Name: Why the Federal Reserve Controls So Much of the Economy | WSJ
Uploaded: 2025-12-02T13:26:38.000Z
Duration: 9 min 31 s
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At the top of any US Dollar bill, you'll see this.

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That's because even though the bill may have come from the treasury, the Federal Reserve is who actually distributes it.

They're the ones that's charged with managing the currency in circulation in our economy.

In other words, they can kind of print money.

That was a popular meme in 2020, when the Fed was creating money out of thin air.

The Federal Reserve is in many ways in charge of the US Economy.

As a former chairman once said, they're the economy's chaperone who has ordered the punch bowl removed just when the party was really warming up.

Which means they know their decisions, like raising interest rates, aren't always popular.

The Fed is just this poorly understood and really important institution in our country.

It's important for people to know what's going on in the economy.

They should understand why we have the Fed, why it does what it does, and

How did the Fed get put in charge of the punch?

The Fed as we know it has evolved over time after responses to financial crises gave it more and more responsibility.

So let's start with why the Fed was created in the first place.

In the early 1900s, bank runs were pretty common.

If a bank, a private business, went out of business, that meant everyone lost their deposits.

Fearful people would run to their healthy bank to withdraw their money.

Only banks didn't keep that much cash handy.

So they'd fail, causing more people to fearfully run to their bank.

And back then, there was nowhere for these banks to get more cash to stop these runs.

After a large run in 1907, wealthy bankers like J.P.

morgan put up their own money to essentially bail them out.

After that panic in 1907, bank business and political leaders got together and said, maybe this isn't the best way to run a modern economy, to rely on a few wealthy individuals doing the right thing in a time of crisis.

And so discussions began about creating a central bank, or what became the Federal reserve system.

The Federal Reserve was created to be the United States central banking system, basically a bank for banks.

It's 12 separate Federal Reserve banks set up all across the country.

You had a lot of distrust still in the country over having one bank.

The idea was that it might be too powerful.

So you could go to different parts of the country and say, well, the power won't be in New York, it won't be in Washington, it'll be here.

There'll be a bank in Atlanta, there'll be a bank in Kansas City, there'll be a bank in San Francisco, in Minneapolis, and

There was a senator from Missouri who was instrumental in creating the Federal Reserve System.

And lo and behold, there's a Fed bank in Central St. Louis and in Kansas City.

The idea was they would each represent different regions of the country and would independently set their own policies and interest rates on the money banks would keep with them.

There was also a president put in charge of each bank.

It's widely agreed by historians that the Federal Reserve Bank's inaction and them keeping the circulation of money and lending too tight made the Depression worse.

And by widely agreed, nearly a century later, a Fed governor said, we did it.

There were concerns even before the Great Depression that the political compromise that had been necessary to create this thing had created too much decentralized power.

So in 1935, Congress put the Washington based Board of Governors in charge.

It would be a group of seven people from different parts of the country, including a chairman each nominated by the President and confirmed by the Senate.

These banks, they also serve on the Federal Open Market Committee, the fomc, which also includes five bank presidentsonsone from New York and four that rotate.

This is the group of people who get together and decide things like interest rates.

When you talk about a Fed meeting, you're talking about a meeting of the fomc.

The terms become interchangeable because there are certain things that the FOMC does, there are certain things that the Fed board does, and

So that's how we got to the basic foundation of the Fed.

But the Fed as we know it today, with its many responsibilities, was built from responses to even more financial crises.

In the 70s and in 1978, when Congress gave the Fed, or really the FOMC, two main priorities, the Fed was given a dual mandate to focus on stable prices and maximum employment.

Now sometimes those goals conflict with each other.

When you're trying to crush inflation, sometimes you're going to do things that cause unemployment to go up.

But the mandate really said the Fed should take both of these objectives into account when they set policy.

This was because in the 70s inflation was really high, called the great Inflation.

Now a mix of bad luck and bad policies saw inflation reach nearly 15%.

There were concerns that the Fed succumbed to political pressure in the early 1970s because the Fed chair at the time, Arthur Burns, was friendly with the President and Nixon did not want him to raise interest rates before his reelection in 1972.

So the whole experience of the great inflation reinforced this idea that we should have politically independent central banking, that generally when you kept politics out of the FOMC boardroom, you had better economic outcomes.

In 1979, President Jimmy Carter put Paul Volcker in charge of the Fed and he raised interest rates a lot, like to nearly 20%.

Unemployment skyrocketed and rose above 10%.

Homebuilders would mail two by fours to the Fed and say stop these oppressive interest rates.

They would mail keys for cars and houses to the Fed saying these are homes and cars that aren't being sold.

There were tractors that protested driving around the Fed's headquarters.

History has vindicated the moves of the Volcker Fed.

He's lionized today as this figure who did something that was really hard and really unpopular.

But if you look at the US economy over the 30 years that followed, the US economy performed better than most other advanced economies.

The Fed gained credibility because it was politically independent, since politics don't always make great economic policies.

And when the 2008 financial crisis arrived, the Fed chairman Ben Bernanke learned from lessons of the past.

The bold measures the Fed took in response to the recent financial crisis reflected in part its determination to avoid repeating the same sorts of mistakes it made before and during the Great depression of the 1930s.

Those bold measures included things the Fed had never done before, like dropping interest rates to near zero for the first time.

In addition to managing the currency in circulation and the occasional treasury security, it started loaning money, a lot of money, to non banks.

It also got into new markets, buying things like mortgage securities.

This got the Fed even more involved in parts of the financial system beyond just currency and interest rates.

One of the things Bernanke was well regarded for was that he just threw everything against the wall to see what would stick.

We call it the Great Recession and not the second Great Depression.

And Congress also gave it more authority of oversight and regulation of the banking system through Dodd Frank and just kind of by default of inaction, government spending retreated after the stimulus in 2009.

And so there was this saying that the Fed had become the only game in town.

If you needed to stimulate your economy, you weren't going to be able to cut taxes or, or spend more money because Congress didn't want to do that.

What ended up happening was that financial markets to a greater and greater degree, began to hang on every word and every utterance of the Fed chair.

Because now monetary policy was just so important to the markets and also to the economic outlook for the country.

The Fed took from the Great Recession playbook, it bought those same assets, it began loaning more money to even more non banks and it raised the amount of money in circulation.

What you see is a central bank that during periods of severe stress, really, you know, national emergency, is willing to do quite a lot to make sure that the economy and the financial system holds together, including when inflation rises.

Today, in support of these goals, the FOMC raised its policy interest rate by 1/4 percentage point.

The Federal Reserve began as a response to a financial crisis and has only grown with each one since.

The Fed is primarily still a bank for banks, but