SYLVIE DOUGLIS, BYLINE: NPR.
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DARIAN WOODS, HOST:
As expected, today, Fed Chair Jerome Powell announced a quarter of a percentage point rise in interest rates. And in the front row was Jeanna Smialek. She's a reporter for The New York Times.
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JEANNA SMIALEK: Jeanna Smialek, New York Times. Thanks for taking our questions.
WOODS: Jeanna asked about how the Fed now viewed the possibilities of a recession. And Jerome Powell replied...
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JEROME POWELL: The forecast was for a mild recession, and...
WOODS: Of course, a big driver for this is the Fed raising interest rates. And that raises the question, what's the history that led to the Fed amassing so much power over the economy? This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods. And here with me now is Jeanna Smialek. Welcome to the show, Jeanna.
SMIALEK: Thank you for having me.
WOODS: So you've recently released a book titled "Limitless: The Federal Reserve Takes On A New Age Of Crisis." And the key thesis of this book is that, for better or for worse, the Fed has amassed a huge amount of power over the economy.
SMIALEK: That is correct.
WOODS: And there's this key moment at the peak of the early pandemic chaos where this becomes really clear.
SMIALEK: Right. This is the morning that the Fed rolls out a bunch of details on several market rescue programs that it is setting up that it has never set up before. And then Jerome Powell goes on a webcast with the Brookings Institution. And the host of it says, you know, what are the limitations here? You know, what are you capable of? And Chair Powell replies...
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POWELL: But there really - there's no limit on how much of that we can do other than that it must meet the tests under the law as...
WOODS: There's no limit.
SMIALEK: There's no limit. And I think that's kind of a mic drop when it comes to the world of central banking, because he's basically saying that here at the Fed, we have this ability to sort of, at least temporarily, print money out of thin air. And we can use that to really safeguard every important market.
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WOODS: A mic drop moment indeed. Today on the show, a Fed without limits - how the pandemic pushed this institution even further over its old boundaries and emerged more powerful than ever.
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WOODS: Jeanna Smialek, New York Times reporter and author of the book "Limitless," let's start with the Federal Reserve's historical role. What is the institution for, and why does it try to be politically independent?
SMIALEK: So the Fed has had two big jobs basically since the 1970s - to protect the economy against inflation and also to protect the job market. So it's supposed to achieve stable prices and maximum employment. But obviously, one of those jobs is a lot more fun.
WOODS: Yeah, one gives people jobs; the other takes it away sometimes.
SMIALEK: Yeah, exactly. And so if you had a Federal Reserve that was super linked up with politicians who are worried about reelection, they might really not focus on the inflation side of their mandate.
WOODS: And did you come across any stories that reveal how Fed Chair Jerome Powell personally considers his role?
SMIALEK: Yeah. So Chair Powell will often say things like, this is a matter for Congress to decide, this is a matter for politicians to decide - a great example of how Chair Powell was really trying to keep the Fed limited and within its lane. You know, there had been some appetite on the Hill to see the Fed get into municipal lending leading up to the pandemic. You know, we saw some Democrats saying, back when the financial crisis hit, banks got bailed out, but, you know, Detroit didn't get bailed out, and how is that fair?
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RASHIDA TLAIB: Why isn't it equally important to ensure that state and local governments have access to credit?
POWELL: You know, we don't have authority, I don't believe, to lend to state and local governments. I think we try...
RASHIDA TLAIB: And that could be a tool.
POWELL: I don't think we want that authority. I think we want - I think that's something for Congress to do. I think...
WOODS: So these ideals of the Fed and these ideals of Jerome Powell are all very well in what we call peacetime. But let's think back to the early days of the pandemic, early 2020.
SMIALEK: I think it's easy to forget now, but at the same time that we were all trying to figure out how to do work from home and how to adjust to maybe some job losses in our families and those kinds of challenges, the markets were trying to adjust to a world where we didn't know if people would ever come back to offices. And we didn't know which government debt was going to be safe. And what this resulted in was just a run for the exits. People wanted cash. They thought cash was the only thing that was safe, and they were selling everything else. And so we saw huge breakdowns across a whole range of markets that usually are very safe. And this is the kind of thing that's going to hit not just Wall Street, but almost certainly Main Street if it continues.
WOODS: Yeah, but as Jerome Powell has a habit of saying, there are no atheists in a foxhole. You know, sometimes you change your mind in a crisis.
SMIALEK: Yeah. And I think sometimes you change your mind when not changing your mind is going to cause the worst problem.
WOODS: And when we're talking about the Fed pushing past its previous boundaries, it seems to me there are two key dates with two key sets of policies that forever changed what the Fed was capable of. So tell me about that first Fed bundle of programs in late March of 2020.
SMIALEK: So we get to March 23, 2020, and we see the Fed jump into a bunch of markets that it hasn't previously touched. It rolled out a corporate bond buying program and a program that was sort of promising to help out Main Street companies.
WOODS: So not just the big multinational companies, but, I guess, aimed at mid-sized or even small businesses.
SMIALEK: Yeah. And I describe this in my book as somebody described it to me, which is it was really about covering the waterfront. They wanted to make sure that they were trying to service sort of every place that you might see borrowing and lending break down in the economy.
WOODS: Jerome Powell appears on TV pretty soon after.
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SAVANNAH GUTHRIE: And joining us now, in a rare and exclusive live interview, is Jerome Powell.
WOODS: He's on the "Today" show to explain this package. Is that unusual for a Fed chair?
SMIALEK: It's pretty unusual. You know, the Fed chairs tend to stick to the more sort of business-oriented publications and TV shows. I think they were trying to reassure the country that they were really bringing out the big guns.
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GUTHRIE: So you're saying, no, it's not a blank check, but, yes, you're prepared to spend an unprecedented amount.
POWELL: We certainly are.
WOODS: And then it seems like that had an effect. It calmed the markets. But even that huge response didn't totally resolve all the jitters. So let's go through the second big firehose in early April.
SMIALEK: So April 9, 2020, rolls around, and the Fed rolls out a big, new package that includes a municipal lending program. And it also adds in junk bonds to the Fed's bond purchase program. And those are two pretty uncomfortable things for the Fed to do. The Fed has openly said that it doesn't want to be involved in the municipal bond market. And, you know, the junk bond market is also pretty unattractive because it's this big market of people who took on, in some cases, a pretty significant amount of risk. And no central bank wants to feel like they're bailing out the junk bond market.
But the concern is, you know, these are big companies. If you leave this market completely closed, you know, if it fails to operate the way it should, if it becomes impossible for people to issue debt at rates that they can afford to manage to stay in business, you could have a huge round of layoffs just because this market is flailing.
WOODS: And so that day, Jerome Powell crosses another one of his kind of personal lines. He seems like he's kind of recommending things for the politicians to do.
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POWELL: In many cases, what people really need is direct fiscal support rather than a loan, and what we can do is loans. So there's a big need for fiscal policy.
WOODS: So tell me about that.
SMIALEK: Yeah. So what he's saying, basically, here is, dear Congress, we're trying to help people, but people need money to keep their businesses open or money to make up for the fact that they're not going to work, etc. And we've just had the CARES Act pass, but the CARES Act was always meant to be pretty short-term. And this is Jerome Powell being clear that, like, the Fed cannot solve every problem here. Congress needs to act.
WOODS: What does this all mean now that we have a Fed that has lent to all kinds of areas in the economy but is shielded, to some degree, from democratically elected politicians?
SMIALEK: I think one thing it means is that these powers aren't going to get weaker with time. You know, with every new thing we throw at the Fed, they're going to find more creative and more interesting ways to flex them to really deal with the problems in our society. And, in fact, we've already seen the Fed sort of flexing some of these powers to arrest some of the bank runs that we've seen in recent weeks.
And I think that actually what they're doing is really relevant to day-to-day life. And so I think it's important to sort of focus on the Fed, to pay attention to them the way you might pay attention to an institution like the Supreme Court or something, because this institution does have a really incredible amount of might behind these powers.
WOODS: Jeanna Smialek, thank you so much for talking to THE INDICATOR.
SMIALEK: Thank you for having me.
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WOODS: This episode was produced by Brittany Cronin with engineering from James Willetts. It was fact-checked by Sierra Juarez. Viet Le is our senior producer. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.
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