How the Federal Reserve Grew More Powerful Than Anyone Ever Imagined

Joe Weisenthal (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway (0:15)

And I'm Tracy Alloway.

Joe Weisenthal (0:16)

Tracy, do you remember, like, after the great financial crisis, and the Fed couldn't get the unemployment rate down, even with all the rate cuts, and people were talking about, like, a monetary policy is pushing on a string in this environment. You remember hearing that term a lot?

Tracy Alloway (0:30)

You know what I remember? I remember people complaining about below-target inflation for many, many, many years, and how the Fed, we couldn't figure out why the Fed wasn't able to push up prices. And now, fast forward to, you know, 2023, we can't figure out why the Fed can't bring inflation under control.

Joe Weisenthal (0:48)

I don't want to insult, like, the various, like, brilliant economists and pundits out there. I never would. But I always found the complaints about, like, too low inflation to just be, like, hilarious, as if that was, as if there was ever, like, a real problem that anyone in the world faced. But I do think it's interesting, like, you know, this pushing on a string narrative.

Everyone sort of assumed that, okay, maybe it's hard for the Fed to get unemployment down, but that if inflation were to accelerate, well, at least we know how to deal with that.

Tracy Alloway (1:18)

Yeah. But at the same time, there was this weird sort of discrepancy or tension because the Fed couldn't figure out how to push down employment or push up prices at that time. But it seemed to do a reasonably good job of intervening in markets. And this was the chorus that you heard for so many years, the Fed is coming in and distorting the markets, which tacitly admits that they do have an impact there.

Joe Weisenthal (1:50)

Yeah, I think that's sort of like one thing that everyone agrees on, especially in the wake of the massive spasms in March 2020, and then of course also in the wake of the great financial crisis. The Fed is pretty good at stopping financial crisis. That when there's a run on some sort of bank, if it so chooses, that like maybe the Fed can't get inflation at target when it plans, maybe it can't get employment at maximum employment, but it can definitely stop bank runs.

Tracy Alloway (2:17)

Well, the other thing I would say, and we should stop talking soon, because we could keep going forever, but I think people forget how much things have changed in the span of, let's see, like 14 or 15 years.

Because I remember writing about the corporate bond market, and it was like, ooh, maybe one day, the Fed will have to come in and bail out the corporate bond market. And that was the worst thing that could happen. That was like, I got so much pushback on that. And then lo and behold, 2022 happens, and the Fed comes in and rescues not only the corporate bond market, but treasuries, munis, pretty much everything. And it's sort of an accepted state of affairs now.

Joe Weisenthal (3:00)

Right, and of course, this is one of the things we talked about in a recent episode, our live episode with Lev Menend and Josh Younger.

Anyway, let's get right to it. Let's talk more about how the Fed has taken on these new powers, these new responsibilities, what it can do, what it can't do. We are going to be speaking with Jeanna Smialek, Fed reporter at the New York Times, also a former Bloomberger, a former colleague of us, and the author of the new book, Limitless, The Federal Reserve Takes on a New Age of Crisis, which I see as number one in the Amazon Money and Monetary Policy category. Jeanna, thank you so much for coming on Odd Lots.

Jeanna Smialek (3:36)

Yeah, thank you for having me.

Joe Weisenthal (3:38)

Congratulations on the new book. I'm curious about the title because Limitless, and obviously we talk about like, okay, these new powers that the Fed has taken on, both in the wake of the great financial crisis and also the COVID shock, and yet there does seem to be a limit on its actual dual mandate, as in does it even have the tools to do like, the two things, max employment and stable prices that we think of as being the Fed's core mission?

Jeanna Smialek (4:05)

Yeah, so I think they're actually fairly interrelated. So the title itself actually comes from something Chair Jerome Powell said during sort of the depths of the 2020 pandemic upheaval.

He was doing an interview with David Wessel at the Brookings Institution, and David asked him, is there a limit to how much the Fed can do to sort of save all of these markets that are crashing?