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'Limitless' makes the case that the Federal Reserve is more powerful than we realize


This is FRESH AIR. I'm Dave Davies, in for Terry Gross. If you do your family's shopping, you know inflation is a problem these days. And if you follow economic news, you know that the Federal Reserve Board, aka the Fed, is trying to cut inflation by raising interest rates, which can have its own troubling impacts. It makes it more expensive to buy a home or car, and it makes it harder for businesses to borrow and expand, which, over time, slows the economy down and reduces employment. But what or who exactly is the Fed? Well, our guest Jeanna Smialek's job is to trek deep into the jungles of financial management, get to know the players and understand their language, then share her knowledge with the rest of us. She writes about the economy and covers the Fed for The New York Times.

In a new book, she says, yes, the Fed is powerful, probably even more powerful than you think. And in recent years, it's expanded its reach and taken on new policy roles. That's partly due to extraordinary circumstances, like a global pandemic, and partly due to changing expectations from a country that wants more accountability, more fairness and more diversity. Jeanna Smialek previously covered economics at Bloomberg News and wrote feature stories for Businessweek magazine. Her new book is "Limitless: The Federal Reserve Takes On A New Age Of Crisis."

Well, Jeanna Smialek, welcome to FRESH AIR.

JEANNA SMIALEK: Thank you so much for having me.

DAVIES: There's a lot of news coming in about the economy all the time. But take us to the big picture. If we look at what's happened over the past year or so, the Fed trying to cut interest rates and beat inflation, how are we doing? What can we expect in the coming year or so?

SMIALEK: So far, we are not doing fantastically well. I would say inflation remains very rapid in America. We had a really hopeful moment toward the end of last year where it seemed like inflation was slowing down. It seemed like it was slowing down pretty steadily, really from about June until December. We saw this nice, steady downdrift. And at the same time, it felt like the economy was cooling off a little bit. Unfortunately, we've been getting January data over recent weeks, and they seem to sort of contradict that narrative. It looks like the economy's picking back up over some measures. And it also looks like inflation might be picking back up. And so I think there is some real concern that the Fed may have to do even more than it had previously anticipated when it comes to raising interest rates in an attempt to slow down the economy and get us back on to some sort of sustainable pace that we all feel good and comfortable with over time.

DAVIES: All right. So the Fed's going to stay at it. You know, it's interesting. One of the things you note in the book is that the Fed seems to have been imprinted with a painful experience in the 1970s when people didn't take inflation as seriously as they should have.

SMIALEK: Just so incredibly important to look at that 1970s episode to understand, really, the very basics of what the Fed is doing right now. So to take listeners back to that moment, in the 1970s, we had, really, a decade where the Fed did not act particularly decisively to control inflation. And I think it's important to note that they did act. The Fed raised interest rates. It was aware of the inflation problem. It tried to combat it, but it just didn't sort of stick to its guns. It didn't stick to its knitting. Any time the job market showed signs of slowing down, Fed officials would kind of reverse course and either cut rates or stop raising them. And that really just let this inflation continue for a long period. The problem with that is when we got hit with a couple of oil shocks, inflation just jumped up into the stratosphere because it was already pretty unanchored. People were pretty used to inflation. Businesses were pretty much in the practice of passing along price increases. And so it really sort of paved the road, as it were, for much, much faster inflation.

And when the Fed ultimately sort of really put the brakes on and tried to get that inflation under control, they had to do so very painfully. They had to raise interest rates to double-digit levels. That sent unemployment up into double-digit levels. It was a horrible, very painful recession. And I think it sort of permanently scarred the Fed's psyche. The Fed doesn't ever want to repeat that experience. And so I think the Fed circa 2023 is very much thinking you just can't stop before you have inflation under control. You cannot waver. You have to be really resolute in trying to get this problem under wraps pretty quickly, or else we could have a 1970s redux. And nobody wants that.

DAVIES: You know, a lot of things contribute to inflation - too much consumer demand, too many dollars chasing too few goods. But there can be these other external factors, like in the '70s, an Arab oil embargo, and nowadays supply chain disruptions from the pandemic, the war in Ukraine. Do those kinds of events make the traditional tool of raising interest rates less effective?

SMIALEK: That's an excellent question, and I think there's sort of a two-part answer to it. Part one is, traditionally, the Fed actually looks right through supply shocks. So when we get sort of a big external surprise, like a supply chain problem or like a big moment in geopolitics that roils oil markets, the Fed will typically kind of, you know, sit on its hands, wait for that to play out, wait for it to calm down because the basic philosophy is that Fed interest rate increases can't do too much about something like that. The place where that falls down, and the second part here, the place that we are right now, is when you have sort of a consistent chain of those kinds of events, and they seem to build on each other, and they seem to sort of feed this inflationary psychology in markets, in businesses, in the economy. And that is where the Fed actually can come in and do something.

So just to give a concrete example, to make that a little bit more real, if you've had a couple of years where inflation's been relatively high for these sort of bizarre one-off reasons, you might have companies feeling like they're more in the practice of passing along price increases to their consumers. So the Walmarts and the Targets and the Home Depots of the world might feel more comfortable making price increases, knowing that their consumers are pretty used to seeing price increases and aren't necessarily going to balk at them and just stop spending. And in that world, what the Fed can do is sort of constrain the demand side of the equation so that consumers are a little bit more flighty when it comes to price increases. And that can keep pressure on companies to not raise prices as quickly. And so I think that's really sort of where we are now. We've had a lot of shocks, but they've all built on one another. And so the Fed sees something, you know, a job here for it to do from the demand side of the ledger.

DAVIES: You know, I heard the term greedflation, which refers to companies taking advantage of an inflationary climate to actually raise prices faster than their costs and increase profits. Are we seeing this?

SMIALEK: Absolutely. But I think it's more complicated than people often paint it to be. I think that it is definitely true that we have seen a lot of companies raise prices by more than their costs have increased. Corporate profits look amazing. They're very, very solid right now, and they have been solid for quite some time. So I think that is absolutely the case. I think it's important to note that one of the reasons that corporations were able to do that is that consumers had pretty persistent demand through this period. You know, consumers have been sitting on pretty big saving stockpiles that they amassed during the early pandemic, both because they were sitting at home and they weren't out and spending money and because the government sent out repeated stimulus checks. And so that money has really helped to fuel consumer spending. It's only been sort of padded by a very strong labor market that's meant labor income has been going up quite a bit and recently actually going up faster than inflation.

And so that combination has really allowed shoppers to just keep spending. And that is part of why companies are able to raise prices so much and, you know, get these really fantastic profits is that the consumer demand side of the equation has just been so strong. And so I think it's important to talk about both sides of that equation when you think about something like greedflation. You know, it's not just the case that companies are willy-nilly sort of independently raising prices. It's also because so much else is happening in the economy.

DAVIES: We need to take a break here. Let me reintroduce you. We're speaking with Jeanna Smialek. She covers the economy and the Federal Reserve for The New York Times. Her new book is "Limitless: The Federal Reserve Takes On A New Age Of Crisis." We'll continue our conversation in just a moment. This is FRESH AIR.


DAVIES: This is FRESH AIR. And we're speaking with Jeanna Smialek. She writes about the economy and covers the Federal Reserve for The New York Times. She has a new book about the Fed called "Limitless."

So let's just take a look at kind of the Fed - what it is, what its role is, where it came from. You know, what the Fed does is it controls monetary policy. You know, we have learned through painful experience that an industrial economy works best when there is a central bank that has one currency that we can all use. I mean, for a lot of the 19th century, private banks would issue their own forms of currency and we would have confusion and runs on banks and crashes in markets which imposed a lot of pain on people. But now we have the Fed, created in the early 20th century, which is our central bank, and it, in general terms, regulates the money supply. So we have enough money to facilitate transactions and keep the economy humming, but not too much.

Monetary policy is different from fiscal policy, which the government also exercises and which also affects the economy. You want to just explain the difference?

SMIALEK: I like to think of it as sort of broad macroeconomic policy that infects the whole overarching economy in a very blunt way versus much more specific policy that picks winners and losers. So monetary policy, which in the modern day and age is very much about setting interest rates and trying to influence how much money costs to borrow and how much credit is available in the economy - those policies really sort of speed up or slow down the economy as a whole. It affects not just mortgages, but also business credit and all varieties of credit throughout the economy - so very broad brush, very powerful, but very sort of blunt. I think when you talk about fiscal policy, that's the stuff that gets passed through Congress and signed by the White House. And it's really about taxing and spending. And those policies really sort of shape the fates of individual actors in the economy.

So when Congress passes something, it's going to impact, you know, how much infrastructure gets built, for example. And it's going to do that pretty specifically because it's going to be focused on infrastructure, whereas what the Fed is doing is much blunter. It might also spur more building of infrastructure, but it's not going to do it specifically. It's certainly not going to be earmarked to that goal.

DAVIES: You know, one of the other differences that what Congress does, you know, is in the federal budget, and if it wants to spend money, it has to find money in the federal budget from current revenues or borrowing to pay for it. I mean, if it spends a lot of money, then that's either going to crowd out some other spending or it's going to be a debt of taxpayers. Whereas the Fed has this strange kind of sorcery it can do. It can essentially create money if it needs to, to stimulate the economy. Is this literally true, with the keystrokes of a computer?

SMIALEK: Yes. So I think that it absolutely can create money, but it's worth giving a slightly more complicated explanation of how that happens and what it means. So Congress spends money. It taxes or it raises money in financial markets and it spends it, and that money is spent and gone. What the Fed does is a little bit more complicated.

It typically buys bonds or buys other financial securities by creating money at a keystroke. That is definitely true, and it typically does that to influence, again, as we've talked about repeatedly, how cheap and easy it is to borrow in the economy. The goal of buying those securities is typically to push down interest rates. If it sells securities, the goal is to raise interest rates. So that is where the Fed's primary sort of monetary policy function comes in.

The Fed is also capable of lending money in extreme moments of crisis. And when it does that, it also just sort of creates money with a keystroke. But the idea is that that money is short term. It's going to be lent out and then it's going to be snuffed out eventually when the loans are repaid. And the Fed will say ad nauseum that its tasks and its role is lending, not spending.

So unlike Congress, which is, again a fiscal actor and can actively spend on specific parts of the economy, the Fed can lend to specific parts of the economy in times of trouble, but it can't actively spend on them.

DAVIES: Now there's mistrust and suspicion about the Fed, right? I mean, the idea that this is this elite group of unelected people who make these decisions and hold really enormous power over our lives. Explain a little bit about what the Fed is, how its leaders are chosen. Who appoints these people?

SMIALEK: So there are basically two parts of the Fed, the part in Washington and the part in the rest of the country. The part in Washington looks a lot like a government entity. It is seven people. They're called governors. They sit on a board of governors. They are all appointed by the president. They are confirmed by the Senate. And they're basically public figures.

Then the Fed has this sort of more complicated private arm. That is the reserve banks. They are 12 reserve banks speckled across the country, and they are sort of private institutions. They were imagined to be sort of representatives of local businesses and local banks. And that's kind of the role that they continue to serve in the modern Fed.

These sort of private-ish (ph) institutions are important at the Fed, but slightly less important than the Fed board, in that all seven members of the Fed's Washington-based board have constant votes on monetary policy. Of the 12 regional banks, five have a vote at any time. So they're an important voting portion of the Federal Reserve when it comes to interest rate policy. But they are always a minority. And so that is sort of the slightly complicated but, you know, interesting structure of the Fed.

DAVIES: All right. So there is this board of people that meet from time to time and make important decisions that affect the economy. It is important to know that that these board members - governors, they're technically called - but the board members - they don't serve at the pleasure of the president, right? They are appointed and confirmed by the Senate - right? - to specific terms - right? - which gives them a measure of independence, right?

SMIALEK: Right. That is absolutely true.

DAVIES: This matters because I think independence is an important tradition within the kind of culture of the Federal Reserve. You know, when Donald Trump appointed the current Fed chairman, Jay Powell, he decided a year or two later he didn't like what he was doing, and he couldn't remove him. He could publicly insult him, which he's good at, and did so, but Fed - but Jay Powell kept doing what he's doing. You tell an interesting story in the book about - you know, this has happened before where presidents try to muscle the Fed into doing what the president wants in economic policy. One of them was Harry Truman. In the late '40s, he got into a scrap, and this was sort of resolved in sort of a courageous move by a Fed official. You want to tell us this story?

SMIALEK: Yeah, absolutely. And I think it's a good story to illustrate why independence matters as well. So it's one I really like. So back in the 1950s, we had a situation where the Fed had, for a number of years, been really kind of helping the elected government out. It made sure that interest rates didn't rise too much, and that allowed the elected government to sell government debt pretty cheaply in order to fund the war efforts - first World War II, and later we were mobilizing for the Korean War.

And so this was obviously a policy that the elected government really liked. They wanted it to continue, and they thought it should continue pretty much indefinitely. Unfortunately for the elected government - in this case, the Truman administration - the Fed did not agree with that. They wanted to start raising interest rates because they were worried that inflation was about to get out of control. And so this sets the stage for this really dramatic showdown. The Truman administration thought that they would be able to sort of bully the Fed into keeping interest rates really low, because there had been this sort of several-years-long tradition of the Fed taking a backseat to the administration.

They summoned the entire Federal Open Market Committee, the people who vote on interest rates, into the White House for a meeting with Truman. And at that meeting, it's basically sort of communicated that the White House would really like the Fed to keep interest rates very low. The Fed makes no promises. It does not agree to do that. But as soon as the Fed leaves, the White House releases a statement saying, how nice of the Fed, effectively. You know, they've agreed to keep interest rates low. We're so pleased, essentially. I'm obviously paraphrasing there.

DAVIES: In effect, Truman lied about this, right?

SMIALEK: Yes. So Truman says that the Fed has promised to keep interest rates low - Truman's administration, at any rate, says that the Fed has promised to keep interest rates low. And it hasn't done that. And so within the Fed, there's a lot of angst over what to do about this situation. You know, how do you even handle something like this? The White House has just put out this statement. And so there is a Fed governor, who was previously the Fed chair but has recently been demoted, by the name of Marriner Eccles, and he decides to take it upon himself to sort of solve this problem. And his solution to solving the problem is he calls up the secretary who took notes from this meeting, and he says, hey, can I have a copy of those notes?

He gets the copy of the notes. He goes back to the hotel room he lives in in Washington, and he calls up his favorite reporter. The reporter comes down. He hands him the notes, and he says, you have to distribute this to several of your friends, but as long as you do that, you're perfectly allowed to write a story about it. And so the reporter distributes it to the friends, as, you know, requested. And so every major newspaper in the country the next day has a headline basically saying the Truman administration lied about this. The Fed did not promise to keep interest rates low. And so this really sort of hardens the battle lines.

The Truman administration eventually capitulates. They say, you know what? We shouldn't be trying to bully you. We're not going to force you to keep interest rates low. And the Fed finally has its independence. We call it now the Fed-Treasury Accord of 1951. The end result here is that the Fed really has a lot of ability and a lot of latitude that it's continued to have ever since to set interest rates without having to in any way cater to the administration. And the reason that that is so important is it gives the central bank the ability to fight inflation, even when those kind of actions are really unpopular, even when the White House and the public do not like that policy.

DAVIES: So we were talking about the Fed, how it functions. One of the issues that comes up from time to time is accountability. I mean, the Fed has traditionally made its decisions behind closed doors and resisted efforts to explain what it does. You know, there's a logic here because, you know, people who bet on the stock market and make other financial decisions would love to know what's going on in private. But, you know, people want some accountability. You tell an interesting story from the 1990s when Congress wants to know more about Fed deliberations, and another Fed chairman, Alan Greenspan, spun them. Tell us what happened.

SMIALEK: Right. So in the early 1990s, there was a bit of a push going on in Capitol Hill to have more sunlight in government. So one of the representatives in Congress asked the Fed if it would be willing to hand over notes from its historical meetings. And Alan Greenspan, who is the Fed chair at the time, basically said, we can't do that. We don't have those notes. He said that, you know, rough notes were taken at meetings, but a lot of them were taped over. There wasn't a complete set. They didn't make sense. You know, for various reasons, these transcripts weren't real transcripts. They didn't exist. Unfortunately for Alan Greenspan, transcripts did exist. He was aware of that. The Fed was aware of that. And that became public knowledge because somebody leaked the news to a wire service within Washington and to the committee that was asking for these notes.

So this ended up blowing up into sort of a mini-scandal for the Fed. It turns out that, you know, after Congress pushed a little harder, they discovered that there were transcripts, that there were a pretty complete set of transcripts. You know, it's not perfect. It's not verbatim accurate to everything that was said, but it's, like, a pretty full set of transcripts. And so the Fed was pushed to be more transparent to release those historical transcripts. And it also ended up agreeing to release new transcripts at a five-year delay. And so after this episode, we really get a lot more insight into what happens behind closed doors at the Fed - at a lag, but we still get it. And it's really the result of sort of this back-and-forth, this very dramatic showdown that we had between Congress and Alan Greenspan.

DAVIES: We need to take another break here. Let me reintroduce you. We are speaking with Jeanna Smialek. She writes about the economy and covers the Fed for The New York Times. Her new book is "Limitless: The Federal Reserve Takes On A New Age Of Crisis." She'll be back to talk more after this short break. I'm Dave Davies. This is FRESH AIR.


DAVIES: This is FRESH AIR. I'm Dave Davies, in for Terry Gross. We're talking about the Federal Reserve - what it is, what it does, how its leaders are chosen, and how its reach and power has expanded in recent years - with Jeanna Smialek. She writes about economics and the Fed for The New York Times. In a new book, she writes about changes in the Fed as it's had to respond to economic shocks from the 2008 financial meltdown and the COVID-19 pandemic and to the expectations of critics who want more accountability and fairness in economic policy. Her new book is called "Limitless: The Federal Reserve Takes On A New Age Of Crisis."

So what we have in the Fed is a relatively small group of people who make very powerful decisions - not elected, but appointed by elected officials, at least the most important players. You know, I've thought about this over the years. I studied economics in college and have done some financial reporting. And it just seems to me that, you know, no industrial economy can function without a well-managed monetary system. And managing it is just so complicated, you know? And the effects of policy are so wide-ranging and sometimes indirect that it really has to be done by people who have some technical knowledge. You can't have Congress deciding on every interest rate cut. So it's kind of inevitable - isn't it? - that we have a small group of people making these really consequential decisions.

SMIALEK: I think that is absolutely true. And I think it's important to note that this is not hugely different from the system that's used across most advanced economies and many developing economies. You know, it is typical to have a sort of independent body. It's almost best practice to have an independent body of experts trying to make these very complicated, very difficult decisions. I think it's also important, though - and I think that some of the Fed's transparency efforts in recent years actually nod to this. It's important for the public to be aware of how powerful these folks are and have some idea of what they're doing because this is a huge amount of power. It's a huge amount of responsibility. And so I think it's very relevant for us all to sort of understand or at least have a rough grasp on what's going on down at the Fed.

DAVIES: You know, the other thing we have to note about - the people who have made the decisions at the Fed for most of its history and until very recently have almost been exclusively, you know, wealthy white men - many executives from the financial industry, in some cases academic economists. But you have people who are investment bankers. I mean, the current chairman, Jay Powell, made a fortune in private equity, which a lot of people have a lot of problems with, you know, that these are firms that sometimes take over businesses, sell off assets, load them with debt, and then walk away with big paydays. I mean, this is a broad statement, and, you know, it can be debated. But you have people who have made a fortune in private interests making these decisions. Should this worry us?

SMIALEK: Yeah. So I actually think interestingly, this is one of the biggest areas in which the Fed is changing these days. So just to give you a personal anecdote about this - when I started covering the Fed, which was about 10 years ago, I would occasionally, you know, chip in. I was on - a general econ assignment reporter at Bloomberg, but at the time, I would occasionally chip in and go talk to a Fed president.

I had just very recently been a waitress in Pittsburgh during all of my school breaks in college. And so I was coming from sort of this very blue-collar background. You know, that was sort of the part of the world that I knew, and it was shortly after the Great Recession. And so I was pretty familiar with the economy from on the ground at Eat'n Park in Pittsburgh. And that economy looked pretty tough. You know, consumers weren't spending as much as they previously had been. Jobs weren't very good. You know, the economy did not feel great at that time.

But I was following around these Fed presidents. And I - you know, I'm newly a reporter, and I'm newly talking to these folks, and they seem pretty disconnected from that. You know, they thought that the economy was speeding up. They thought that it was possible that inflation was going to show up soon. They thought that, you know, things were really starting to, you know, show some signs of getting back to normal after the Great Recession. And I remember thinking, you know, this is a failure of diversity of thought here. You know, these people haven't had enough of a connection to sort of what's happening on the ground in a while to sort of know about the experiences of the people that, you know, I just so recently was working with.

And I think that that doesn't happen as much anymore because I think the Fed has been very intentional in recent years about trying to sort of broaden out who it's talking to and broaden out who it's hiring. So we've seen a lot of appointments recently who come from sort of more diverse backgrounds. We've got, you know, not just academic economists, but also a variety of business people who come from different backgrounds, both at the regional Fed banks around the country and at the Fed board in Washington.

DAVIES: You know, the Federal Reserve has always kind of had a focus that it regarded in some ways as limited - right? - to keep the economy humming, keep employment up, but inflation low. But over time in recent years, other issues have gotten a lot of attention - one of them, the growing inequality of wealth and income, which has really skyrocketed over the last 20 years. There are some numbers in your book here that are really stunning. Is there a case that the Fed itself has contributed to inequality - the growth of inequality?

SMIALEK: This is one of my favorite questions about the Fed because I think it is actually just so complex. And anybody who tells you that there's a simplistic yes-or-no answer to this is just taking you for a ride. So I think it's definitely the case. We can clearly see that some of the Fed's policies bolster asset markets. So they push up stock prices. They push up bond prices. And we know that rich people tend to hold assets, like stocks, in much greater sums than poor people. And so you just kind of end up with this logical conclusion that naturally the Fed must be boosting wealth inequality. And I think that, you know, there's clearly a lot of evidence to suggest that that's - at some margin, that's probably true.

That said, the story is so much more complicated than that because the same policies that push up the values of those markets also do things like push up employment rates. And when people are more employed and they're earning more income and they're able to put away a little bit of savings, they get on that wealth ladder in the first place. So if you have lower employment, there's a chance that people with basically no wealth are never going to build any. Whereas if you have high employment, you've got people with low wealth who are able to start, you know, if not catching up, at least catching something. And so I think that that makes this story just so much more complicated. And I think that you have to think about both sides of that ledger when you talk about how the Fed's policies affect things like the income and wealth distribution.

I think you also have to think about whether what you care about is income inequality or wealth inequality because high-rate policies that really sort of, you know, hurt the employment situation could really actually be pretty bad for income inequality in the sense that they could leave a lot of people out of work and not earning any income at all. And so, you know, the income side of this is perhaps evolving slightly differently than the wealth side. And so I think it's just a very, very complicated situation and one that, you know, is worth being aware of, but is also worth appreciating in all of its complexity.

DAVIES: A lot of what you write about here has to do with the way the Fed responded to the pandemic and its devastating impact on the economy and ways in which the Fed really, you know, took on new areas of policy. You know, in 2008, when the financial meltdown occurred, the Fed and the government and the government in Washington put a ton of money into shoring up the financial systems with loans and bailout plans, you know, for financial institutions, which, of course, drew a lot of criticism. Similar thing was required here, and so the Fed put a lot of money into, you know, backing up the financial system. But it went into new areas, things that people didn't really think they had the authority to do before, didn't they? Give us some examples of this.

SMIALEK: Yeah. So the Fed - I think if there's one takeaway that I hope people walk away from my book with, it's that this is not your mother's Fed. They're doing things that we didn't typically think that the Fed would do. And they really showed that in 2020. So we saw the Fed step up and sort of help the municipal bond market to make it through. So it made sure that money was still flowing to state and local governments, something it had never done before, and in fact, something that it had previously stated that it didn't think it could even do. So that was really interesting. We saw them really step up and help the corporate bond market. So they made sure that big companies could still issue debt and fund their operations.

We saw them step up and help Main Street businesses, which is a bit of a buzzword, but basically it meant mid-sized businesses. It made sure that, you know, mid-sized business loans continued flowing. That wasn't a particularly successful program. But the fact that it even existed, I think, would have been shocking to, you know, me sitting in 2019. It was a complete sort of departure from anything the Fed had previously done in the modern era. And so we just really saw them flexing their abilities to sort of help shore up markets in times of trouble in ways that really were pretty unexpected and pretty expansive.

They were a leading responder to the financial portion of the crisis that happened at the onset of 2020. And it's worth mentioning that they were pretty successful, you know? These programs were very big. They were very well-supported by government funding. And they were, you know, capable - the Fed was capable of sort of taking that funding and blowing it up to make huge programs. And those big supports were never really used because just saying that the Fed was going to step in and help all of these markets was enough to make the markets themselves calm down. And so sort of private commerce got back to chugging. And things basically worked out.

DAVIES: You know, when you say things like that the Fed stepped in to support the market for state and local government bonds, does that mean that they were actually providing money to state and local governments, which, after all, were in terrible trouble with the pandemic because their revenue streams were collapsing and their citizens had great needs? Was the Fed actually loaning or granting money to state and local governments?

SMIALEK: Yeah. So what the Fed does typically in times of crisis is it offers loans that are relatively unattractive. So they're not terrible, but they're not great. You would hope that you would get better loans than these. And that's basically what we saw them do in 2020. So they offered loans to state and local governments, but they offered them at not fantastic rates.

And so what we saw happening was they only actually lent to a couple - literally two - state and local government entities. And the program was otherwise basically unused because people discovered that they could get better rates in the private markets. But just by standing in there as a backstop, the Fed enabled the private market to keep functioning in a much better way than it previously had been. And so a lot of the other loans that went to state and local governments at that time can kind of be looked at as the aftereffect or the side effect of the Fed's intervention in this area.

DAVIES: We're going to take another break here. Let me reintroduce you. We are speaking with Jeanna Smialek. She writes about the economy and covers the Federal Reserve for The New York Times. Her new book is "Limitless: The Federal Reserve Takes On A New Age Of Crisis." We'll continue our conversation after this short break. This is FRESH AIR.


DAVIES: This is FRESH AIR. And we're speaking with Jeanna Smialek. She covers the economy and the Federal Reserve for The New York Times. In a new book, she writes about changes in the Fed as it's had to respond to economic shocks from the financial meltdown and the COVID-19 pandemic, and to the expectations of critics, who want more accountability and fairness.

So the Fed, which, I mean, I think you quote - it's probably Chairman Powell saying at one point, you know, we're not going to get into state - you know, state and local government bond markets and then turning around and doing it. They also supported corporate bonds, including junk bonds. This drew some criticism, I'm sure. Does that mean, going forward, it's going to be a completely different Fed?

SMIALEK: So this is sort of the central contention of my book. I think we've talked a lot about what the Fed did in 2020 as it relates to inflation. But we haven't talked a lot about what the Fed did in 2020 as it relates to these emergency programs. And we need to because I do think it is going to sort of open this Pandora's box where people want them to do this again in the future. You know, the Fed acted very quickly. It was very effective. It did a lot of things we didn't previously know it could do. And that's going to be really attractive to lawmakers going forward, because what the Fed showed us is that it can do a lot of things that they might hope to do but that would be difficult to pass through a democratic process or would take time to pass through a democratic process.

And so, I think if you're a rational lawmaker, you're going to kind of look at them and think, hey, we should use this tool more often. But the challenge is that, that could end up being sort of a workaround for actual democracy the way that we always envisioned it. And so I think that that's something that we should be having a national conversation about. I'm a reporter, so it's not my job to have an opinion about how that conversation comes out. But I do think it's interesting that we haven't really reflected on it yet. And it's probably something that deserves reflection.

DAVIES: Yeah. You make the case that, you know, some people in the Fed were thinking, well, yeah, we helped out a government that was in a crunch. But now if they think that we're their agent, then you can have people wanting to fund a mission to Mars, for example.

SMIALEK: Yeah. And I think the challenge is we already saw this during 2020. Like, there was a lot of political pressure to make programs more attractive, to make sure that they could benefit specific state and local entities, to make sure that they were sort of getting money to people that politicians hoped would get that money. And I think that that temptation is going to still be there in the future. And that's why this deserves a little bit of attention, because you could really be at risk of politicizing the Fed if we make these a regular part of the toolkit and if we use them again, and if there aren't sort of different guardrails around how they're operationalized and how they're used.

And so, you know, obviously, the pandemic was an exceptional moment. Hopefully we never have one again. But at the same time, I think it's probably worth being conscious of how political some of these programs had the potential to be and ask whether we want that to be sort of the role that the Fed plays in the future. And, you know, if it is the role we want the Fed to play in the future, ask whether it needs some different rules around it.

DAVIES: You know, another issue which, you know, 20 years ago, no one even dreamed that the Fed would pay attention to would be climate change. In fact, there are central banks that are paying attention to this and crafting policies to address it. What's the posture of the Fed here?

SMIALEK: Yeah, this is another one that I think the American public needs to be pretty conscious of and pretty thoughtful about - how we - where we want the Fed to be on this and what role they want them to play here. Because there is pressure, I think, at an international level for central banks to really start thinking about what role they have in the climate crisis. And I think that's sort of a two-part - that's a two-part conversation, I'd say.

One part is it seems pretty obvious to anyone who pays attention to bank regulation that climate change could have important implications for the safety and soundness of the financial system and the banking system in particular, and that central banks have a role to play in being conscious of where climate-related exposures and risks are within the banking system. So as a supervisor of major banks, they need to be aware of this stuff. That's not super controversial, and that's kind of where the Fed is now. That's how it thinks about climate change.

I think there's a second rail here, though, which is that some central banks around the world are asking, should we think about things like green finance - like, you know, giving favorable loan rates to institutions that are sort of helping with infrastructure construction that will help to greenify (ph) our economy? And I don't actually think that this is something we have a lot of international consensus about, whether this is a good idea or a bad idea. But I think here in the United States, it's probably likely to be a much more political idea than it would be abroad, where sort of concerns about climate change in some countries are a much sort of firmer political consensus. Here I think there'd be some risk of politicizing the Fed if you sort of crossed that Rubicon. And that is why the Fed has been pretty resistant to thinking about anything like that up to this date.

But I think that this is an issue that isn't going to go anywhere. It's one that's going to continue to be part of our national conversation. And I think we need to be sort of pretty aware of how this plays out as it relates to the Fed - again, because the Fed does have this independence that it values so much and that has served the institution pretty well over time.

DAVIES: So there's this theme that's emerging, which is that the farther this - the Fed strays from its traditional narrow goals, the more it can become a tool of partisan manipulation.

SMIALEK: Yeah. And I think the concern here - and to be clear, you know, I'm not trying to take a position on where the Fed's role should be or where it shouldn't be. I think that the thing that we should be conscious of, though, is not sort of making these decisions without really talking about them, not sort of crossing these Rubicons without talking about what river we're crossing. I think it's important to have a sort of national conversation about these things.

And I think part of the reason for that is if you get into a situation where the Fed does seem like it's politicized, where it doesn't have democratic buy-in, where the public doesn't trust what it's doing, where the public sees it as sort of an agent of one party or the other, you could really have a situation where they lose faith in the Fed's ability to do the things it's going to say - the things that it needs to do to just do its basic job, which is controlling inflation and sort of moderating the pace of the economy over time. You need that sort of legitimacy for the Fed for it to sort of properly shape expectations in a way that allows it to actually do its core job.

And so I think that's why the Fed is being very cautious as it sort of tiptoes into these conversations. But it's also important for the public to be aware of these conversations, for the public to be conscious of how Congress is treating the Fed and how the White House is treating the Fed. And it's just important to sort of think about where it fits into our sort of democracy. I think that's a really fundamental question that is important for the public to be aware of.

DAVIES: Well, Jeanna Smialek, thank you so much for speaking with us.

SMIALEK: Thank you so much for having me.

DAVIES: Jeanna Smialek writes about the economy and covers the Fed for the New York Times. Her new book is "Limitless: The Federal Reserve Takes On A New Age Of Crisis." Coming up, Nick Quah reviews "The Coldest Case In Laramie," the new podcast from Serial Productions. This is FRESH AIR.


Dave Davies is a guest host for NPR's Fresh Air with Terry Gross.
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