This week, the Federal Reserve is expected to raise interest rates again, despite coming under scrutiny in recent months for its aggressive hikes to battle inflation. This week on Intercepted: Jon Schwarz, senior writer with The Intercept, talks all things Fed, the most powerful economic institution in the U.S. Schwarz is first joined by Intercept reporters Ken Klippenstein and Daniel Boguslaw, who discuss how banks are lobbying the Fed, raising questions about the institution’s independence. Schwarz is then joined by former Fed economist Claudia Sahm to break down the Fed’s role in the economy and how its efforts to curb inflation are destabilizing the global economy and raising unemployment.
Jon Schwarz: This is Intercepted.
[Intercepted theme music.]
JS: I’m Jon Schwarz, a senior writer with The Intercept.
Today’s episode has three guests, and they’re all going to talk about the Federal Reserve. You might ask: Why are we having an all-Fed episode?
Well, obviously just for the clicks. The Federal Reserve milkshake brings everybody to the yard.
[“Milkshake” by Kelis plays.]
Kelis: Damn right, it’s better than yours. I could teach you, but I’d have to charge. My —
JS: — Federal Reserve —
Kelis: — brings all the boys to the yard. And they’re like, “It’s better than yours.”
[Music fades out.]
JS: That’s a joke obviously, but it shouldn’t be a joke. The Fed milkshake should bring everybody to the yard because it’s the most powerful economic force in the U.S., which means it’s the most powerful economic force on earth.
[Upbeat jazz starts.]
JS: And yet it’s rarely talked about among non-weirdos. Many Americans have no idea it even exists; people who do know it exists often have bonkers ideas about it. They think it’s terrible and rigs the economy — which is sort of true, but it doesn’t rig things in a thrilling, conspiratorial way. It rigs them in a boring way you can read about at your local library.
And honestly one of the very best things for me about working at The Intercept is the strangely high percentage here of people who like to talk about the Federal Reserve as much as I do. The only other way to get that is probably to be, like, a bond trader on Wall Street — and as much as I like to talk about the Fed, I’m not willing to go that far.
So, first, I’m talking today to my Intercept co-workers, Ken Klippenstein and Daniel Boguslaw, about what they’ve uncovered in a new article about how the Fed really works and who it truly listens to.
Ken and Daniel are both investigative reporters with The Intercept’s D.C. bureau.
Ken, Daniel, welcome to Intercepted.
Ken Klippenstein: Thanks for having us.
Daniel Boguslaw: Thanks, Jon.
JS: So can you just tell us the basics about what you guys found when you investigated how the Fed really works, and who is trying to persuade it to do what?
So people generally know the close relationship between the Federal Reserve and banks: The local branches are run by boards that, in each regional bank, are comprised of a majority of members chosen by the banks. Obviously, there’s lots of public interaction in a highly regulated space. But what we really wanted to cut down into was the aspects of communication between banks and the Federal Reserve that aren’t largely understood by the public — or, in some cases, experts.
Many of the people we talked to whether they were former Fed officials, whether they were subject-matter experts were shocked, as we were, to find out that the Federal Reserve can be lobbied in the same way that Congress can. These are lobbyists who meet with Fed officials, they’re on the books, they’re reported on lobbying disclosure forms, and they’re targeting all kinds of regulatory oversight measures. Those could be things like regulations on overdrafts, digital layaway, credit limits — really any kind of consumer banking issue, we found lobbyists going in who are paid to make their case.
And to both us and the people we spoke to, I think this was kind of shocking because, for the most part, people understand there is a constant flow of communication. But the degree to which this was taking place, the number of different advocacy organizations registered — over 100 in 2022 alone — was pretty surprising.
JS: And can you talk a little bit about who the specific groups were and who they represent? Talk a little bit more in detail about that.
KK: Yeah. So these groups really run the gamut of financial service providers. I mean, on the one hand, you have the biggest banks: Chase, Barclays, Capital One, and J.P. Morgan. But you also have groups like Amazon, you have groups like Facebook, who are coming in and trying to target really specific regulatory functions of the Fed, and are investing tons of money in this body that is supposed to be charged with a neutral stance. And just like in Congress, you have big money coming in and completely tilting the scales in a way that represents corporate interests over consumers who don’t have this type of access.
And also to give you guys a sense of the stakes here. And the reason really, that we were interested in doing this story is that we’re looking down the barrel of a Fed-manufactured recession, in the form of its really aggressive interest rate hikes that we’ve written about recently that threatened to drive up unemployment, which is understood to be the consequence of those policies, in an effort to bring down inflation. To quote Jerome Powell, he said that his goal is to bring down wages and then bring down inflation.
Jerome Powell: I mean, it really depends on how long it takes for wages, and more than that, prices to come down, for inflation to come down. And so what you see in our projections today, is that inflation moves down significantly over the course of next year, and then more than next year after that. And I think once you’re on that path, that’s a good thing.
KK: The idea being that those two are in some way connected, which I don’t think there’s a very compelling argument for, but that’s really what made us interested in who is pushing the Fed. And not to say that we found evidence directly of banking involvement in the interest rate hikes themselves, but it should be said that the banks are profiting off of higher interest rates because that’s in part how they make their money.
And what was sort of astonishing in researching the context of all this, was seeing the many varied people warning about this. Everyone from senators like Elizabeth Warren to the United Nations, [who] recently put out a statement warning — their economic arm — that the Fed and other central banks internationally, hiking up interest rates as rapidly as they have been can have a magnifying effect, wherein the effect on unemployment can then have a sort of runaway outcome that ends up being a lot higher than they anticipated. Because you’re supposed to stagger these things out. The idea is that there’s a lag time after central banks hike interest rates and the effect on unemployment.
And unfortunately, they’re doing this stuff really quickly. I mean, if you look at what Powell is doing now, it’s beyond what’s happened in maybe a decade. And if you look back at the Trump administration, when Powell, the chair then and also the chair now, was hiking interest rates, President Trump launched a pressure campaign against him to get him to stop it.
President Donald J. Trump: We shouldn’t have a Fed rate that’s higher than our competitor nations. You look at Germany, they’re essentially under zero; they’re negative. There are many countries negative: Japan is negative, Germany’s negative, others are negative. And we’re paying higher interest rates.
And what I’d like to do is, frankly, refinance our debt. We could refinance our debt very easily at a much lower rate. We have some tremendous opportunities right now. But Jerome Powell is not making it easy.
KK: But it seemed as though that succeeded, because not only did they start hiking interest rates, they actually brought it back down once the pandemic came around. And now if you look at what President Biden has said, he has stated repeatedly that he’s going to respect the independence of the Fed. And that’s really what made us interested in this subject is: How independent is the Fed? Because it seems to be something that a lot of people in Washington just sort of assume how much evidence [there is] for that. And I think what we found is that there’s not a whole lot.
JS: Yeah, and so in a sense, all these people lobbying the Fed form a kind of creditors’ lobby, and there is a debtors’ lobby, which is maybe three people and they all belong to the group Fed Up. So it really is an extraordinary imbalance. It’s even more than you would expect. And one thing that surprised me reading about this that I’d never thought about was how deeply it goes when you have them even consulting with people in academia who have their own unrevealed conflicts of interest.
DB: Yeah, so this was a really interesting point that was brought up in our piece by a former New York Fed official. And his point was basically: You have these academics who are not registered as lobbyists. Their public-facing personas are as academic experts. But there’s no reporting requirement for academics who have one foot in the door of academia and one foot in the door of corporate consulting or who take in large sums of speaking fees to then speak with beneficials without disclosing their corporate ties.
And the classic example given was, obviously, Larry Summers, who’s made millions of dollars in speaking fees and who is very tight-lipped about the full extent of his ties to all sorts of organizations, including the banks who he lobbied for bailouts for in the fallout of the 2008 financial crash.
And you see the kind of the hard power of these paid lobbyists, which I think is familiar to most people who are familiar with the way lobbying Congress works. But then you have all these other back channels for interactions between Fed officials and stakeholders. And as one former Fed economist told me, the way their communication policy is written is general enough that there are no hard reporting requirements for some of these meetings. But that doesn’t mean that they don’t go against the ethos of that document and also the ethos of what the Fed is supposed to be for, which is serving the American people and not banks.
KK: Yeah, in some ways, I thought that the forms of informal lobbying that take place, that is the kinds that are not reported, was one of the most surprising aspects of the story. Because you look at the formal lobbying that’s reported, and that really is the tip of the iceberg.
And, again, I can’t tell you how weird it was to talk to longtime experts in these things and have they themselves not aware that either [laughs] the formal or informal lobbying was taking place. And it’s sort of amazing that, as far as I can tell, there’s never been any reporting on that fact.
JS: And can you guys talk about some of the scandals involving Fed officials, and things that haven’t been scandals but should be?
KK: Yeah. These are things that Sen. Elizabeth Warren has, you know, done a really good job of drawing attention to — warning about — and actually cited in her opposition to Jerome Powell’s appointment, namely that he was going to have a deregulating effect on this institution that has a very important job of regulating the big banks to make sure that something like the 2008-2009 financial crisis doesn’t happen again. And, in fact, when you look at the formal lobbying that we cited, that’s what a lot of it was focused on, is dismantling the regulations and protections put in place to prevent another banking crisis.
DB: But I would also add to that that if you look at the scandals from the past, say a year and a half, you have clear, clear violations of the most basic tenets of the Fed’s policies. These are issues that I think represent something far greater than individual transgression. I mean, when you have scandal after scandal after scandal, it points to the fact that there is a culture of corruption at the Federal Reserve. There is a day-to-day operational intent that is fixated on the fact that a lot of these officials are going to go straight into Wall Street when they leave their job at the Federal Reserve — and there’s nothing preventing that from happening.
And so every now and then a scandal emerges. And there’s talk of, as Powell said, greater oversight on trading. But that’s a piecemeal solution to a much bigger problem, which is the fact that there’s total synchronicity between the interests of these banks, and the people [laughs] who currently work at the Fed who see a golden parachute on the way out.
KK: Yeah, it’s interesting: In researching the story, I got the impression that there were mixed attitudes as to Jerome Powell’s appointment. Because, recall, Trump appointed him and then Biden appointed him again in 2021. There were some questions, but if he would get someone more progressive. And the argument seemed to be that he’s not great on financial oversight regulations kind of stuff; however, he’s a dove with regard to interest rates and inflation, so that makes it worth it.
And as we’re seeing now, that whole dove persona has kind of gone out the window, since inflation has increased. And so I think we’re in a situation now where they ended up getting the worst of both worlds: Him having a very laissez-faire attitude towards regulations in addition to a very hawkish attitude now towards rate hikes.
JS: So can you talk a little bit more about the specifics of what you found, including the culture of this revolving door between the Fed and industry?
DB: Yeah, so one of the main examples we used, we looked at the Bank Policy Institute or BPI, and this is one of the largest banking lobby groups lobbying the Fed. And every former employee of this group that we spoke with, and these are people across the political spectrum, conceded the fact that there are vast opportunities for informal conversations between Fed officials and members of their lobbying group, whether that was at meetings, whether that was phone calls, and there’s just a total sieve going on with absolutely no oversight mechanism. The executive vice president and chief economist of BPI was formerly an employee of the Federal Reserve, interacting with the Board of Governors and people at the highest level there. Now he works for one of the biggest bank lobbies.
So because of its quasi-independent status, there’s just not the same types of oversight you have in other governmental agencies.
JS: So this is super interesting. And I encourage everyone to read this article, which we will link to in the show notes.
And lastly, I want to quote one of your sources on this who said: “The average person has no idea how much money is made off of being able to hear what people in the Fed hear. And there are a ton of former Fed economists on Wall Street. Congress has given the Fed a mandate to serve the American people, and the people go well beyond the 1 percent. The Fed needs a wake-up call and heads need to roll at the top. If there’s no accountability, nothing changes, then it’s just words.”
So your source who said that was Claudia Sahm, a former economist at the Fed, and we will be speaking with her next.
Ken and Dan, thank you so much for joining us.
KK: Good to be with you.
DB: Thanks, John.
JS: I’m now joined by Claudia Sahm, a former economist with the Federal Reserve.
Claudia, welcome to Intercepted,
Claudia Sahm: Oh, I’m always happy to talk about the Fed. This is one of my passions, so — [chuckles].
JS: All right, we have a lot of Fed talking to do, so let’s get started: My belief is that there are only maybe 10 people in America who truly understand the Fed, and how it works, and why it’s important — and also think seriously about it. And I am not one of them. But you are.
So let’s begin at the beginning. What is the Fed doing?
CS: It’s being reckless. I mean, there’s really no other way to put what the Federal Reserve is doing right now.
Now, specifically, what is it doing? It is raising its Federal Funds Rate — that’s the policy interest rate that the Federal Open Market Committee has control over — aggressively. It is going fast. It is going big. And it is destabilizing financial markets and the global economy.
And the United States economy went into this period of very aggressive Federal Reserve hiking in a place of strength. Our labor market is knock-it-out-of-the-park. Right? We have had a jobful recovery. This has not happened in many recessions. Low-wage workers have gotten raises, there are families who have money in the bank that have never had it. So the Federal Reserve right now raising interest rates to quote-unquote soften the labor market — which basically means they’re trying to throw a bunch of people out of work, get a bunch of people not to get raises.
Because Americans, we spend. I was a lead on consumer spending. There are many, many people who it’s money in, money out. Some of that is just because we like to spend but for a lot of people, it’s because they have to. Basic necessities have always been expensive, like housing. So the way to destroy demand in the United States, which is the path the Fed is taking to bring down inflation, is to destroy jobs. And they use a lot of euphemisms for the softening of the labor market, but like just call a spade a spade, right? This is the tool they have.
Now, they get to decide how big, how fast. And that’s why I say they’re being reckless, because it’s clear at this point, particularly as we’ve watched the global economy deteriorate, and we got a warning from the U.K. that financial markets are kind of on pins and needles, the Fed should be backing off.
And the last thing I’d say on that is when the Federal Reserve raises interest rates — I mean, mortgage rates are over 7 percent now, right? It takes a while for it to work its way through the economy. When I say they’re trying to destroy jobs, they can’t do it right away. So they raise interest rates, say the mortgage interest rates, we’ve seen housing loans, purchases are really falling off. And so, if you’re a realtor, you ain’t making a lot of commissions now, which means you aren’t going to the store and buying as much. Well, if you don’t buy as much, they don’t need as many workers. So this spiral gets going. And those workers that get laid off at the clothing store, well then they don’t go out and spend as much.
So this is why when we talk about monetary policy, there’s this old adage of long and variable lags. I mean, the long piece is kind of obvious: it just takes some time. The full effects of what the Federal Reserve has done this year will not hit the U.S. economy until probably the middle of next year. So think about that. And then variable just means: We don’t exactly know when it’s going to happen! It could be in three months, it could be in six months, it could be the end of next year. It’s just hard to predict things. But they know — they know — what they’re doing right now is too much. But they’re obsessed with their credibility as an inflation fighter. And they’re putting the institution over the American people. It’s really sad.
JS: Yeah, I think that if you ask most people in America, they do not understand that there is this institution at the center of the American economy, that at certain points, like right now, decides we’re going to throw a lot of Americans out of work.
CS: Mhmm. Yeah.
And this is the Federal Reserve. It’s important to remember it is an unelected, unaccountable institution. It was created by Congress, it has a role to play. I am central-banks-are-important-ite. When they go rogue, I am not happy about this.
Congress created the Federal Reserve. The Board of Governors, the seven individuals including the chair of the Federal Reserve, are nominated by the President and Senate confirmed. So they have some accountability. But that’s really a pretty thin thread. And, frankly, a lot of members of Congress don’t understand the Fed.
So there are 12 Reserve Banks across the country. And this was in the design, the original design of the Federal Reserve, and the Reserve Bank presidents are basically appointed by the banks in their district. I mean, talk about a conflict of interest, because the Federal Reserve also has oversight over the large banks, or just banks in general in the United States. So yeah.
And there are 12 voting members at any point in time. The seven Board of Governors, five of the Reserve Bank presidents — the New York Fed is always voting — and then the other four seats rotate. But I mean, seriously? Twelve people, unelected, are sitting there making decisions that could easily tank the global economy — and undermine efforts to preserve democracy in Ukraine and the gains in the labor market in the United States. I mean, it is just mind-blowing.
But again, I don’t think a lot of people have that understanding of the Fed, where it came from, what its constraints are, who it reports to, and its history. Right? Like, the world did not start in the 1970s. There is a long history of central banking that goes back to the early 1900s. And we have a pandemic and a war in Europe; this is a lot more like 1918 than it is 1978.
JS: Yeah, I would say that most people do not know about, or if they know about, do not understand the Fed. And that’s exactly how the Fed likes it.
CS: Mhmm. And I worked at the Federal Reserve for over a decade. I’ve learned a lot about the institution and its history — on my own. I’m just fascinated with how this thing came to be. And I will say that the people who work at the Federal Reserve, my former colleagues, are so dedicated. I mean, these are public servants and they take that very seriously. And, truly, I believe the members of the Federal Open Market Committee are doing what they think is best. So I’m not questioning anyone’s motives — per se. But it is an institution that has been very closed off. It has some very serious ethical issues. And it has a lot of power, and it is not very accountable.
And I think it’s important for people to understand: This could potentially be a problem. And it is a problem that Congress can solve — like, Congress maketh and it can taketh, right? Or it can adjust the parameters. So it’s unfortunate. And I don’t think the Fed even appreciates, like that they’re not all-powerful here. Right? And the macroeconomics profession in general has fed this attitude that the technocrats should be in charge and not the politicians, which is just — I mean, that’s full-on undemocratic. Right?
JS: And can you talk about why that is how the Federal Reserve was structured? Because I would say, based on my understanding of this history, that it’s structured this way for very basic political reasons, which is that if you have a country with enormous levels of income inequality, the people at the top have a lot of money [and] they are always going to be terrified that the people at the bottom are going to try to inflate that away — just print a lot of money and then their glorious, luscious savings are worthless or worth a lot less. And so the idea is that if you give regular people the power, they’ll go nuts and destroy everything, and that’s why the Fed is the way that it is,
CS: Going back to the origin of the Fed helps put some context on it. And it actually goes beyond the monetary policy. Like right now, we talk about the federal funds rate and 75 versus 50.
The core function, the founding function of the Federal Reserve, and this is true for most central banks, is to be what’s called a lender of last resort. So when financial markets go haywire, the Fed steps in as a backstop. I mean they brought out the big guns in March of 2020, and backstopped all kinds of markets. And I mean, I want financial markets to function; like, it would be bad for Main Street, Wall Street, you name it.
Now, the reason the Federal Reserve exists is so through many banking crises leading up to the very start of the 1900s, it was when there was a run on banks when there was some kind of financial crisis, it was J.P. Morgan — the man — and his friends, so these big financiers on Wall Street — would decide which banks survived and which didn’t, which institutions got the loans and which didn’t.
OK, so there are some problems with that setup, right? [Laughs.] And so they convened a group of very powerful politicians, very powerful titans of Wall Street, some business interests — because having a bank fail is very bad for businesses — and they actually took them to Jekyll Island. The pretext was they were going on a duck hunt. In fact, they were not going on a duck hunt; they had a secret meeting about setting up the Federal Reserve.
And so I mean, this is where we start, right? Behind closed doors, [with] clearly the potential for conflict of interest. And so it just has been baked in the DNA of the Federal Reserve from the beginning. And it absolutely puts precedent for some good reasons and some not. The lender of last resort is a real thing and the Fed works through financial markets. So there’s a reason it has close ties to Wall Street, but it gets too close sometimes. And to your point, in the discussions about fighting inflation, workers living paycheck to paycheck are struggling with inflation. And I mean, to me, it’s like: Don’t sell this on poor people, right? Because by definition, if you’re living paycheck to paycheck, and you lose a paycheck, you’re done. Right?
And we never talk about, well, it’s the people who have big savings — and I don’t mean like, you’ve got your 401k, I mean you’re full on 1 percent — inflation eats away at the purchasing power of that savings, in particular if you’ve been lending it out. For people who are carrying mortgages, credit-card debt, they’re paying it back — not like super high inflation, but right now it’s come down a good bit, but inflation actually makes it less costly when they repay. It makes the value of the purchasing power less. But the opposite is for the people who are lending.
And whenever we talk about the cost of inflation, very conveniently it’s all about on the spending side. Like, oh, it’s more expensive. And they’re very few analyses that bring in the comprehensive picture of the spending and the financial quote-unquote, balance sheets of households. And if you put that together, there’s a lot of research that says it nets out to either zero or it’s actually better off particularly low-middle class families that are carrying big debts like mortgages,
JS: I will say I know with my own family that my parents bought a house in the 1970s at exactly the right time. And then inflation radically reduced the value of the mortgage that they had to pay. And my father was getting raises that kept up with inflation, so that inflation actually was very good for my family.
And I wrote an article recently — like even I was surprised to see that since the beginning of 2020 the net worth of the bottom 50 percent of Americans has doubled. And I think about half of that is the cost of housing, like the home prices jumped up. But the other half is real money for a lot of people. As you mentioned, like people have money in the bank for the first time.
CS: Mhmm. So it’s been hard to be a macroeconomist, actually, since I started at the Federal Reserve in 2007. I care a lot about people and I often say caring is an occupational hazard in macro. I think that’s true. But when I want to cheer myself up, I go look at — the Federal Reserve created a data tool called the Distributional Financial Accounts, and it allows — every quarter — to have a picture of all the financial assets, all the net worth in the United States, who’s holding it, by groups, by wealth, by income, they have estimates by race. I go and I look at the wealth of the bottom 50 percent. And it goes back to the late 1980s, so you can see the time series.
The bottom 50 percent has had basically not much in the grand scheme of our financial markets; the Great Recession totally decimated what was there, and a lot of that was the housing crisis, and people were basically shut out of getting back into housing when the house prices came back. And if you look at it after we came out of this recession, it makes me so happy; there’s something there now. And it’s still rising.
I mean, the higher prices do eat into the money at the bank, and there are absolutely people who are suffering right now. I do not want to downplay: inflation is legit too high. But we still see these assets rising, and a lot of those people are getting raises, they have income, they have jobs, right? And you can put some aside.
I was talking with a macroeconomist who follows all this very carefully. And he was like: I can’t believe they haven’t spent it all. Because there’s this view that poor people don’t have savings because they just hold back. Like they just spend whatever. And it’s like, you know what? People don’t have savings because we pay them crap, and basic necessities are expensive.
So it makes me very happy to see this. It’s proof we can help people, they can have savings on the side, so they can do what they need for their family in a moment of crisis, or just to get ahead, invest in their kids. In any case, that makes me happy. But because I can’t be too happy right now; this is not a good world we live in. So then I flip over and you can add to the bottom 50 percent, I add the top 1%. And then that little thin red line at the bottom is the 50 percent, and just the 1 percent over time — like there’s some reward for being innovative and running, but it’s like: Come on. This is so far past what you need to incentivize a dynamic economy. This is creating the opposite of a dynamic economy. This is creating oligarchs in the United States. And it will hurt us all. It has hurt us all.
But it’s a good tool to drill down under the big numbers, the aggregate, and it’s like: OK, who’s got this? So there’s some really good news, like helping families, having a jobful recovery. And then there’s some really longstanding bad news: We have a massively unequal economy.
JS: Again, I was shocked, looking at those numbers about the bottom 50 percent of Americans. As you say, it begins in the late 1980s, the statistics. And during that time, the size of the U.S. economy has about doubled, right? And so you would expect at the very least, you would want to see the net worth of the bottom 50 percent also doubling during that time. But instead, it just went nowhere — for decades.
Then you had the Great Recession starting in 2007. It crashed, the net worth of the bottom 50 percent just zoomed downwards. And then it slowly crawled its way back painfully up to where it had been in 1989 by 2020 — like 30 years later. And it is only now that it has zoomed upwards in the last couple of years. And, as I understand it, is now about double of what it was 30 years ago. Again: That’s not a lot. The bottom 50 percent of Americans have a shockingly low amount of wealth. But nonetheless, you would at least want it to have doubled, and now it has, and my perspective is: Let’s build on this winning streak rather than trying to bludgeon the economy so it collapses again.
CS: Yeah, I mean, we’ve learned so much in this crisis. I’m deeply afraid that some of the powerful elites in macroeconomic policy, say, are going to take the absolute wrong lesson. For example, the rescue plan — and I was a proponent of it, I have done a lot of research on it, and did a lot of advising on the stimulus checks, and also the unemployment insurance, but the stimmies are one of my big focuses. And I was adamant, and I’m still adamant, that the American Rescue Plan was some of the best policy that has been put out in like decades and decades in the United States.
Now, it’s not time for a victory lap. We need a full recovery. We had a jobful recovery; we got money to people, right? Within the first year of the Covid crisis, a family of four, so two adults and two kids got $11,400 in just the stimulus checks. That’s nearly 20 percent of the median family income. And that’s 25 percent of the Black family median income. That wasn’t an accident, right? The rescue plan was designed to be the bridge to the other side of this crisis and to push the recovery to really get us back on track.
It did both of those things. The labor market is in a very good place. There’s still a lot of damage, long Covid is a huge problem, we had such disruptions; we don’t have everyone back. And frankly, I mean, one million Americans died of Covid. And we have very serious, long Covid health issues that are still working themselves out — I mean, we’re missing immigrants. I mean, there’s just a lot of problems in the labor market. And all that put aside, the unemployment rate is near its 50-year low, low-wage workers got raises last year. I mean, corporations have told us these people weren’t worth raises. Well guess what? [Laughs.] They are! OK? If you need them bad enough.
And then the other piece is the relief to get us to the other side. And all of the inflation hawks, and there are still individuals who say the rescue plan was like, the devil itself or something outrageous, none of the inflation hawks when the rescue plan was being debated talked about Delta, or Omicron — or Putin. I mean, hell, I think the world would have loved a heads up on those three horrible events that came later into 2021. And so we are still in a crisis.
And there’s some of that money that was put in the bank. Right? So the rescue plan is doing exactly what it was designed to do. And a lot of the inflation, not all of it, but a lot of the inflation is coming from disruptions to the productive capacity: whether it’s workers, getting them back to work, or supply chains, getting our cheap goods from Asia here, or, we have Putin in Ukraine causing massive problems — I mean, loss of human life, threat to democracy, but also energy prices, energy shortages, potentially food price. We’re still in a bad place. And nobody else did the rescue plan. There’s a reason the United States in this moment comes into the ongoing crisis in a position of strength. And I just — I am so worried.
JS: And as I see it, this really is not just an issue about money, and like how much money they have, but it is the fear that people will recognize that if they can get control of the government. It is an incredibly powerful tool that can be used as it was used in these circumstances to make life better for regular people — like, not perfect. There’s still an enormous number of problems. But that power is available to people if they realize that it’s there, and they don’t want regular people to understand that.
CS: I mean, again, the members of Congress stepped up. I mean, the CARES Act was a bipartisan effort. The Democrats really pulled it together with the rescue plan. And there’s been other good policy to kind of make the U.S. economy more resilient, so the infrastructure — like oh, my gosh, we actually have an energy policy now — and the CHIPS Act. I’ve been impressed! And the White House opening up the Strategic Petroleum Reserve to get gas prices down. I mean, Congress has been doing a lot of good policy; like, they showed up this time.
And I don’t really care how we got here in terms of them doing something. But the rich and powerful are still very influential in Washington, D.C. So I think this was just a crisis of such epic proportions that they stepped in. Right?
Oh, and another good policy that came through it was the Child Tax Credit. I mean, the reduction in child poverty, particularly deep poverty, was just — I mean, something we should have seen in the United States generations ago. I mean, no child should be living in poverty in the richest country in the world. Poverty is a policy choice. Democrats [and] Republicans have chosen this for children. Now it has expired. This is very tragic. But we have proof of concept, right? Like, we know how to fight poverty now for children, and it ain’t work — it’s not the Earned Income Tax Credit. Like it’s giving them money — kind of like, duh! But we did it for a year. And we’re going to see the positive effects. I mean, there’s more and more research coming out.
So there was a lot of good policy for this moment in this crisis. But there is a lot of good policy there that if applied going forward, would have massive benefits for the U.S. economy and just massive benefits for people. I mean, setting aside, you know, GDP or whatever.
JS: Yeah, and again, I think that that is exactly what a lot of people don’t want Americans to understand. We could have kept this streak going, as I say.
Now let’s talk just about some specifics about what the Fed can do formally, what I think it could do informally, and what it can’t do and the rest of the government needs to do.
I would say that clearly corporate profits are part of the inflation story. They are now higher than they have been as a percentage of the economy since, I think, 1950. And the Fed, as I understand it, doesn’t have any formal power over that. But I have to believe that if the Fed directed some of its economists to do research on this, to really drill down and investigate: Here are the numbers, here’s how much of inflation is due to higher corporate profits, and then the Fed publicized, just the political pressure that would be generated by that would get boardrooms to say: Hey, we need to cut this out. And so am I right about that, from your experience with the Fed?
CS: So I disagree. Even if the Fed did all that — and there is research being done, and has been published on how the market structure could be affecting inflation, not just now, but other ways it affects the economy, too.
The thing is: We have a shareholder economy, right? We have a lot of big businesses. The shareholders, they want to make money. They do buybacks, instead of investing in the corporation, they give it to the shareholders, shareholders are happy, they give big raises to the C suite, right? But this is the economy we have. Congress through its regulatory powers can like soften the edges, some.
I’m pro-capitalism. We have a very dynamic economy. It’s not like all things are bad. And, frankly, in a moment like this, what do you expect? This is the economy we have. They’re going to make profits. You can’t ask companies to go against their shareholders, who are going to go against the bonus [structure] — I mean, we’re human beings, right? And this is the system we have now.
So I don’t think the Fed has any real ability to affect this. I think Congress does. I think the President, the White House do in bringing awareness to it.
There’s some really interesting research. This was from a while ago, from Bob Shiller, who was also a super creative macroeconomist and academic, and it was just asking people: How do you think about inflation? Right? Not like, how do the macroeconomic models think? Because I mean, they get a lot of it wrong, but it’s just asking people. Actually, it was an interesting study: So they asked people, and then they asked economists, so you can then do comparisons.
And the thing is, with inflation, I mean, clearly it’s bad. People are angry about it. It does create some hardship, not just anger that you have to go in and buy the same thing and pay more. But they want to blame somebody. Right? And I mean, the thing that just blows my mind is like we talked about inflation like it’s this blob of inflation; it just comes from nowhere, right? And businesses, they write the price tag down. Again, I’m not criticizing the profit incentive. And normal people? This is not lost on them. It’s the business owner that raises the prices; it’s a corporation that raises the prices in a discussion.
And I’ve spent a lot of time talking to business owners, small ones and larger corporations — they’re a little hard to get information out of — but just like: What are you thinking? You keep raising those prices so high, the Fed is going to tank the economy, and I guarantee you’re not going to make [laughs] good profits if the economy [tanks].
But we have a complicated system. The Fed can’t change the structure of the U.S. economy. I mean, frankly, Congress can’t, big picture, either. I mean, we’re not moving towards a whole other economic structure, but they can do things to address the extent to which we do have the quote-unquote profiteering.
And frankly, the other thing Congress could do right now is go in and levy a tax on extraordinary profits. I mean, there is a precedent for this. If you do it properly, it doesn’t disincentivize future production. And I think there’s an absolutely valid case to do that for energy and food corporations right now. And there’s some cases of it being done in Europe.
JS: Alright. And then also, specifically about housing: Obviously the cost of homes has gone up at a really extraordinary rate, the cost of renting has gone up. You mentioned now that the Fed, in order to cool the economy down, has now set things where the mortgage rate is up to 7 percent, so that also seems like a problem [laughs]. Like is there a better way for the Fed or for Congress to deal with that kind of asset inflation?
CS: Yeah, so I’m really excited that the rich and powerful are finally worked up about housing costs — because it’s affecting inflation and it’s damaging their wealth.
The United States has for a very long time, going well before Covid, had an affordable housing crisis. The fraction of Americans who have spent more and more of their income on housing is just — like it was rising, it is unacceptable. People need a roof over their heads.
The other thing, one feature of the U.S. economy, and this is just really depressing: So housing costs, whether it’s house prices or rents, they tend to, when the labor market gets really good, housing becomes even less affordable. And the reason this happens is well, if you get a job, you get a raise, well, you can move out from mom and dad’s; you might even go get married, you might start a family. You got more kids, you buy a bigger house. So we have a housing market in the United States that is so running on empty, that when good things happen, it creates this hardship in housing.
Now, this is not an unsolvable problem. The Fed can’t solve this problem. The Fed will actually make it worse: high-interest rates discourage homebuilding. So in that we don’t need less homebuilding; we need more homebuilding. OK, but it’s really not that hard. We need more supply. We need more homes.
One of the programs that was in Build Back Better was to just build affordable housing units. I mean some of this you could just go through the private sector, too, and just make it cost-effective, profitable for small builders to build homes, right? That hit the cutting room floor, it absolutely should have been in the Inflation Reduction Act, because it fits within that piece of creating more supply that wouldn’t bring inflation down now or next year. But it would protect us from the next time we have a great recovery, that it doesn’t mess up housing prices.
And this time, actually housing prices — and this doesn’t get talked enough about, although there’s good Federal Reserve research on this, among others — is the pandemic, when everything shut down and there were a lot of professionals that could do work from home, there still are, people moved around the country. People moved from very high-cost areas like San Francisco and sometimes they were just buying another home, right? And they would march into something in Utah or Arizona, just like nice places to be, where the houses were less costly. And they would roll in with all kinds of cash. And the market couldn’t adjust fast enough in terms of building, particularly because of the supply-chain problems; you couldn’t get garage doors to finish houses. And so that just like people moving around the country, it was really disruptive. Disruptions take time; people can move a lot faster than homes can be built.
And so that’s actually a piece of the housing price increase that nobody talks about. And that’s one of those supply disruptions that it’s kind of working itself out. Like there are still a large number of homes that are in construction and have not finished yet. But I fundamentally — the lesson we should take from this is not the Fed needs to tank the economy. It’s that we have an affordable housing crisis; we need to build more housing.
JS: Let’s move on to the nutty part of the podcast.
JS: So, Claudia, I have a question for you that I suspect you have never been asked before, which is this: In anthropology, there is this concept called social silence. And social silence is a phenomenon that has been observed in all kinds of societies where the questions and the institutions that lie at the very heart of power of those societies are exactly the ones that people in general do not talk about, and do not debate.
And that’s easy to understand. Like, if you imagine a country that has an absolute monarch, and the belief is they’re descended from God, and their son should be the next king, you don’t have a lot of like op-ed pages talking about: Is he really descended from God? It’s just not a subject that people are willing to discuss. And even moreso, won’t even really think about that.
And my belief is that there is a kind of social silence that envelops the Fed. And it is something that people do not think about, because it’s like looking at the sun. It’s very difficult to come to terms with the fact that, like, we just have a society that engages in this form of human sacrifice, where it’s like: Well, things aren’t working for everybody. So you there, you lost your job.
And so my question is: Do you think that there is anything to that, to this general phenomenon? And does that apply to the Fed?
And if so, even more interestingly, how do we break this social silence and talk about what really matters?
CS: It absolutely applies to the Fed. The example that is, I think, most important is the independence of the Fed. And what that means is that Congress created the Fed, and gave it a job to do. So in the monetary policy space, that’s stable prices and maximum employment.
Now, the Fed, they get to decide: Well, how do I even interpret that? What does stable prices mean? What does maximum employment mean? And then the Fed gets to decide: OK, well, how are we going to do this job? You do have to go back twice a year to Congress and go kind of like: Here’s what’s going on in the economy.
But Congress doesn’t say: Hey, instead of 75 basis points, I think that should be 50.
Like there’s the separation of Congress gave it its job, and the Fed is out there doing its job. Like the boss is not real hands-on, I guess that’s how we would say it, because Congress is kind of like: Just do your thing.
Now, and like the Federal Reserve, and I think often Congress feels this way, it’s like independence is some sacrosanct — like, it’s just something we could never question, we never talk about like. And they’ll give examples: I mean, we don’t, there have been times, like in the 1970s, there was a big push with the Great Society, they’re funding a war, doing programs at home, this was a lot of money going out of the federal government, there were not taxes raised to even come close to covering it, it was called like guns and butter, right? And the Federal Reserve did not get in the way of that. And it did contribute — and there are other factors in the U.S. economy. In the 1970s, we had a decade of high inflation. And it did become problematic. We’ve had like, less than two years right now. But the principle is, if it keeps going, people will change their mentality about spending, and wage-price spiral — and blah, blah, blah. I mean, we’re not living in the 1970s.
But there have been times when the Federal Reserve has kind of stood out of the way and with political pressure, right? OK. So fine. We don’t want to be a banana republic. I mean, we’re trying — but then not the Fed.
But the independence of the Federal Reserve has not always been considered a good thing. In World War II, that was the last time that Congress and the Federal Reserve explicitly coordinated. It wasn’t until 1951 that the Treasury-Fed Accord was signed where it made clear we’re not doing this anymore, like the Fed is gonna make its decisions, and Congress is going to make its decisions. OK, so why was it a good idea in World War II? So the federal government, the United States, when we joined the war, was spending a serious amount of money to fund the war effort, whether it’s the tanks, and the planes, or the people — and that, like, you know, they told the Federal Reserve: Hey, keep those interest rates low. Because the last thing we need to do is make it even more costly to fund a war in Europe, like defending democracy.
OK, so that made sense. Now after that war effort and these special circumstances ended, then it was kind of like: OK, we’re gonna stabilize the economy the way we think is the best way to do it — and sometimes that might mean raising interest rates when the government is spending, right, because we’re stabilizing the economy. OK, but in a time of war, it was considered that the Fed should kind of follow Congress’s lead.
Alright, so what do we have now? We have a war in Europe. OK. So as Congress is spending hundreds of billions of dollars to get military aid to Ukraine, the Federal Reserve is jacking up interest rates. It’s like they’re making it more costly to fund the war effort. And they’re encouraging the European Central Bank and the Bank of England to do the same thing. It’s like: Stand down!
To me, I don’t know that it’s some nefarious reason the silence has shrouded the Fed. I think largely, it’s just a complete ignorance about the history of the Fed, the history of the U.S. economy.
I mean, in 2022, the U.S. economy, financial markets are fundamentally different — I mean, they’ve been fundamentally different since the 1970s, and they’re fundamentally different from during World War II, right? I get this. But independence is not that we just can’t touch it under any circumstance. Like we just don’t contextualize policy in a way — like, we’re not thinking about it, because, like you said, we’re not talking about it. So how can you have a debate?
And I could be wrong. Maybe it is completely appropriate for the Fed to be jacking up interest rates and destroying the world. I don’t think so. But we should have a real conversation about this. And it shouldn’t turn into this: Oh, politics, don’t tell the Fed what to do, independence. No! Like, hello? We have a country. And at the end of the day, the Federal Reserve serves the people, right? This is a government institution. This is not like its own thing.
But we need to have that conversation. And we need to have it in a thoughtful, robust kind of way. But we’re not having that conversation at all. And I’m really concerned for central banks; I really think when the dust settles, they might not have that independence. And it is gonna be their fault.
I mean, after the Great Recession, it was such a horrible recovery. When the Tea Party came into Congress, they had a large “End the Fed” contingent, and “Audit the Fed” was a real threat. So I mean, this could be like, way worse.
And frankly, at this point, I’m not shedding a tear for them. The Federal Reserve, it’s inexcusable that they don’t know the context and that they’re not looking out at the world. And I mean, they’ve had some real serious ethical breaches recently. I mean, I’m so deeply disappointed. And so it’s like: Fine, you all run yourself into the ground.
JS: All right, so we’re getting to the end of this podcast about the Fed. Thank you so much. I want to say that people on the right are wrong when they believe that the Fed is a terrible secret conspiracy against the American people. In fact, it is a non-secret conspiracy and you can read all about it — a lot of it — on the Fed’s website. But nonetheless, it’s a conspiracy. It is very exciting to learn about and we can change this and make it work for regular people if we care enough.
So Claudia, thank you again so much for your time and everybody, check her out if you want to join in on the Fed hype!
CS: Great, well thank you. I really appreciated the chance to be here today.
[End credits music.]
JS: And that’s it for this all-Fed episode of Intercepted. Follow us on Twitter @Intercepted for more Fed content — also lots of other stuff.
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Thanks so much.
Until next time, I’m Jon Schwarz.