be confirmed by the Senate Banking Committee. But a key Republican member of the Senate Banking Committee has said he will not vote on Warsh's confirmation until Powell's justice investigation has wrapped up.

[B]

Right. So Powell would stay on as chairman beyond his May 15 term limit date. Okay, so we've given you a lot of context to absorb the news over the next couple of months, which was really my goal was like, the Fed is in the news a lot anyway, but it's going to be in the news a lot between now and May. And I think it'd be nice to give listeners a little backstory on what the Fed is, what they do, why we have, why we should care, and how much we should care, I think is my concern.

[A]

Yeah. Oh, question from production. Do we like Powell? I don't know whether to root for him. Speaking as a general consumer of Fed news, do we like him? I don't think you need to.

[B]

It's like liking your dentist. You just need him to be really good at his job.

[A]

Exactly. The best Fed chair and Fed system is one that doesn't have that much scrutiny. It doesn't have much public fascination. We just. We shouldn't have to care about them. They should just do their job. And we shouldn't really know that much about, like. Shouldn't have to know that much about them. It was like that 2000 is that SNL skit from the first Trump administration where they go to a fortune teller and she's like, what do I get from what do I want for my birthday? Like, what do I get? And she's like, you get exactly what you want. Stamps. And she's like, I want stamps. Then the fortune teller says, yeah. And you get them and say, take that, Postmaster General Louis DeJoy. And she's like, why do I know the name of the Postmaster General? That is how I feel. If they do a good job in their independent position, you shouldn't have to know about them, and we should have trust in institutions. So Powell, for what it was worth, was a Trump appointee and ended up being, like, probably one of the biggest thorns in Trump sides in his entire professional career. So you can't always predict what's gonna happen. Yeah.

[B]

All right, that's it for the Fed. We're going to take a quick break, and we'll be right back. We got two executive orders. I think of this as the word ban edition of Executive Orders. These came in both by email to optimist.eacreymail.com First, Alex in West Virginia wants to ban the phrase common sense from politicians use. And David from Wisconsin wants an instant 10% wealth tax again for federal Officials who use the term the American people. And I get it. Like, especially when you hear politicians talk about policies and things you disagree with, they call them. These are just common sense policies. And this is what the American people want and that it does great on one's nerves.

[A]

So I think that this, to me, falls under what my family calls the restaurant rule, which is if a restaurant has an adjective in the title, it's not that. So, like, if it's called quality restaurant, it does not have quality. Or if it's called like, like luxury, like anything. If you put an adjective in any, it could apply to non restaurants. So when someone says, like, this is common sense, 100. It's not.

[B]

Absolutely.

[A]

It's not. That's the restaurant rule. They're trying to be what they're not. These are great executive orders. Okay. Do you have a spiritual sponsor for this week for new listeners? We don't have any actual sponsors, really. Not that much money. But we do need to thank our spiritual sponsors who get us through our week in our life.

[B]

Yeah, my spiritual sponsor this week is the fact that it's 81 and sunny here. I don't want to gloat. My poor sister's buried under two inches of ice.

[A]

Eastern Seaboard under ice is about to crack off and go to the Atlantic.

[B]

For all the time they've said, oh, California is going to crack off. No, it's not us. No, it's been beautiful. And we've had to take a lot of long walks because, you know, it has been a Category 5 news storm for a month. So I'm really grateful sometimes that I live here.

[A]

Awesome. My spiritual sponsor is Team usa Fits. I love the Olympics so much. I love winter. I love summer. I love every story. You need to give me 10 seconds of backstory on an athlete, and I'm sobbing, and I'm, like, rooting for them like they're my own child. Like, I just. I cannot tell you how much I love the Olympics. And my spiritual sponsor is just all the Team usa. The opening ceremony, like, loved, loved our outfits. I, like, looked up how much it would cost for me to buy it.

[B]

An Olympic outfit.

[A]

Yeah, you can buy. I mean, you can buy the whole thing. You could buy the opening ceremony and closing ceremony outfit. And, I mean, I've priced it out. And I think maybe not this year. Got, like, two kids in daycare. Like, this ain't the year before, but, like, one year I'm just, where do I. What would I wear it to? I guess, like, do I go to the airport wearing a full team. USA, LA, 2028, baby.

[B]

I'm excited because Coach Jackie is now doing her. Is she gay or is she just an Olympic athlete?

[A]

Oh, thank God.

[B]

I just started.

[A]

Thank God. I. Oh, man, I love the Olympics so, so much. This is great.

[B]

We also love the Olympics and that will probably be our spiritual sponsor for the next three weeks.

[A]

Y' all expect a theme on the spiritual sponsor executive order front that it is going to be a lot of events in the Olympics and we record with a lag. So this. We're like two to three weeks behind.

[B]

We record two weeks ahead.

[A]

Two weeks ahead. I didn't know. Let's just wrap this.

[B]

The Optimist Economy podcast is edited by Sophie Lalonde. Our video production for social media is by Andy Robinson, Video Consulting. If you agree with the things we say, we do, post video clips on TikTok, Instagram, YouTube and LinkedIn and you can share those and spread the word.

[A]

If you're on Substack, you can follow us there too. You can join the Optimist Chat to talk with fellow optimists. And while Optimist Economy is absolutely a labor of love, amateur love, we do have bills to pay. And if you have the means to contribute, please do so. And you can do [e-mail] we will also happily sell you a shirt, a hat. But actually, the tote bag is the one my family loves the best. I don't know about you, but my family loves the tote bag. It's a wide bottom bag, so it's really good.

[B]

Good.

[A]

It is. It's. It's excellent. It's weird. If I bring it places of like.

[B]

Oh, me all the time.

[A]

You care all the time. I do.

[B]

I get to it and I'm just waiting. You know, someday I will cross paths with a, with a. An Optimist Economy listener.

[A]

And then, heavens, I'll be like, what? Me? No. Anyway, snap Mount.

[B]

We need to stop them out. Thanks, Andy. Thanks, Sophie. Sam.