Why The Federal Reserve's Power Is 'Limitless'
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Hey there, listeners. Before we begin, I wanted to let you know about a live show that we have coming up. It's going to be on April 19th in New York City at the Bell House, and it'll be at 7.30. You can get tickets at 538.com slash live show. Again, that's 538.com slash live show. April 19th. We really look forward to seeing you there.

Hello and welcome to the FiveThirtyEight Politics Podcast. I'm Galen Druk. American government is designed to have components that are not directly accountable to the public. The Supreme Court is probably the most recognizable example. The idea is that parts of the system need to be above politics in order to keep everything else running smoothly. Say a popularly elected president tries to consolidate power. Well, the unelected Supreme Court is there to uphold the Constitution.

In part because of its separation from electoral politics, though, the Supreme Court is the subject of a lot of scrutiny. Whether you think the court is actually above politics or not, you are almost certainly aware of the ways that it can shape your life.

Well, in her new book, New York Times reporter Gina Smilick wants to focus our attention on another unelected institution with a lot of power over American life, the Federal Reserve. And while the Fed has great power, unlike the Supreme Court, Americans on the whole are pretty unaware of the role it plays in their lives. According to an Ipsos poll, 90% of Americans say their knowledge of the Fed ranges from not much to nothing at all.

Smilak argues that over the past century, through successive crises, the Fed has accumulated the power to choose winners and losers across American markets and society on the whole.

and that if partisan loyalists were to make their way onto the Fed board, that degree of power could be abused. The name of the book is Limitless. The Federal Reserve Takes on a New Age of Crisis. Gina, welcome to the podcast. Thank you so much for having me on. It's really a pleasure. So did I do a decent job of summarizing your thesis? Is there anything you'd like to add?

That was a perfect summary of my thesis. OK, awesome. Fabulous. Thank you so much. I'm going to hire you to do my PR. That was great. I think the Supreme Court comparison is just so apt. You know, that is so much of the point I'm trying to make here is I think we're all very conscious of the amount of power that the Supreme Court has in our society. And I think we talk a lot about that, you know, especially in recent years, particularly with the Roe overturn. I think this has just been very top of mind. I think the Fed is amassing, if not similar amount of power,

not a million miles away amount of power. And it's just something that we've treated for so long as sort of boring or obscure or complicated, just sort of beyond the realm of everyday understanding. And I think we're going to need to sort of think about whether that's appropriate going forward.

So exactly to that point, I mentioned this Axios-Ipsos poll where 90% of Americans said that their knowledge of the Fed ranges from not a lot to nothing at all. Honestly, I'm a little skeptical of the 10% of Americans who say they have a lot of knowledge about the Fed anyway. So on behalf of at least 90% of Americans, what is the Fed? Yes. So the Fed is America's central bank. It is, I think the easy way to think about it is sort of the macroeconomic organizer of America.

And so what I mean by that is it sets interest rates. So it sort of determines how much we all pay to borrow and spend in the economy. It sets one big interest rate that trickles out throughout the whole economy. The goal of that is to either speed things up in bad times or slow them down in good times with an end goal of keeping inflation under control and maximizing employment, but at sort of a sustainable rate.

And so that's sort of its macroeconomic policy. Its other big job, well, it has two more. Its two other big jobs are maintaining sort of a stable financial structure, which really boils down to bank regulation. And then its final job, and the one that we talk about a lot, or I talk about a lot in this book, is really stepping in when there's a financial crisis and making sure that markets can still function. So sort of being the backup insurance policy when things go wrong.

And so to help set the table here, I sort of laid out the argument in the intro for why the Supreme Court is meant to be above politics. Why is the Fed, why is the bank that's responsible for the three things that you just mentioned, meant to be apart from politics, not directly accountable to the public or even necessarily politicians? Right. So the reason that the Fed is outside of politics is really all about that sort of first leg of the stool that we just described.

Macroeconomic policy setting can be a really unpleasant job. Sometimes you have to really hurt the economy in order to bring inflation under control. We're at just that sort of a moment right now. Inflation is too high. People think that it needs to be brought back under control for us to have sort of a steady, stable economy in the long run. But it's going to be really painful to do that in the short run.

And the idea is that central banks, and this is true around the world, the idea is that central banks aren't going to be willing to make those hard decisions that could really inflict a lot of pain on the economy in the short run if they're thinking about a presidential re-election cycle. And so the idea is you need to separate them from Congress a little bit and you need to separate them from the president quite a lot in order to make sure that they can be really good macroeconomic managers.

And so say, for example, there were no Fed and the political branches were responsible for setting interest rates with every successive election. There would be an incentive to lower those interest rates because, hey, in the long term, it'll make money cheaper. It'll boost the economy. And you see countries around the world where there isn't such a separation between politics and the central bank.

And oftentimes they have sort of like decades-long problems with inflation, right? Absolutely, yeah. And this is a pretty well-tracked international phenomenon. There are kind of two options if you don't have an independent central bank that is going to set your monetary policy. Option one is have the government do it. And like you said, hyperinflation is pretty much the end result of that. We see that really clearly in places like Turkey.

The other option, which is what we had in America before we set up the Fed, is a place where just the market sets the interest rate. The sort of banks are in charge of that. And those systems tend to be really unstable and susceptible to big runs. And so neither of those is an ideal option. This is kind of central banking as an independent central banking system is sort of best practice around the world.

In your book, as I alluded to, you warned that, quote, What do you mean by that?

Here I'm talking about sort of the second leg of the stool or third leg. I can't remember which leg it was when I referred to it earlier. But the Fed has these abilities to sort of swoop in in times of crisis and really bail out a lot of the economy. They can really sort of backstop and provide an insurance layer to

huge swaths of markets. And we saw them do that pretty aggressively in 2020. And that's really what I'm talking about here. I'm not talking about the sort of everyday interest rate changes. I'm talking about two things. One, the Fed has this ability to buy government-backed bonds in huge sums, just absolutely enormous sums. That is typically a policy it uses for

for monetary reasons. So it uses this policy to make borrowing cheap and help the economy speed up. But in times of crisis, we've now in two different crises, both in 2008 and in 2020, seen the Fed jump into markets and buy a lot of bonds for market functioning reasons. Not about monetary policy. It's not about interest rates. It's just about keeping markets functioning.

And the second thing that they can do is in times of crisis with the sign off of the Treasury Secretary, they can jump in and lend to a whole bunch of different entities. In 2020, we saw them lending to state and local governments. We saw them lending to sort of mid-sized businesses, like huge amounts of entities.

And I think those two powers together really open up a situation where the Fed can, if it says that circumstances are unusual and that we're in a crisis, really exert a lot of pressure in the economy. It can really sort of decide which sectors of the economy are going to get some sort of preferable financing rates. And that is just an incredibly powerful tool. And I don't think it's one we fully unpacked as a society yet.

Okay, so nightmare scenario where there's multiple staunch partisans sitting on the board of the Federal Reserve.

and they decide we want to use this power to achieve political aims. What kinds of things could they do like specifically in this situation? Yeah, absolutely. So it's worth kind of talking about the nerdy little details here. So there are seven members on the Fed's Board of Governors. The Board of Governors, the folks who sit in Washington within the Fed systems, are the only ones who have to vote on these emergency tools, particularly the ones that I was talking about, the lending to specific markets.

So five of those seven governors need to vote on any given emergency action to make it work. So you get five partisans. That's kind of the minimum you'd need to make this work.

But if you have five people who the president in power has just appointed, which this happens all the time. This is not completely like out of left field. Governors turn over relatively quickly. They have long terms, but they don't typically stay in them. And so you've got five partisans who are in the same party as the president. You could really see a situation where in a moment of crisis, they, with the sign off of the treasury secretary, set up a lending facility for, let's say, state and local governments. And they...

want to, for political reasons, benefit some particular state and locality. Let's say Detroit or let's say Sarasota, Florida. Let's just, you know, pick some different examples. And they could write the terms of that facility. They could sort of write the loans so that Detroit and Sarasota, Florida can qualify for really sort of very good loans. And they specifically can qualify for those loans. And then they can really have that benefit.

So they can sort of, you know, pick winners and losers in a political way and basically hand out money at very cheap rates for very long terms. You know, I think there is almost nothing more powerful in an economy than being able to hand out free money. And that is effectively what you could do with this tool. OK, so that's the most extreme scenario of the Fed, in this case, abusing its power.

How close have we gotten to anything like that? To what extent have the political branches been able to influence the Fed? Or to what extent have the people on the Fed just been partisans themselves and had a sort of like worldview that is not necessarily neutral because perhaps no one has a neutral worldview?

Yeah. So I would say we have not gotten close to this. But the reason that I thought it was important enough to write an entire book about is there was absolutely pressure to do this in 2020. And these tools are brand new. So the fact that we haven't gotten close to this means that we have a sample of n equals one. And we didn't cross the line in our one example.

And so what I mean by that is, so we didn't really know that the Fed had these powers. It had never really exercised them until 2008. 2008, as everybody knows, the entire economy melts down. Ben Bernanke's the Fed chair. He's a scholar of the Great Depression, which is when a lot of these tools were established. And nobody knows about them anymore, but he does. And so Ben Bernanke and the Fed's lawyers, who are quite powerful, set up these facilities, start using these powers that nobody remembered that the Fed had.

And we saw them used pretty extensively, but not as extensively in that episode. 2020 rolls around, the pandemic hits, and the Fed really pulls these out in force. And they pulled them out from markets that we've never seen before, including some that are much more political, including the municipal bond market, including Main Street businesses, which is sort of the mid-sized business sector. And at

at the end of 2020, when we thought that Joe Biden had taken the White House, but we didn't know if the Democrats were going to take the Senate, there were plans hatching to try and use that municipal program to really shuttle a lot of money out to municipalities. The idea being that it was going to be hard to pass another legislative package through Congress. And the Fed was very clearly resisting that. You know, all of my reporting bore out that they would not actually go for it. But I think the fact that politicians knew that these powers could be used in this way

and that the Fed officials were likely going to come under some pressure to use them in this way in the event that we did have a divided Congress. I think that that is a warning sign that we shouldn't just completely ignore. So that's one form of political pressure that is exerted on the Fed. There's another form, too, which is on the actual interest rate question, which, although it may not be as obscure or as targeted, there's still a lot of power in whether or not interest rates are raised or lowered.

folks probably remember that former President Trump was putting pressure on Jerome Powell to keep interest rates low. How far outside of norms is that and how far outside of history is that?

Like, from my understanding in the modern era, presidents don't do that. Yeah. But is that just sort of like naive thinking? No, no, no. So and so it's important to note that this is like the original reason for separation for the Fed. This is why we have Fed independence is for these interest rates. You know, it's for this first part of the monetary policy.

task. And in the modern era, we really have seen presidents avoid putting pressure on the Fed to set interest rates a certain way. Presidents generally accept that the Fed needs to do its thing sort of outside of the partisan system. Obviously, President Donald Trump was a huge break from that.

We really only have that sort of tradition of Fed independence being respected by White Houses. Going back to the Clinton administration, though, actually, I guess it would have started sort of at the end of George H.W. Bush's administration. But Clinton was really the first president who just embraced it wholeheartedly. Before that, it was pretty frequent for presidents to talk negatively about what the Fed was doing. And we had instances in history where the Fed pretty clearly, completely capitulated to that. And it ended really badly. So the most recent

Common and frequent example of this is Arthur Burns, who was a Fed chair in the 70s, does seem to have really sort of bent under pressure from President Richard Nixon, who he was a huge fan of, to keep interest rates very low at a time when inflation was kicking up. And we all know how inflation went in the 70s. It went very high. And Paul Volcker, when he came in as Fed chair, had to push interest rates to just punishing levels to get it under control. So we've got a sort of bad history of presidents leaning on the Fed.

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A lot of your book is about how the Fed actually accumulates the power that you now describe, where it is both responsible for raising and lowering interest rates, but also responsible for, has the power to target municipalities or parts of the market or what have you for very cheap, basically free money.

How did this come to pass? Like, is this power that the Fed always theoretically had but never actually used? Is it power that was devolved from the federal government to the Fed over time? And also on top of that, I think one theory of the way that the Supreme Court functions today is that our legislative process has gotten so off kilter and so stuck in the mud that

that increasingly politicians try to pursue their political aims and activists try to pursue their political aims through the Supreme Court. And so to what extent is this sort of new power or this breadth of power a result of the legislative process breaking down? Yeah, it's a great series of questions and they're super related. So

One, the history of this really traces back to the Great Depression. So in the Great Depression, all kinds of markets just completely seized up. Nobody was lending. Nobody was making markets. Like it was just obviously everybody knows the Great Depression was pretty terrible on Wall Street and on Main Street. And so we saw the Fed get these powers for the first time. They're called 13-3 because they're the Section 13-3 of the Federal Reserve Act. They get added. The Fed suddenly has this ability to lend to a bunch of different entities.

It doesn't really exercise that ability too aggressively in the early years. You know, it does make some loans. It makes, you know, pretty famously some like funny loans to distilleries, etc. But it does a marble. It secures one with a marble shipment. You know, there's like a little bit of lending and it's very 1930s-esque, but it's not enough to be economically meaningful. And then this power sort of falls by the wayside for a really long time. You see occasional additions to it or occasional subtractions to it over the decades. But we have this

this period of relative financial calm, really stretching from sort of the end of the Second World War up through the Great Recession.

And so you just don't see a ton of interest in exercising these powers. That changes pretty fundamentally, obviously, with the onset of the Great Recession, just because in 2008, when Wall Street blew up, so many markets broke. And there was such an intense desperation to figure out how to get them to start working again because things were bad and they seemed like they were going to get better.

absolutely catastrophic if nothing was done. And so that is when these powers that have been sort of slowly accumulating over time are really exercised for the first time. So I think that that was this real sort of line in the sand moment where we suddenly realized how much the Fed could do, how like expansively it could be used, what it could accomplish in a moment of crisis.

And I think that was very sort of, I don't think we maybe fully grasped this at the time, but I think it was setting out a precedent that made it much more likely that those powers would be used in another crisis because they're

2020 rolls around and things are breaking down, things are getting really bad with the onset of the pandemic. And we already know that these tools are available. So they're really attractive to use. And then I think there was a real concern. I'm sure everybody who's listening will remember at the start of March 2020, we didn't know if Congress was going to successfully pass anything. We had years of congressional dysfunction, much like you alluded to.

And so I think there was this idea that if you did it through the Fed, if you passed legislation that sort of backed up Fed facilities but helped a lot of these markets and helped a lot of entities with the Fed's powers, it would get around some of that congressional bickering and make sure that these essential parts of the economy could continue functioning. And so I think there was this idea that we could devolve some of this power to the Fed, but I don't think there was maybe a –

as much of the discussion about governance as you might have had in a non-crisis moment. And so that's pretty much all I'm saying in the book is we should probably have a discussion about governance at this stage. And we should have a discussion about whether we want these emergency powers to be used in the future in the way that they were used in 2020. Yeah. I want to get to the question for people who are critics of the situation where we find ourselves, what are the possible solutions? Before we get there, though, so

Because the Fed has so much power and is not directly accountable to the public,

Both the left and right have been pretty critical of the ways that it's behaved in specifically in 2020. You heard both the left and right saying, you know, the Fed is literally just printing money, blah, blah, blah. So could you lay out what some of the criticisms are from the left and the right of the Fed? Yeah, absolutely. So I will say that this is not a big one of them, the one I'm raising here. So maybe I'm just throwing wood on the fire. But I do think you do hear a couple of pretty clear criticisms.

systems. The first is that the Fed bought bonds for too long in the wake of the 2020 crisis. So like I mentioned earlier, they jumped into markets, bought a ton of government-backed debt in order to get things functioning again. It was really important. It got markets functioning. Markets were in disarray, and that would have been horrible had it continued. But even after the point the markets were functioning pretty normally, the Fed kept buying a lot of government-backed

debt. The idea there was to keep interest rates super low so that when the recovery set in, it would be very strong. Unfortunately, it collided with a situation in which demand was already really strong because the government had just set out a bunch of checks and we had all been stuck at home so we couldn't spend money. And that combination, very low interest rates, very solid

household consumer finances led to this big pop in inflation when things got back to normal. You know, we all know supply chains broke, but part of the reason supply chains broke is because we all tried to buy new couches at the same time. And you've only got so many ships to transport new couches from China to here. And so, and you know, that's a simplification, but I think the point stands. And so that is, that's a big criticism. The Fed shouldn't have done as much bond buying as it did. It helped to stoke the inflation. And that's more of a criticism from the right?

That's a criticism from both parties to some degree. But yeah, you definitely do hear it from the right. The reason it's also a criticism for the left, actually, which is kind of leads into my next criticism, is all of this QE, all of these bond purchases leads to inequality is a complaint you will frequently hear. The logic to that is that bond purchases obviously push up the value of bonds. They also tend to push up the value of stocks really like

just elevate asset prices throughout the economy. Assets tend to be held by the rich. And so the idea is that that exacerbates wealth inequality. I actually kind of complicate that narrative a little bit in my book. I think it's too simple. I think you need a little bit more nuance. Because low interest rates also boost employment levels and high employment levels and a tight labor market also benefit the worst off among us. Exactly.

like some wealth is better than no wealth. And so, you know, I think if you're going to talk about wealth gaps, you also have to talk about ability to build wealth for the poor in society. And that definitely comes more in a low rate interest rate environment. And so I just think it's too complicated to be simplistically say that this is a wealth inequality exacerbator. That said, you know, it's something worth talking. We should talk about the after effects of these policies because they do have some unintended consequences. I think those are sort of the two big ones that you hear these days.

How would you assess other criticisms of the Fed quantitatively? Like, does the Fed sort of screw the pooch pretty often? And how do we go about judging the Fed after the fact and who's accountable when they do mess up? Yeah. So, I mean, I think that it's really...

important to think about the context in which the Fed operates when we think about things like is the Fed just like messing up and creating inflation? Like in this instance, we hadn't had inflation in 30 years and the Fed had just come off a cycle during which it just couldn't generate enough inflation. And I think that sounds really counterintuitive to most people because you're like price

prices are staying stable. That seems fantastic. I want my prices to stay stable. But the problem is an economy with no inflation actually can get pretty dysfunctional, actually. If there is no inflation, if your company has no ability to raise prices, they're also going to really resist giving you wage increases. And if you're not getting wage increases, you're going to feel less mobile. And just all kinds of things start to sort of break down in a world with no inflation. And so the Fed was trying to generate a little bit of inflation. It thought that it

couldn't generate inflation, it had been trained into this world where it just didn't think inflation was going to be much of a problem. I think that's kind of relevant. You have to think about that context. These people are human. After all, they do learn. And there are no hard and fast rules in economics. So I think that's all pretty relevant. I do think on the sort of responsibility and sort of how do we hold Fed officials accountable

standpoint. We do have a decent amount of accountability for monetary policy in the sense that they go up and they testify all the time. There's a lot of scrutiny on monetary policy. We all debate it. It's something that everybody is talking about. Part of the reason that I focus not so much on monetary policy, but also on sort of these emergency powers is I don't think we have the same amount of scrutiny around the emergency powers. I don't think that people are sort of

backseat quarterbacking, backseat driving every one of the decisions the Fed makes on these emergency powers. And I think when you don't have sunshine, that's when you run into problems. I want to get back to the emergency powers in just a second. But what are the arguments today for and against rapidly raising interest rates in order to keep inflation down? Yeah, this is such an interesting question because it's something that they are just grappling with painfully and in real time. The argument for raising interest rates very quickly is that you want to get

inflation under control as quickly as you can because if you don't get it under control in a timely manner, it might just become completely embedded in all of our psychology. Like we might just learn how to live with inflation. We might get used to asking for bigger wage increases. We might get used to paying more on a regular basis and just start to accept that. It could be the case that, I think a practical example can be pretty useful here. It could be the case that I drink lattes every day. And in the past, if my store

jacked up its latte prices by 20 cents, I was going to go down there. The power of suggestion, you said latte and I reached for my coffee. Exactly. But it could be the case that in the past, if my latte got more expensive, I would go look for another store. But now I'm used to inflation and I just assume that the store down the road is going to have raised its prices too. So I'll just stay at my favorite coffee shop and get my latte there. Inflationary psychology is a real thing. It's been traced throughout the literature, throughout history, many different countries, et cetera. So that's the argument for really getting on top of this quickly.

The argument for being a little bit more careful and trying to take a more balanced approach is that it's not costless bringing inflation under control. Raising interest rates slows the economy. When you slow the economy, what you are fundamentally doing is killing jobs. You are making sure that people don't hire as much.

And when you kill jobs, you kill opportunities for people to have a better life, earn a little bit more money, do all the things that a job enables. And so it's not just this sort of monolithic answer where you can just say, yeah, absolutely get inflation under control because you do have to think about the tradeoffs. Okay. So back to these emergency powers.

If partisans, you know, one example you already cited was providing money to state and local governments in 2020 during the pandemic. If partisans were to get a hold of, you know, a majority of Fed board seats and be able to chart policy according to their partisan ideologies, what are the kinds of things that those partisans might do?

Yeah, well, I think the state and local government one that we decided is a pretty powerful example. But these can be used in all kinds of different markets. And I think the limitations on them are less stringent than even most experts understand. I will often talk to experts who will tell me things like, yes, but Congress has to give the Fed money to back these programs up.

And that's not strictly true, actually. In 2008, one of the programs, which I will not bore

bore you with all the crazy details of, but it was this very wonky market-facing program that helped sort of loans that are bundled and sliced and diced, etc. Really aimed at sort of squarely the heart of Wall Street. And they managed to back that up just by having various private companies provide some sort of insurance layer. And so, you know, it's not the case that in every instance you have to have some like massive congressional buy-in and an administration could really use these powers pretty, you

you know, expansively to funnel cheap credit to a lot of different sectors of the economy. But I'm curious, though, are there specific examples? I mean, one I think that gets cited a lot is climate change. For example, Democrats may be interested in using the Fed's power to

choose winners and losers in energy markets to try to affect the greening of the American economy. Now, it may even be the case that a majority of Americans would love to see a greener economy, but the idea is that the way our representative government is supposed to work is that the legislature makes those decisions, not the Fed. So are there other examples where, you know, partisans in control of these levers are

could enact policy that's meant to be decided by the Fed. And I should say, I think it's

it's common, you hear arguments from progressive economists and politicians, even that the Fed should be doing this, that the Fed should be sort of like choosing winners and losers in energy markets because of climate change. Yeah, yeah. So climate change, like you alluded to, is a big one. Some people actually think that the Fed should do that with its everyday powers, not its emergency powers. It's probably limited from doing that legally. The emergency powers, clearly, it would be less limited if it could sort of

past the hurdles that we already talked about, which are it has to declare an emergency and it has to get Treasury Department sign off. The Fed has, again, been like it's worth repeating. I've said it before, but the Fed has been very resistant to anything like that. But climate change is an obvious one. Another one that people will occasionally bring up, I haven't actually heard any suggestions of actively doing this, but like an example of a thing that they could be asked to do is, you know, say you had a huge surge in

in immigration and Republicans said, we need to quickly finish the border wall. We really need to get like funding out to subcontractors who are going to work on the border wall. That's the kind of thing like if those loans weren't readily available in the marketplace, theoretically, the Fed could back something like that up. So, you know, this is this is the kind of thing that, you know, people who are worried about these authorities, which I'm not, you know, I'm not the first person to raise this as a potential issue that we should be thinking about. People who are worried about these issues will bring up things like that.

I think there have got to be folks who look at the Fed and say, in a way, it's never been above politics because the decisions that it makes are political. It decided, for example, to directly help banks in 2008, but not directly help small businesses and homeowners, for example. And that's, in a way, choosing winners and losers. That's a pretty political decision. And if you look at the

the Fed, you might understand why a body like that would make decisions like that. It's largely wealthy people coming from large financial institutions who may have a more obvious incentive to be like, we got to save the financial institutions before thinking about smaller businesses and homeowners and things like that. So is there an argument that we have already experienced exactly the thing you warn of, that it is a body that can serve the elite and make political decisions as a

as a result that's our view. Yeah, I think that people would probably make that argument. I would actually complicate what you just said a little bit, though. I actually don't think I think it's an easy way to understand what happened in 2008, that like these are elites, they were serving the elites, etc. But I think it's actually too simplistic. I think what, you know, I've spent a lot of time reporting on and trying to understand this institution. And I think a lot of what happened in 2008 was the Fed looked around and they said, like,

what is going to destroy everything else if it breaks, you know, and that is at the end of the day, banks. Banks are in a really important, you know,

catalyst for economic activity. If you don't have a healthy and well-functioning banking system, nothing else works. You have to be able to get capital into markets. If the company you work for can't borrow debt in capital markets, if it can't borrow from a bank, it's not going to employ you. I guess I would say 100%. And I guess that was sort of my understanding of what happened in 2008. However, my understanding of what happened in 2008 changed once 2020 happened. Because

In 2020, the Fed actively made decisions to help other parts of the economy that it had not decided to help in 2008. And so that's where the political choice in a way becomes clear, which is like, in 2008, there were a lot of homeowners struggling, there were a lot of small businesses struggling, there were a lot of state and local governments struggling.

And the Fed used its power to help banks, but not those other parts of the economy, which in retrospect, we can understand to be a decision because it later made the decision to do those exact things, right? Yeah, yeah, absolutely. And I do think that there are just...

such interesting questions around those judgment calls. And I think this is why we should be having a more robust discussion, because I think you could very reasonably say, yes, the Fed should do this every time. This is something we want the Fed to do. I think you could also say, this really looks like something Congress should be doing. Like, this does not look like something like the Fed was made to basically work in the financial system, right? Like the Fed exists for the financial system. That's how we set it up in 1913. It's sort of like, you know, it

it's like the specialist doctor, if you will. Like it's like, but suddenly we're having, you know, it's like the neurosurgeon of the surgeons and Congress is like the general practitioner. But suddenly we're having like your neurosurgeon come out and like treat you for the flu. It's like, I think kind of what we're doing here, we're kind of like mixing what it's, what its role in society is. And I think that's,

That opens up some really interesting questions, like how far do we want the Fed to go? Where should the boundaries be? Should there be boundaries? Should there not be boundaries? Is this an effective way to run the society? I don't actually have a good answer to that question. I do just think that we haven't actually had a conversation about it, and it's an interesting one to have. Yeah. Okay. So for people who, your job is to be a reporter and find the facts and present them.

And you do an amazing job of that in the book. For people who do look at this and say, oh, there aren't really guardrails in place for the next emergency. And maybe this is power that Congress should have. Or maybe the Fed should be accountable in certain ways if it is going to have that much power. What kinds of policies are out there that could actually put some guardrails in place?

Yeah, so one really interesting one that I've heard talked about recently, and this is an idea of Christina Parajon-Skinner, who is a professor at Wharton down at the University of Pennsylvania. She thinks that the real issue is sort of the QE buying, the mass bond buying that we were talking about earlier. And she thinks that if you're going to use it in ways that look more like fiscal than monetary policies,

So what I was talking about earlier with those sort of, you know, like get markets functioning again, kind of like big purchases that were sort of almost crossing that line in 2020. She thinks that you should have like specific triggers, specific criteria, like under what circumstances are we allowed to use these programs?

And, you know, if we use them, do we need some sort of treasury sign-off? She just thinks that there should be, you know, like you said, some more guardrails, some more explicit criteria. Another thing that you'll occasionally hear about is just, you know, we should be thinking about should the emergency facilities in particular, should they only be applicable to certain markets? Should they be applied? Can you apply them to every market? Is that a good thing? Is that an idea that we want to encourage?

That's not, I think most people will come down on the side of, yes, you want this to be able to apply broadly because the thing about emergencies is you don't know where they're going to pop up. And so if you try and like,

define any really, really specific hard and fast rules about where the Fed isn't allowed to tread. It could really come back to bite you down the road. But again, like what kind of oversight, what kind of accountability, how are we going to make sure that these are set up in a way that, you know, doesn't favor any individual group? And I think like I said, you know, this is the kind of thing that still needs to

there hasn't been much of a discussion about it since 2020. Like Congress basically passes a law saying that the Fed cannot create programs that would benefit Detroit and Sarasota explicitly and not anywhere else in the country, for example. Yeah. And I will say there are some of those requirements in place. So after 2008, because of the bank bailouts, uh,

In Dodd-Frank, it included a provision that says that these programs have to be broadly available. Unfortunately, well, fortunately or unfortunately, it is the reality that most lawyers interpret that to mean five entities. So five entities would have to be able to borrow it. But obviously... So if it was like Detroit, Sarasota, Phoenix, San Diego, Washington, D.C. We're widely available. Dallas. Okay, great.

Yeah, exactly. So it's a relatively low hurdle. A lot of these things can be interpreted pretty creatively, legally. I just, you know, it's an interesting, there's just so much ability to sort of leverage these powers in ways that I don't think we fully understand.

So that's maybe a way that you could put guardrails in place for how far these emergency powers can go. What if your concern is partisan meddling? Are there steps that, you know, for example, Congress recently considered steps to take to try to reduce partisan meddling in our elections process and just certifying results, things like that? Are there ideas of things that Congress could do to try to greater silo the Fed away from partisan pressure?

You know, the Fed is already pretty separated from partisan pressure. It's probably worth actually briefly just going over how because I think it's relevant. So the Fed, the seven governors in Washington are all presidentially appointed. But once they're appointed, they're basically in like the –

chair in particular who is the person who is obviously sort of subject to the most scrutiny is not fireable. We discovered that because Donald Trump wanted to fire Jay Powell and we all had to call a lot of lawyers and discover that in fact that's pretty much impossible. You can be fired for cause which is extreme negligence in the job but as long as you're basically doing the functions of the job you cannot be removed from that post.

in all likelihood, hasn't been tested. And back to the Supreme Court, we would rely on the Supreme Court to ensure that that person remains in their post even if they are quote unquote fired. Exactly. Nobody has actually tested this in the courts. So this is all pretty theoretical. But the basic idea is we don't think they could be fired. Certainly Donald Trump came to the conclusion that he couldn't do it.

And so you've got a very insulated board. You've then got 12 other officials sitting around the country and they are actually at quasi-private institutions. So the regional reserve banks that the Fed has, Federal Reserve Bank of Dallas, Federal Reserve Bank of San Francisco, et cetera, those are all semi-private. And so they're not even accountable to the elected government really at all. They are a smaller portion of the decision-making table, but they're still there and it's relevant. And so very insulated bioparking,

by design from political pressures. But like I said, you know, you do get a situation where these governors turn over pretty quickly. So you could get some sort of partisan lean on the board, which has control over the emergency facilities. Right. Of course, like with the Supreme Court, it's certainly insulated from accountability to voters and even politicians. I mean, maybe theoretically, you could impeach a member of the Supreme Court, although extremely, extremely unlikely. But

It's just through the appointment process over time that you can get a partisan bent on the court. And I would imagine that the same thing could happen on the Fed. Are there concerns that there should be more barriers in place to ensure that politicians can't influence the Fed now that sort of that norm has broken down a little bit?

Yeah, I mean, we already have so many barriers in place that I think that that's viewed as pretty safe. I do think that, you know, obviously, there has been a return to not talking about the Fed at the White House, you know, the White House will occasionally be like, good job, Fed. But aside from that, it pretty much leaves it alone.

And so I think that norm has reasserted itself. Whether that lasts, we will see. Congress has always complained about the Fed, literally time untold. So I don't think that's going to change anytime soon. But Congress just really can't do much about it. You know, Congress, if it can get to an agreement, can actually do quite a lot. They can change the Federal Reserve Act. Congress is the one institution that can change the Fed, to which the Fed is actually accountable. But there's been very little consensus over that in recent years.

All right. So final question for folks who clicked on this podcast thinking that they were going to hear about current inflation rates and what the Fed in this moment is grappling with.

I mean, I read your reporting in the New York Times all the time. Every time there's a new consumer price index report out, every time, you know, I'm sure folks aren't familiar with your work. What do you think is the biggest sort of nuts and bolts challenge for the Fed today in this moment where we still have like, you know, 5%, 6% inflation? And it seems like...

We're getting conflicting messages all the time about the direction of the economy. Yeah. You know, I think the hardest thing for them right now is trying to figure out if their policy is actually working to combat inflation. So the Fed has this idea that if you get interest rates above a certain point, they're going to be weighing on the economy and that's going to be net disinflationary. Mm-hmm.

And there's this sort of magical number, they call it the neutral rate, that they think that they're well above now. So they think that the economy should be really getting constrained.

That said, the neutral rate is a made up number. It's very theoretical. We don't know where it is. And I think a lot of these conflicting signs in the economy are suggesting to them that maybe they're not actually weighing on the economy quite as much as they thought and hoped they would be at this stage. And just, yeah, if I, that would be a tough job to hold right now, trying to figure out where that number is, trying to figure out how high rates need to go, how high is high enough.

And I think we're hearing a lot of uncertainty from them. They are being very hesitant to give us any guidance about what comes next. And I think that that all ties back to that idea. They really don't know where they are in this process. How much of this work is guesswork that feels...

like it's lent credibility through numbers oh yeah and I'm sure folks could say that about the work we do here at 538 as well but like and I hope they don't think that based on the amount of time that we have spent on this podcast trying to explain what we're doing but like

Looking at situations like this, the idea that economics can only be explained in the past rings very true. We're like, okay, then do the math and figure it out. Why can't you solve this with an equation? Yeah. So I was actually, if you will indulge me for a moment, I actually have kind of a story about this. I was at a conference last week and I saw a bunch of really prominent, famous economists sort of

titans in the field present a paper saying that actually Fed interest rates need to be so much higher than the Fed currently understands in order to get inflation under control. And they had they had a model. They had like used past data to figure this out. It was all very, very theory based, very numbers based, looked very convincing. And one of the Fed officials got up on stage and responded to this paper.

And the TLDR version of this was, why would we use past data for the current juncture? Because the post-pandemic era is so little like anything we've previously seen. There's every reason to think that the models wouldn't work in this situation. And I thought that was a really interesting--

Hopefully he thinks that was an accurate take on his paper because it was a very nerdy paper. So that was an extreme summation of it. But I just thought it was such an interesting statement coming from a Fed official because I do think they're at this moment where they don't want to cloak any of this in too much precision because...

the world is very imprecise right now. It's really nice and I think it's very comforting in economics to think that you can kind of cloak yourself in theory and numbers and look at your charts and be scientific about things. But you look at any chart since 2020,

And it's like, you know, there used to be a pattern, there used to be some sort of idea that we could really hang on to. And you look at it now and it's just like spike, spike, spike. You know, it's just very difficult to use any incoming data to guess what's going to happen next with data, I think.

All right. Well, that's a theme that I'm sure listeners of this podcast will be somewhat familiar with. Lots of uncertainty, but trying to use numbers to lessen that uncertainty nonetheless. And we're going to leave it there. So thank you so much for joining me today, Gina. Thank you for having me. Gina Smiley's new book is called Limitless. The Federal Reserve Takes on a New Age of Crisis. My name is Galen Druk. Tony Chow is in the control room along with Vanessa Diaz. And Chadwick Matlin is our editorial director.

You can get in touch by emailing us at podcasts at 538.com. You can also, of course, tweet at us with any questions or comments. If you're a fan of the show, leave us a rating or review in the Apple Podcast Store or tell someone about us. Thanks for listening, and we will see you soon.