Episode 354 – The Fed As a Weapon of Class War with L. Randall Wray
Randall (Randy) Wray explains the workings of the Federal Reserve and how its policies enrich the wealthy while disciplining labor.
Randy: “We’re supposed to believe the central bank manages inflation by using interest rates?”
Steve: “It’s ridiculous.”
L. Randall Wray, one of the original MMT economists, recently wrote a paper with Yeva Nersisyan entitled, No, the Fed is NOT Independent – It is a Creature of Congress. Steve invited Randy for a conversation about how the Federal Reserve is, and always has been, a “creature of Congress,” and its supposed independence is a smokescreen that benefits the wealthy at the expense of the rest of us.
The Fed has a dual mandate of full employment and price stability, yet it consistently prioritizes the stability of Wall Street over the well-being of Main Street, bailing out banks while leaving workers to face the fallout of manufactured recessions.
Randy describes how raising interest rates – the Fed’s so-called tool – works to suppress wages by slowing the economy and killing job growth. Federal Reserve transcripts explicitly state that they fear “wage inflation” but see “profit inflation” as desirable.
Randy wants Congress to take control of the central bank. (Some of us don’t see Congress as independent either.) But whatever our belief in the role of the state and who it serves, the episode contains valuable information on central bank operations, how interest rate hikes discipline labor, the truth about “fighting” inflation, and the difference between monetary and fiscal policy. We need to understand the mechanics of power if we’re going to build the future we deserve.
L. Randall Wray is a Professor of Economics at the Levy Economics Institute of Bard College, and Emeritus Professor at University of Missouri-Kansas City. He is one of the developers of Modern Money Theory and his newest book on the topic is Understanding Modern Money Theory: Money and Credit in Capitalist Economies (Elgar, 2025).
Transkripzioa:
Steve Grumbine:
00:00:42
All right, folks, this is Steve with Macro N Cheese. Today’s guest is none other than the original OG L. Randall Wray, as you’ll see him in his writings.
That’d be Randy Wray, for those of you that get to know him and a prolific writer. He is a professor at Bard College at Levy [Institute].
He is also one of the original developers of the economic school of thought known as modern monetary theory. Randy has been on the show many times, and for those of you who don’t know him, please go look up more of his work.
For those of you who heard my story, Randy’s primer that he put in New Economic Perspectives, and his original book, [Modern Money Theory: A Primer for Sovereign Monetary Systems] which basically was the primer put into book form, was a core part of my learning MMT. It was way before The Deficit Myth, way before a lot of the stuff we get to see on the Internet that we’ve grown to know and love.
And so Randy’s work has been very, very, very instrumental in really what a lot of the work we’ve put out there represents. So I appreciate him taking the time to be with us today.
We’re going to go over the Federal Reserve and we’re going to talk about a policy paper or position paper that they put out at Levy Institute called: No, the Fed is NOT Independent- It Is a Creature of Congress. You all have heard me talk about it. We’ve had multiple guests come on, such as Rohan Grey. We’ve had Christopher Shaw come on. We’ve had a number of people come on to discuss the Fed.
But it’s really important today because as we’re watching these No Kings rallies, for whatever they’re worth, and we’re watching the Trump administration rattle its sabers and talk about getting rid of Powell and so forth, the mere notion that the Fed is somehow or another truly an independent thing, that it’s not part of the government, is ludicrous. And we will cover that today.
We’ll also cover the primary purpose that the Fed was originally supposed to serve for the government and what it’s been reduced to over the last 30 years or so. I’m well on the record for saying I believe a lot of this stuff is a manufacturing of consent.
These narrative forms that go out there are meant to keep us in a chaos mode, et cetera, and not really ever knowing what truth is. Kind of like a post-truth society at this point meant to keep us all, you know, if there is no truth, then we can’t ever know anything. Right?
And so we can’t make decisions. But let’s be honest, MMT is a real source of truth.
At least it’s a mooring, an anchoring, that we can have in understanding the world around us as money is a primary mover of all things, quite frankly. And this is no different. So with that, I bring on my guest, Randy Wray. Welcome to the show, sir.
Randy Wray:
00:03:29
Oh, yes, good to be back.
Steve Grumbine:
00:03:31
I appreciate it so much. This paper that you and Yeva [Nersisyan] put out, I guess this is what, September 19th of 2025. Very timely.
Can you talk a little bit about what prompted you guys to write this policy position paper?
Randy Wray:
00:03:44
Well, actually, it was a statement by Senator Elizabeth Warren.
She is normally very good on financial markets, and she said that she completely disagreed with the appointment of Chair Powell, but now wants to protect him from President Trump. She wants to protect the Fed’s independence.
And I was very shocked by this because the Fed is not independent, has never been independent, should never be independent of Congress. And what she should be doing instead is getting Congress to take back control over the Fed, take it away from Trump, take it away from Powell.
The Fed is a creature of Congress from the very beginning when it was founded, and she should take control.
Steve Grumbine:
00:04:38
You know, it’s funny because you would think as a lot of these folks are lawyers that have been through a lot of legal review and have probably heard about this stuff in their schooling and their work, and yet they act like they’re rubes, they’re noobs. They have never heard of these things. It’s almost oddly weird.
It’s weird how off they are, how just absolutely ignorant of the very system they control or have access to, etc. It’s appallingly shocking, isn’t it?
Randy Wray:
00:05:05
Yes, it’s shocking. Even if this was just a political angle, a way to get a ding against President Trump, which I’m all for doing.
But if it really is a misunderstanding of this, it is very difficult to understand that Congress does not understand that the Fed is a creature of Congress.
Now, the Fed has worked extremely hard over the past 30 years to become the Wizard of Oz, completely controlling the economy, getting people to believe that it’s got all the right levers so that we don’t really need fiscal policy, we don’t really need regulation, that the Fed can do everything. The Fed can keep the economy on course.
[Former Fed Chair Alan] Greenspan came in 1987, and the Fed worked very hard to build this belief that the Fed absolutely can control the economy. When all of the evidence for the past 30 years demonstrates that is completely false.
There is no evidence to support the belief that the Fed is in control.
Steve Grumbine:
00:06:16
You know, when I look at all the happenings, if you will, the market crashes and the recurring bailouts, and realizing that only once have we seen even a slight bailout of the American people. And that was during COVID and it was very temporary unfortunately.
It doesn’t seem like the Fed mandates, even in writing, even though they talk about full employment and price stability. And I know the Hubert Humphrey Act, which we’ll talk about here shortly, you know, is a legal end to that.
It doesn’t seem like the Fed really, not just the Fed, but our government as a whole, but the Fed in particular. It doesn’t seem like its primary purpose is to make the American public whole. It seems like it’s there to protect American enterprise.
And whether it be shadow banks or whatever, it never really seems to work out for the little guy. How do we square up the Fed’s mandate and the outcomes that it produces?
Randy Wray:
00:07:19
First, let me just remind everyone the COVID bailout actually was fiscal policy.
Steve Grumbine:
00:07:26
Yes, it was.
Randy Wray:
00:07:27
Both Biden and Trump spent trillions of dollars to help bail out the economy. And Yeva and I wrote a piece laying out what the response should be. And we were focused on the fiscal policy.
And we believed, and still believe, that Biden’s relief package was very good, did a lot of good. We had our doubts about Trump’s bailout package, but anyway, the bailout was not monetary policy.
Now, it’s true that the Fed lowered interest rates, but interest rates had been low for a very long time. The Fed has engaged in some bailouts. Everyone remembers Silicon Valley Bank. [Yes] The Fed did step in, but that did not help the economy.
It didn’t help people. We can argue about whether it was a good idea to do that or not, but that is not what helped get us out of the deep COVID recession.
Now, the Fed’s mandates have always been interpreted as a dual mandate, but really it’s a triple mandate. It’s always been reasonable growth, reasonably low inflation, and reasonably high employment.
So those are supposed to be the three things that the Fed focuses on. And this mandate was strengthened in the Humphrey-Hawkins Act.
Jamie Galbraith actually played a big role in writing, and even he thinks now that it was probably misguided. And the reason it’s misguided is if you look at that triple mandate, the Fed has no levers, no tools to achieve any of them.
In other words, even if we believed that all of these are good mandates, the Fed is not capable of pursuing any of them. All of these actually are better pursued by fiscal policy, not by monetary policy.
Back in those days of the Humphrey-Hawkins Act, the Fed and many economists still believed that the Fed could control the money supply. And Milton Friedman had convinced many economists and politicians that the key to controlling the economy is to control the money supply.
We now know, and the Fed actually began to discover this almost immediately after the Humphrey-Hawkins Act was passed. By the late ’80s, the Fed gave up on money targets.
The Fed can’t control the money supply and so they switch to interest rates, the Fed funds rate, the overnight interest rate. And the problem for pursuit of the mandates is the Fed’s funds rate is not a tool that can be used to hit any of the mandates. Just plain and simple.
And all of the evidence since the late ’80s, it demonstrates that what I’m saying is absolutely correct. And even some people within the Fed have now written research reports and stated publicly that the Fed cannot do this.
And it is delusional for the Fed or for Congress or for the President to think that the Fed is able to do any of this.
Steve Grumbine:
00:10:42
There’s conspiracies galore. The Fed is probably the most propaganda-driven institution that the United States government has.
It’s got more stories, more conspiracies, more insane, and some sane, some starting to feel more sane narratives behind the scenes as to its role and purpose.
Most of us on the MMT side, whether it be Warren [Mosler] basically saying the Fed could be reduced to a spreadsheet, or some of the other folks that have said basically that, you know what you just said, which is that overnight interest rate isn’t really much of anything. I mean, there was a meme going around where there was a child’s pretend car steering wheel and the kid was in the passenger seat playing.
They’re saying this is the Fed and the reality driving it is fiscal policy. Fiscal policy belongs in the driver’s seat, not the Fed. But we make a really big deal about this.
There’s obviously something very negative that the Fed is capable of doing aside from just choosing to bail out rich people and leave the working class to suffer. What are some of the things that the Fed’s misguided approach to things has done negatively to not only the economy, but really the broader society?
Randy Wray:
00:11:59
Yeah, back in, I think it was 2004 when the Fed had started raising interest rates sharply and that is what triggered the Global Financial Crisis (GFC). I mean, we had severe financial problems, massive fraud by Wall Street. So a crisis was pretty much inevitable.
But the Fed made it a lot worse by jacking up interest rates. And I was trying to think through why the Fed was doing this in 2004 and I noticed how much 2004 looked like 1994.
And fortunately, the Fed, actually Greenspan, had been caught lying to Congress. And Congress induced the Fed to start releasing transcripts of the FOMC meetings, which is where the decisions are made with a five-year lag.
So by 2004 we had the transcripts from 1994 and I read through those to see why did the Fed raise rates in 1994 when we were in a jobless recovery? It was our first jobless recovery. Normally when you recover from a recession, you create lots of jobs and people go back to work.
That was not occurring in 1994. And so why was the Fed raising rates when, yes, okay, the economy was recovering, but labor markets were not. People weren’t getting jobs.
And so I read through the transcripts, which are almost word for word.
The only thing that they take out is if they start discussing a bank that’s in big trouble, they take out the bank’s name, but otherwise it’s word for word. And they were worried that some jobs were being created. Literally that was the reason. They liked the high unemployment.
And they were worried that if more jobs were being created and more people went back to work, then there could be inflation pressure. I think that indicates that you’re right. The Fed acts against the interests of the working class. That I think is true.
If you just plot the unemployment rate over time and you plot the Fed’s interest rate movements, it becomes very clear that as soon as the economy starts creating jobs, they raise interest rates. So it’s very clear that is what they’re doing. Now, should the Fed be doing that? Of course not, because high employment is one of those mandates.
What else is the Fed supposed to do in addition to the mandates? The Fed was founded be a lender of last resort. The US was very unusual. We didn’t have a lender of last resort.
What a lender of last resort is supposed to do is stop bank runs.
And the idea is that if people start running on a bank, obviously it does not have the cash on hand so that people can take cash out of their demand deposits. If everyone’s coming in at once.
And if one bank has a run and the depositors find out they can’t get their deposits out, then there’ll be run on another bank. And this used to happen back in the 19th century and it happened in 1907. So Congress created the Fed.
Finally, we would have a central bank that would act as lender of last resort. And the Fed does act as a lender of last resort. And that is a proper function of a central bank.
You say, “Well, they’re saving the banks.” This is true.
But if the banks are solvent but illiquid, which is when you’re supposed to do lender of last resort interventions, you really don’t want those banks to fail just because they’re holding assets which are basically loans to households and firms that they can’t sell immediately. So anyway, that function has been performed by all central banks.
And it’s been known since around the middle of the 19th century that you need a central bank to do this. So that’s a proper one. Messing around with interest rates is how the Fed is trying to achieve those other mandates.
And that is something that central banks were not set up to do.
Steve Grumbine:
00:16:23
You know, I want to touch on something. I’m just an activist, I’m not an economist before anybody accuses me of saying otherwise, but I do want to ask this question.
If the Fed’s role is to manage interest rates or the overnight window, if you will, and the mandates are for shorthand, full employment and price stability. When you say that the Fed seemingly always raises interest rates when they start creating jobs, tells me a couple things, right?
So number one, the more jobs there are, the more opportunity it is for labor to withhold itself for a better wage that they can bargain. They’re in a position to bargain. That’s not the case when it’s the other way around.
And interest rate hikes are, and I’ll reduce this to a meme level, interest rates are cash to rich people, cash to people who already have money, cash to countries that. Whatever.
And so as labor is trying to achieve some sort of stability of its own, trying to gain some strength, some bargaining power, the Fed swoops in to sweep the legs of the labor movement and knock away its bargaining power while simultaneously giving the rich, presumably the people that own those businesses, more money through interest income channel. What’s not to like if you’re an oligarch or a rich person? And the Fed’s approach to this, it seems like they’re working hand in glove.
Randy Wray:
00:17:51
Yes. Reading the 1994 transcripts, Chairman Greenspan put it this way.
Now I’m summarizing. If unemployment is getting low enough that labor is able to demand higher wages, that will be inflationary because firms will pass the higher labor costs on in the form of prices. And the problem is that paying workers more doesn’t increase their productivity. So it’s just inflationary, okay?
On the other hand, if firms are just raising prices to increase their profits, that would be inflationary too. However, firms then have more profits that they will invest that will increase productivity.
So profits inflation is self-limiting and in a way it’s sort of desirable because it’s going to increase productive capacity for the country. But wage inflation is undesirable because workers don’t become more productive just because they have higher pay. And so think about that.
That’s the way the Fed thinks and I would say that’s the way many economists think too.
Now there actually is quite a bit of work that shows that if workers are paid more, actually they are more productive. They’re happier. They work harder. They’re more devoted to their jobs.
And there’s a whole literature on this that’s been created by what is called New Keynesians, like Janet Yellen, who was at the Fed and also at the Treasury. There’s sort of a whole literature on this that emphasizes that actually raising wages is good for productivity.
Steve Grumbine:
00:19:35
It’s interesting because like personal anecdote. Went to the hospital the other day. I had a weird reaction between an over-the-counter supplement and one of the other medications that I take and went to the ER and so forth. They kept finding nothing wrong because there was nothing wrong. I mean, I took a pill that didn’t work well with another pill.
The answer is stop taking the pill. But each time they were like, you know, “I’m a doctor and I don’t see any of the symptoms. However, my job is to recommend that we admit you.
My job is to recommend that you stay, that my job is recommended, we do more tests and so forth.”
And that sounds great and all that stuff, but I said to him, I said, “What would be my estimated out of pocket [cost] if I say yes to any of the above,” including with not even thinking about, you know, my insurance payment, it was ridiculous what it didn’t cover and how many different hands had to be fed in this process. And to me, my ability to pay that and be safe. And like hypothetically my doctor said I should do this thing.
So technically, if you’re just allowing yourself to follow a doctor’s instructions, I should have done this thing. But I don’t have the thousands and thousands of dollars that would have come from that simple stay just for diagnostics.
But if that was taken care of, I might have been willing to stick around. However, I race back because I don’t have any paid time off. I’m a contractor, I’m a consultant, and we don’t get paid if we don’t work.
So if you think about the circular nature of pay, benefits, whatever, and, you know my health and my ability to do my job and on and on and on, like I went back to work without any sleep, still in the throes of what had happened, knowing full well it wasn’t deadly, but still scary, that couldn’t be good for productivity if you think about it like that.
And ultimately, if I would have had the peace of mind that it would have been covered and that I could have taken a day or two off from work just to get right, I would have come back to work healthier, better, ready to take on my role even more.
But instead, because of these kinds of austerity-driven narratives that are real-life narratives that are real-life situations we find ourselves in anecdotally, I mean, it’s my story. I think that kind of proves the point right there in and of itself.
I’m a terrified guy, couldn’t afford the bills, didn’t do the thing that would ensure that I’m okay. And simultaneously came to work without any sleep the night before.
I mean, it doesn’t sound like a winning proposition if your goal is to maximize your resources and not having them live in precarity, am I correct?
Randy Wray:
00:22:17
Yeah, precarity is a big problem. You know, people have to string together two jobs, three jobs, and that’s gonna hurt their productivity. Sure.
And just the worry of being able to support your family is not going to be good. Low pay is a problem. It reduces productivity. I don’t think there’s any doubt about that. So the Fed has this one tool.
It’s the overnight interest rate target. And that’s an interest rate that banks pay each other. Okay? For borrowing reserves. That’s linked to interest rates for treasury bonds and bills.
And as you said, when the Fed raises its interest rate target, the interest rates on bonds, both private and government bonds, are going to go up. Who are those held by? Well, they’re held by people who already have money. Wealthy people hold those things.
Your pension fund, if you have one, if you’re lucky enough to have one, holds those things too. So sort of indirectly it can help working-class people who someday hope to be retired and have a pension.
But for the most part, you’re going to be shifting income towards the top. When you raise interest rates, it’s going to increase mortgage rates. If bond rates go up, mortgage rates are going to go up.
They’re pretty closely linked to 10-year bonds. And that’s going to make housing more unaffordable. It’s going to make housing construction more expensive.
Because of course, while developer is building a housing development, they’ve got to pay wages. They’ve got to buy the materials. They’re not going to see revenue for months, maybe a year. They’ve got to carry loans at higher interest rates. When the Fed is raising rates, so it’s going to most likely reduce construction.
Contractors will wait until the interest rates go down in order to avoid the high costs of construction. The US built hardly any housing after the global financial collapse. So we already had a severe housing shortage before the Fed started raising rates.
And they only compound the problem by making housing more unaffordable and by reducing the incentive to construct more.
So there’s many ways in which raising rates is going to hurt working-class people while increasing the interest income to the already well-off people. So there’s that very negative distribution impact on the population. There also can be a link to the value of the US dollar.
All things equal, if our interest rate goes up relative to the rest of the world, the dollar will increase in value.
And that’s going to have some negative impacts on production in the US. Those costs relative to the cost of imports are going to be higher because imports become cheaper if the dollar is stronger. So there’s another way that it can impact the working class.
And then finally, the most important impact, and I would say the main avenue through which the Fed affects the economy is by tanking financial markets by causing a financial crisis. This is what the Fed did.
When Chairman Volcker was brought in the high inflation period in the early ’80s, he actually increased the target rate to 20%. Half of all the savings and loans failed in a tremendous financial crisis.
We’ve had several other financial crises, but then again we had the Global Financial Crisis that was triggered by the Fed again raising interest rates. Today you don’t cause bank runs for the most part. Silicon Valley was a bank run. But high rates cause insolvency of banks.
And that is what the Fed did in the Global Financial Crisis.
The insolvency was so great among the US banks and global banks that the Fed had to spend and land $29 trillion to bail out the global financial system, after it had caused the Global Financial Crisis by raising interest rates sharply beginning in 2004. I think this really is how Fed policy works. It’s by devastating the financial sector and then that will tend to depress the economy too.
If your financial sector tanks, the economy is also going to go down. Unemployment is going to skyrocket. You’re going to have stagnation. And that stagnation is going to bring down inflation.
And so we did have a 20-year period of very low inflation where the inflation was running consistently below 2%, which central bankers have just decided on their own. 2% is the right number for inflation. There’s no justification for this. Greenspan and Volcker have basically admitted this.
They just say, “Oh well, central bank has decided this is the right number.” We could not get the inflation rate up to 2%.
Intermission:
00:27:51
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Randy Wray:
00:28:14
Europe could not get the inflation rate up to 2%. Japan has been suffering with near-zero interest rates for 40 years.
Central banks, no matter what they tried to do, couldn’t get the inflation rate up to 2%. And we’re supposed to believe the central bank manages inflation by using interest rates?
Steve Grumbine:
00:28:37
It’s ridiculous. I want to touch on your policy paper. We’ve kind of touched a little bit of this, but I think there’s something very specific here.
It was like, can the Fed actually manage the economy, which we’re determining quite clearly they cannot! They can do some very negative things, however.
But you know, during the pandemic, obviously we had saw what Isabella Weber dubbed sellers’ inflation, which is the profiteering. They found an opportunity to use a crisis to raise rates. And those rates never, ever come back down. They just stay kind of where they were.
But, here we are now, we’ve got a new animal in town and that’s Trump trying to play tariff fairy. And Trump has been willy-nilly shooting favors out for lower tariffs. And you don’t kiss the ring, you get higher tariffs.
And one of the things that has occurred over the last several months is this tariff on lumber and wood-built products in particular with Canada.
And we’re watching the tariffs on those really, really cause a tremendous impact on lumber in general, which is what we build houses with and a whole host of other things. What exactly is the Fed’s role within the tariff space?
It seems like there is no greater economic issue going on right now than Trump’s willy-nilly kind of gangster-style tariff flinging. And there’s nobody in Congress is doing a damn thing about this. Let’s be fair.
If they were ever a legitimate agency or organization or element of our government, they’re doing nothing. They’re just sitting back and letting it happen. What exactly is the relationship between Trump’s tariffs and the Fed?
And quite frankly, this 2% target rate and how is the Fed managing that and is it effective and what will be done or what is being done about it?
Randy Wray:
00:30:36
I agree that the tariffs are going to add some inflation pressure and especially lumber. It’d be hard to think of a worse strategy than to raise the price of lumber when we have a severe housing shortage.
If you, you know, get down into the details of what is it that is causing our measure of inflation to be consistently around 3% instead of the 2% that the Fed wants. Housing is the biggest part of our inflation pressures. And the way to relieve that is fairly obvious.
Build more houses and raising the price of lumber is not going to do that. But also because of Fed thinking, the Fed is afraid to lower interest rates because Trump is causing inflation with tariffs.
And so we have this standoff between the President and the head of the Fed. If Trump would stop all the nonsense about the tariffs, the Fed maybe would lower interest rates as Trump wants them to do.
But as long as he keeps threatening these ridiculous tariff rates, the Fed is scared to lower them. And Powell was warning. He says, “Okay, we’re lowering now, but don’t think that we’re going to lower again. It’s not baked in.”
The Fed is going to wait and see how much more damage is Trump going to do. So they’re kind of a loggerheads now. I don’t agree with either side.
The Fed should be lowering interest rates to compensate for the problems that Trump is creating. We want to reduce the cost of building houses. We want to reduce the mortgage rates to help the market for homes.
So keeping rates high is not the right response to tariffs.
Steve Grumbine:
00:32:31
You know, obviously you went on to talk about some of the things you agree with Elizabeth Warren about regarding Fed policy and so forth. I guess we can let you. I mean, I’ll boil it down.
You agree that the President shouldn’t be meddling, but you do believe Congress, which has created the Fed, this is important–this is kind of bringing a full circle–the Fed is a creature of Congress. Congress, however, doesn’t show any…
In my lifetime, I have not seen Congress actually do anything with the Fed. I’m 56, and maybe I just wasn’t aware of activities that they did to do this.
And this is why people go, “The only thing federal about the Federal Reserve is the name. It’s as federal as FedEx.” You know, all the little tropes, but in reality it is a creature of Congress. And I want to take it a step further.
I have my fair share of disagreements with Warren Mosler outside of MMT, but within the MMT space, he will frequently say banks are public purpose entities already. They’re already national. The issue is they’ve been deregulated.
And as a result of that, when we talk about reigning in the banks and we talk about all these various things, I mean, what we’re really talking about is predatory lending practices and things like that.
They are still intended to be for the public purpose, but they really don’t serve the public purpose, not in a way that I think the public would deem in their best interest. Can you talk momentarily about the banking system, the relationship between the Fed and banks and their subordinate role to Congress in general and the charters that they’re given from the federal government?
Randy Wray:
00:34:11
Yeah, sure. So, as I said, the Fed was created in 1913 to be lender of last resort. We go into the Great Depression, we have a severe banking crisis.
Half of the banks failed in the 1930s. The first act of FDR was a banking holiday. Holiday sounded nice. What it really was, every bank was shut down.
FDR sent his people in to decide which ones to reopen. So that’s a long story, very interesting story. I won’t go any more into that. But as a result, they said, “Well, hold up.”
What was the Fed doing to help prevent this crisis? The Fed was only willing to lend to solvent banks that had a liquidity problem. And that was the way the Fed was set up.
And Congress said, “Well, oh, okay, that’s not enough. What we need is for the Fed to also get involved in regulating the banks.” Okay? So the second function was regulating the banks.
And then skip forward to World War II. We know that the federal government is going to spend far more than it’s going to raise in tax revenue.
And I can tell you that everyone in the administration understood the government cannot run out of its own money. They understood that then. They knew that finding the money was not the problem.
But they were going to issue a lot of government bonds and they wanted to make sure that the government didn’t waste a lot of its spending on interest, which we already said goes to rich people. So they wanted to keep the interest rate low. So Congress told the Fed, you will keep the interest rate, the short-term interest rate, if I remember it was 3/8’s of 1%. Way below 1%. You’re going to keep it there. And the longer rate was longer. I think maybe it was 2%.
So Congress did tell the Fed exactly what the interest rate targets would be. In 1951 there was a, it’s called the Fed Treasury Accord. Supposedly they got together and agreed on this.
Now the Treasury actually did not want to do it, but was forced to do it. They freed the Fed so that the Fed did not have to keep the interest rates at that range.
The third thing was the Fed is supposed to do what Congress wants with regard to the interest rate, although Congress decided, “We’re not going to do that anymore.” Okay? So those are the things that the Fed is supposed to do. The problem is the Fed is not good at regulating.
The Fed has become a very free-market oriented. “Let the biggest banks do whatever they want to do. Don’t worry, the market will discipline them.”
We know how well that works, with failure after failure and then the Fed doing something it is not supposed to do, which is bailing out an insolvent institution. That’s what it did in the Global Financial Crisis. That is actually illegal by US law, but the Fed did it and it does it over and over and over again.
It should not do that. And it is demonstrated it’s not capable of regulation. So I actually would take that away from the Fed. It already is in the FDIC1.
But you need good people working in the FDIC in order to get them to do that. Okay? It’s also a responsibility of the Office of the Comptroller of the Currency. Now both of these are actually under the Treasury.
So you need a good Treasury Secretary and you say, “Okay, you guys are going to regulate the banks.” And then of course, Elizabeth Warren got through a very good idea. Good legislation.
You also need to protect the consumers from the financial institutions. So we created the Consumer Protection Bureau. Those are a better way to regulate the financial institutions.
States also regulate banks, which also is another layer of regulation, which is a good idea. Congress can pass laws that regulate banks, tell them what they can do and what they cannot do. I think that’s the right way to regulate.
So I would take that away from the Fed. I would take interest rate setting away from the Fed.
Just do what we did in World War II say “Hey, we’re tired of you jacking around the interest rates, causing financial crises, sending money off to the already rich. We’re going to mandate from now on the Fed funds rate will be some target set by Congress.” I recommend 1 or 2%. A lot of MMT people say zero.
I’m okay with that too. Okay, let’s just choose one. It’s movements of the rate that cause the financial problems. So let’s choose one. Zero, 1, 2%. Okay? Any of those, fine.
And the Fed must hit those. And that’s it. That’s what I would use the Fed for, as well as lender of last resort.
You must have a lender of last resort and they are only supposed to lend to solvent institutions. Then you have to have a good way to unwind the insolvent institutions. You don’t prop them up. You shut them down. And we have laws that govern this.
But the Fed has been breaking the law. So that’s the short of an answer as I can give.
Steve Grumbine:
00:39:54
Well, with the kind of like I don’t even know what you want to call it banana republic type judiciary that we have now, the Supreme Court is laughably partisan. I have almost no faith in our judicial system whatsoever to net out any kind of fair equitable hearings.
I don’t see deliberation, not in a meaningful way. I don’t see anything that I was trained in school to believe happening in real life, like everything that I thought I knew.
When I watch it, it doesn’t look like what I was told it was. It could have been error of understanding on my part, which certainly wouldn’t be the first time.
But my lying eyes are struggling to see a functioning government that actually provides justice, provides oversight. This nefarious idea that it’s “We the people.” I mean, you almost have to be asleep to believe it. It’s got to be like a dream or a nightmare.
And reality is, is that I’m not seeing any pathway for regular people to have a say so here. I mean, obviously the more you dig into these things, you realize that the elites were always the ones that it was targeted for.
I mean, our Constitution protects private property right up front. I mean we’re talk the ultimate in elite capture here, if you ever want to call it capture. I mean, it was set up for the elite.
It’s always been for them. We were a slave nation. What, if anything, gives you hope that this will change? This is not even thinking politically, it’s thinking structurally.
I mean, these institutions that we have are being defunded. They’re being destroyed, maybe in some cases for better, but it would be accidental if it was for better. It just seems like a complete unraveling of any kind of meaningful structure.
I don’t know whether this is a transition or whether this is an ending or a beginning or where we are in a process, some sort of change. But what appears to be obvious anyway, to me, is that none of this has anything to do with voters or public interest or public desire at all.
Where is this coming from? What is driving these things that we’re seeing today?
Randy Wray:
00:42:13
I agree that the original setup of the United States was to protect the wealthy and to protect the slave owners from democracy. That is, it wasn’t set up as a democracy. It was to protect the elite from democracy.
But over hundreds of years, we have remedied some of the problems with the original setup. And I agree we have some major setbacks taking many steps backward.
Pavlina Tcherneva and I have a paper on the visions of the presidential candidates since Carter and on the movement of the electorate, both those that vote and those that are registered to vote but do not vote, which is the majority. “None of the above” always wins presidential elections because they don’t vote for either one.
And I think the problem is that the Democratic Party abandoned the working class. I mean, completely abandoned it. Has paid no attention to it. Chuck Schumer said, “Yeah, don’t worry about losing the working class. We’re going to get some of those suburban white women who have been leaning Republican. We’re going to get some of those.”
Well, this was a complete disaster. And you mentioned Bernie.
You know, Bernie, I think, has been on the right path all along, but he was alone.
I think that now more and more Democrats and others recognize that the hope really is with focusing on the working class, getting those who have refused to hold their nose and vote for people that they cannot possibly support, bring those back. The belief always has been, “Well, the people who don’t vote, they’re not engaged. They’re not following the politics.
They’re probably uneducated,” probably in a nice show. That’s absolutely false. The ones who are sitting it out, they were probably the ones that are the best educated. [Yes!]
The most involved, the most active. They’re just disgusted with the candidates that are being put forward. And so I’m a lot more optimistic, I think, than you. [Yes, yes, you are.]
That some people. I think we are seeing this in the mayor’s race.
I can’t remember the number of volunteers that he has, but it was tens of thousands of people that are willing to go knock on doors that can defeat all the money that’s coming in from billionaires to support Cuomo. Okay? So I think that there’s some hope in both Bernie and that guy.
That guy has shown that you can get people out. You can get people to support you who have not been supporting the Democratic candidates.
Steve Grumbine:
00:45:14
I follow the Mamdani stuff marginally, but he doesn’t represent my area.
So, you know, I’m not going to LARP like, I have some sort of role in this, but the reality is that he’s a mayor in a major city, no question about it.
And so it’s naturally interesting and so forth, but we’ve seen various people come in, they come in to bring the ruckus, and five minutes later they’d call him Pelosi Mama Bear. And losing the people’s faith in them instantaneous. The minute that they sell out, and that is selling out, that right there is a tell to the people that are following very closely but unimpressed by the results. And I think to myself, what will it take? And now we can talk about an electoral side. I think that there needs to be another element here.
You saw a lot of MMT activists bring a lot of attention, some of it unwanted, perhaps, but nonetheless got MMT in a lot of ways on the map for a lot of people that would have never otherwise heard of it. I think that was done outside of a political party. That was done outside of the electoral system.
And I think that looking at folks like the Black Panthers and looking at the Rainbow Coalition and looking at Fred Hampton and others, I believe in order to make these kinds of changes matter, it has to go beyond just this electoral process. And people scoff at that like somehow or another. That’s irrational and crazy.
But even MLK, outside of the electoral process, who famously said the greatest threat to the Negro was basically the liberal, the white liberal, who values their own convenience and everything over justice. They prefer law and order over justice and have sold out every step along the way.
Kind of like a Bacon’s Rebellion, watching them sell out the working class if it was inconvenient for them. And if you remember the [2024 Democratic National Convention] DNC, you saw people walking outside the DNC being asked about Gaza and they threw their head back laughing, or they plugged their ears and kept walking. I think this is a bigger stain on the Democrats than perhaps people are willing to acknowledge.
There was a very elite, very, you know, the Hamptons kind of look to it, and I think it’s going to take more than just political party kind of stuff. I think it’s going to require an untenable, un-corruptible kind of external influence to create some sort of dual power to force things to happen.
Because I don’t see it happening naturally. I mean, I don’t think people have enough time to sit there and hound these representatives to do what they say they’re going to do.
And sometimes what they say they’re going to do is so muddled that people have no idea what they actually said. And I don’t know that they know what they said.
I guess as we’re going through this, monetary policy and MMT have taken in many ways a step back because the corruption and the insanity are at such a high level that it’s really hard to bring things about the Fed into a conversation or bring things in about interest rates or monetary policy or fiscal policy or even modern monetary theory. Because they’re like, “Show me the candidates that are doing any of this stuff, Steve. Show me anybody that gives a crap about this stuff. And be honest, Steve, you can’t do it. Show me.”
And I struggle because they’re not wrong. I can’t do it. Help me see this. Do you see a dual approach?
I mean, you’ve been around a minute, you’ve seen some movements in your day. What are your thoughts about the approaches people have been taking? Strictly leaning into the kind of electoral process? It hadn’t really borne the fruit that they would like, but I don’t know. What are your thoughts? I know you’re an economist, by the way. I’m just asking.
Randy Wray:
00:49:06
I think that I’ll agree that politics alone is not enough. Yes. I’m an economist. So what I think needs to be offered to them are economic policies that are going to improve their lives.
Steve Grumbine:
00:49:21
Randy Wray:
00:49:22
There’s no doubt that the current young generations are facing an economy that is much worse for them than the economy I faced 50 years ago when I was young. And we need to offer them something better.
I think we need to focus on the economics and less on the politics and maybe less on some of the things the Democratic Party have been associated with that are very important to some groups. But they. And that’s fine, but they’ve been neglecting things that would benefit the vast majority of Americans.
So I think we need to get a list of those things that will appeal and make those at least part of the central platform of the whatever part. The Democratic Party for a long time has been the party that was offering progressive economics. It has not been doing that for quite a while.
I’m doubtful that the Republican Party is going to switch gears and become that party.
Steve Grumbine:
00:50:28
No, never.
Randy Wray:
00:50:29
It’s extremely difficult to do the third party.
Steve Grumbine:
00:50:32
Oh, yes.
Randy Wray:
00:50:33
But you can do what Bernie does. You can do what AOC does.
Working on the fringes within a party, but really beyond helping to put together an economic package that would improve the lives of the vast majority of Americans is pretty much the only thing I can offer.
Steve Grumbine:
00:50:53
Understood.
Randy Wray:
00:50:54
I can’t offer the politics. I don’t really know how you can bring people back if actually both parties would stop repelling the huge block of potential voters and bring them in.
Whichever party can do that is going to be winning, and I hope it will be the party that is pushing progressive economic policy.
Steve Grumbine:
00:51:15
That’s a fair way to go out there, sir. I appreciate your time here very much and look forward to seeing the stuff you and Pavlina put together.
That would be very interesting thought experiment, looking backwards. Tell us, do you have anything new coming up? I mean, last couple times you’ve had a book, you’ve had this or that or the other.
What’s going on in Randy’s world right now?
Randy Wray:
00:51:34
I am finishing a book on [economist Hyman] Minsky. It’s fairly advanced. I already wrote one in 2015 for a general audience.
But this one will be advanced, going deeply into his contributions, beginning with his dissertation. So that’s an academic thing.
But let me just say November 19th, the Levy Institute is holding presentations in Congress on rethinking the Fed’s independence.
So exactly what we’ve been talking about, directly related to that. Jamie Galbraith will be there, Claudia Sahm, Pavlina, me, William Bergman, I don’t know, but I think he’s representing the more conservative point of view. But I think he also agrees that the Fed independence thing is overstated. But anyway, we’ll see. I don’t know.
So we’ll be in Congress presenting that, and we’ll see whether that has any influence on thinking.
Steve Grumbine:
00:52:30
It’s exciting to at least give it a shot. Right? If you don’t give it a shot, you’ll never know. So I appreciate the effort there and looking forward to seeing that.
Hopefully there’s some sort of video of it or at least a transcript of it that we can kind of catch up on. That would be wonderful.
Randy Wray:
00:52:45
Watch the Levy website.
Steve Grumbine:
00:52:47
Okay, we’ll do. We’ll make sure we get that out there as well. All right. Randy, listen, it was wonderful to be with you.
It’s been a while, so I really appreciate your time. As far as it goes. I’m going to take us out. Folks, my name is Steve Grumbine.
I am the founder of Real Progressives, the nonprofit that sponsors this podcast, Macro N cheese. We are a 501[c]3, not for profit, and hopefully you guys find value in the work that we do.
If you do find value in the work that we do, your donations are welcome. They are tax deductible and it is going into the fourth quarter.
So if you’re looking for a tax write off, we’re a good place to go ahead and throw some money at us because we could use it. You can go to our website, realprogressives.org. There is a donate area there.
You can go to our Substack, which is realprogressives.substack.com you can become a donor there. Or you can go to patreon, which is patreon.com/realprogressives. All your donations are tax deductible, as I said.
And of course, one more final thing, Real Progressives puts on a Tuesday webinar every week representing the podcasts that you listen to that come out every Saturday morning at 8am and so if you’d like to join us, go to our website and at the top there’s a banner and you can go ahead and click on there. Register for the Macro N Chill webinar on Tuesday nights, 8:00pm Eastern Standard Time and join us. Help us build community.
We’ve had lots of people. Bob Hockett’s come through. Bill Black has come through. We have a number of our guests come through. Hopefully we can get Randy sometime to come through and be a part of that.
And we also on Thursday nights have a book club and Thursday night, right now we are doing State and Revolution as Thursday nights, 8pm Eastern Standard Time.
We listen to it. We talk about it, and we discuss what we agree with, what we disagree with and have a great opportunity to build some community and build some mental muscle. So I hope that you will enjoy this podcast and support our work.
On behalf of my guest, Randy Wray, myself Steve Grumbine, the podcast Macro N Cheese, we are out of here.
End Credits:
00:55:00
Production, transcripts, graphics, sound engineering, extras, and show notes for Macro N Cheese are done by our volunteer team at Real Progressives, serving in solidarity with the working class since 2015. To become a donor please go to patreon.com/realprogressives, realprogressives.substack.com, or realprogressives.org.
Gehigarriak
Towards a Libertarian/Austrian Modern Money Theory2
August 16, 2023
ooo
September 19, 2023
ooo
Do Bond Sales & Borrowing Finance US Deficit Spending?
February 22, 2024
Do Bond Sales & Borrowing Finance US Deficit Spending?
(https://realprogressives.org/do-bond-sales-borrowing-finance-us-deficit-spending/)
February 22, 2024
June 21, 2009 at the New Economic Perspectives blog.
Question: I heard a news report that the US Government is issuing bonds to finance its budget deficit, and that this will drive up interest rates and might even threaten government solvency. Also I have heard that the US Government has to rely on China to finance our deficit. Isn’t that why the stock and bond markets are bearish
Answer: This news report reflects two related misunderstandings: first, that government “funds” its deficit by borrowing; second that a large deficit threatens government with insolvency. Let me first deal with those fallacies, then move on to what is happening in markets.
Government spends by crediting bank accounts (bank deposits go up, and their reserves are credited by the Fed). All else equal, this generates excess reserves that are offered in the overnight interbank lending market (fed funds in the US) putting downward pressure on overnight rates. Let me repeat that: government spending pushes interest rates down. When they fall below the target, the Fed sells bonds to drain the excess reserves—pushing the overnight rate back to the target. Continuous budget deficits lead to continuous open market sales, causing the NY Fed to call on the Treasury to soak up reserves through new issues of bonds. The purpose of bond sales by the Fed or Treasury is to substitute interest-earning bonds for undesired reserves—to allow the Fed to hit its interest rate target. (In the old days, these reserves earned no interest; Chairman Bernanke has changed that, effectively eliminating the difference between very short-term Treasuries and bank reserves. It also entirely eliminates the need to issue Treasuries—but that is a topic for another day.) We conclude: government deficits do not exert upward pressure on interest rates—quite the contrary, they put downward pressure that is relieved through bond sales.
On to the question of insolvency. Let me state the conclusion first: a sovereign government that issues its own floating rate currency can never become insolvent in its own currency. (While such a currency is often called “fiat”, that is somewhat misleading for reasons I won’t discuss here—I prefer the term “sovereign currency”.) The US Treasury can always make all payments as they come due—whether it is for spending on goods and services, for social spending, or to meet interest payments on its debt. While analogies to household budgets are often made, these are completely erroneous. I do not know any households that can issue Treasury coins or Federal Reserve Notes (I suppose some try occasionally, but that is dangerously illegal counterfeiting). To be sure, government does not really spend by direct issues of coined nickels. Rather, it spends by crediting bank accounts. It taxes by debiting them. When its credits to bank accounts exceeds its debits to them, we call that a budget deficit. The accounting and operating procedures adopted by the Treasury, the Fed, special deposit banks, and regular banks are complex, but they do not change the principle: government spending is accomplished by crediting bank accounts. Government spending can be too big (beyond full employment), it can misdirect resources, and it can be wasteful or undesirable, but it cannot lead to insolvency.
Constraining government spending by imposing budgets is certainly desirable. We want to know in advance what the government is planning to do, and we want to hold it accountable; a budget is one lever of control. At this point, it is impossible to know how much additional government spending will be required to get us out of this deep recession. Whether the Obama team finally settles on $850 billion worth of useful projects, or $1.5 trillion, voters have the right to expect that the spending is well-planned and that the projects are well-executed. But the budgets ought to be set with regard to results desired and competencies to execute plans—not out of some pre-conceived notion of what is “affordable”. Our federal government can afford anything that is for sale in terms of its own currency. The trick is to ensure that it spends enough to produce sustainable growth and other desired outcomes while at the same time ensuring that its spending does not have undesirable outcomes such as fueling inflation or taking away resources that could be put to better use by the private sector.
Our federal government can afford anything that is for sale in terms of its own currency. The trick is to ensure that it spends enough to produce sustainable growth and other desired outcomes while at the same time ensuring that its spending does not have undesirable outcomes such as fueling inflation or taking away resources that could be put to better use by the private sector.
L. Randall Wray
Why do stock markets and bond markets react the way they do, given that insolvency is out of the question? Sophisticated market players do recognize that government cannot go insolvent and that government will always make all interest payments as they come due. Markets are, however, concerned that all the government spending plus the Fed bail-outs (lending reserves and buying bad assets) will be inflationary. In the current environment, that is quite unlikely. Even if oil prices stabilize at a higher level, that will not compensate for all the deflationary pressures around the world as firms cut prices to maintain sales in the face of plummeting demand. Still, it is not really inflation that bond markets are worried about, but rather future Fed interest rate hikes. (Again, that will not happen in the near future, and might not happen for several years—but there is little doubt that the Fed will eventually raise rates when the economy finally recovers.) Rate hikes lead to capital losses on longer-maturity bonds (interest rates and bond prices always move in the opposite direction). The Treasury persists in issuing bonds with a range of maturities (although the maturity structure in recent years has shortened). This is evidence that the Treasury does not fully understand the purpose of bond sales (since bonds are simply an alternative to bank reserves, it makes most sense to offer only overnight bonds)—but, again, that is a topic for another day.
The Treasury is having some trouble selling the longer maturity bonds (so their price is low and their interest rate is high). China is probably playing a role in this because they are shunning longer maturity debt out of fear of capital losses; they have also shifted some of their portfolio to other currencies (partly to diversify so that they will not lose if the dollar depreciates, and perhaps to pressure US authorities to keep the dollar strong). The solution is that the Treasury should shift even more strongly to shorter maturities—something it will do even if it does not fully understand why it should: Treasury sees that short term interest rates are much lower, hence, will sell short term debt to reduce the “cost of funding the deficit”. If Treasury really understood what it was doing, it would simply offer overnight deposits at the Fed, paying the Fed’s target interest rate. Then it would not “need” to sell bonds at all, and we could stop worrying about government “borrowing from the Chinese”. If the Fed wanted to control interest rates of longer term debt, it can offer interest on deposits of different maturities—for example, it can offer an overnight rate, a 30 day rate, a 90 day rate, and so on, for deposits held at the Fed.
oooooo
You Know Nothing About Economics4
February 21, 2025
******
Gehigarri berezia:
@tobararbulu # mmt@tobararbulu
No, the Fed Is NOT Independent—It Is a Creature of Congress
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No, the Fed Is NOT Independent—It Is a Creature of Congress
(https://www.levyinstitute.org/publications/fed-a-creature-of-congress/)
by Yeva Nersisyan and L. Randall Wray
September 19, 2025
In response to President Trump’s attack on the Federal Reserve, the natural critics of misguided monetary policy find themselves defending the Fed and the notion that the Fed is—and must be—independent.
In a recent interview, Senator Elizabeth Warren began by admitting, “I completely disagreed with Chair Powell since he was first nominated by Donald Trump, that’s how far back he goes. I have disagreed with him on regulatory policy. I think he’s way too easy on the banks. And I have disagreed with him on interest rate policy. I thought he should have lowered interest rates two years ago, and I have said so quite vocally and done my best to persuade him.” But she then went on to insist “I have never, ever questioned the independence of the Fed and the Fed’s ultimate power to make those decisions based on their best judgment of what’s good for the United States of America” (Inskeep 2025).
But from whom should the Fed be independent? This is seldom clarified. And independent to do what?
It is essential to bear in mind that the Fed is a creature of Congress. Congress created the Fed in the Federal Reserve Act of 1913. As the Fed’s own website acknowledges: “The law sets out the purposes, structure, and functions of the System as well as outlines aspects of its operations and accountability. Congress has the power to amend the Federal Reserve Act, which it has done several times over the years.”[i]
Indeed, Congress has “over the years” amended the original 1913 Act, perhaps most importantly with the Humphrey-Hawkins Full Employment Act of 1978, committing the government (including the Fed) to pursuit of full employment while minimizing inflation. It thus refined the directions that mandate the Fed’s macroeconomic goals, as detailed in the full title of the Humphrey-Hawkins Act:
An Act to translate into practical reality the right of all Americans who are able, willing, and seeking to work to full opportunity for useful paid employment at fair rates of compensation; to assert the responsibility of the Federal Government to use all practicable programs and policies to promote full employment, production, and real income, balanced growth, adequate productivity growth, proper attention to national priorities, and reasonable price stability; to require the President each year to set forth explicit short-term and medium-term economic goals; to achieve a better integration of general and structural economic policies; and to improve the coordination of economic policymaking within the Federal Government.
Clearly, the Humphrey-Hawkins Act did not go far enough and was not based on sound theoretical foundations. The Fed took it upon itself to set an inflation target of 2 percent—this is an arbitrarily chosen number that has never been, nor can it ever be, justified. As Powell clumsily admitted when pressed, central bankers have just decided it is the right target.[ii] Thus, central bank groupthink has settled on a target that has no theoretical or empirical justification, nor the endorsement of the US Congress.
Nowhere does this amendment or the original 1913 Act declare that the Fed is independent to pursue what it believes is the best policy goal or to decide “what’s good for the United States of America.” Indeed, Congress made clear what it believes is in the best interest of Americans. While the precise policy measures that might be appropriate to achieving the goals set by Congress could be debated, there is no room for doubt about what Congress has laid out as the Fed’s mandate.
Senator Warren is correct in her assessment that the Fed has long been operating against the interests of the American people. It has been mismanaging the economy at least since the days of Chairman Paul Volcker, with an obvious bias against economic growth and job creation. As Chairman Greenspan admitted (Wray 2004)—and as the data clearly show (Wray and Nersisyan 2022)—the Fed raises interest rates whenever the labor market favors workers, that is, whenever their bargaining power to stop the steady deterioration of household purchasing power improves.
Indeed, over the years, the Fed has often mistakenly raised interest rates in the absence of inflation based on a misguided theory that, if unemployment falls below a certain level, inflation is certain to accelerate. Even Jerome Powell admitted that this view has not served us well as he chaperoned the Fed through a review of its policy framework in 2020. In the current cycle, similarly, as most of the measured inflation has come from housing (at least for the past couple of years), the Fed has maintained high rates despite the fact that higher rates do nothing to alleviate the housing shortage or skyrocketing rents.
Ironically, the Fed rarely hits its inflation target. For two decades after the Global Financial Crisis, the Fed could not get the inflation rate up to 2 percent, even with its tens of trillions of dollars of lending and asset purchases through quantitative easing (Wray and Fullwiler 2011). Indeed, it was the inability to raise inflation to its goal that served as an impetus for the Fed’s revision of its framework as mentioned above. After all, if the basis for the Fed’s ability to hit its target is market participants believing that it can do so, repeated failure to hit its target creates cracks in its credibility. Consequently, this negatively affects the Fed’s ability to achieve its targets.
Since the COVID inflation—which was caused mostly by supply disruptions—inflation has been running consistently above the target even with interest rates high enough to tank housing markets. And, while the Fed has been given (and has accepted) credit for inflation rates coming down, there is no theoretical or empirical evidence to say this is justified. Inflation rates have come down despite Fed policy, not because of it. And yet Congress refuses to exercise its authority to ensure the Fed’s mandate is to serve the people.
The biggest irony is that President Trump has taken it upon himself to do what Congress will not: pressure the Fed to lower rates. While it is possible that he might have the power to fire sitting Fed Governors (a matter that will likely be settled by the Supreme Court), he has no authority to set Fed policy. Congress, alone, has that power.
The Fed During the Global Financial Crisis
Congress did exercise its power over the Fed, albeit insufficiently, after the Fed’s extensive bailouts of a whole host of financial institutions after the Global Financial Crisis. It curtailed the Fed’s ability to create new lending facilities by requiring prior authorization from the Treasury Secretary for doing so. Should the Fed have been allowed to independently decide to open lending facilities, bailing out the shadow banking system—as it ultimately did (Felkerson 2012)—or to lend to individual institutions facing insolvency? What happens when the next financial crisis hits, as crypto markets have become too big to fail?
As Treasury Secretary Bessent (2025) correctly argued recently, the Fed’s response during the recovery from the Global Financial Crisis helped to redistribute income and wealth to the top, and its maintenance of high interest rates after the recovery from the COVID recession continues to distort the housing market, resulting in a housing shortage and rising rents. Moreover, the Fed’s actions have created the biggest moral hazard in history by implicitly guaranteeing that losses in the financial markets will be socialized, while financial wrongdoing will not be reined in through additional regulation.
Can the Fed Actually Manage the Economy?
Inflation may well be picking up even as the economy slows, thanks to Trump’s tariffs. It would be difficult to imagine a worse Fed response to tariff-induced inflation than to keep rates high—except if the Fed were to raise them even higher! High interest rates will do nothing to fight tariff-driven inflation. Instead, high rates continue to hit workers’ pocketbooks—at a time when tariffs are chipping away at their purchasing power—and discourage investment in domestic production to replace the taxed imports.
The truth is that the Fed has only one policy tool at its disposal to promote full employment and price stability: the fed funds rate, which is not effective for pursuing either goal.
The most misguided line of argument [Elizabeth] Warren makes is the following:
[W]hat I don’t want to see is that Donald Trump has squeezed out the independence of the Fed, and that he’s managed to get his own lackeys in there, that he’s managed to fire someone at the Fed. Because as soon as that happens, the value that the United States has built up, literally for more than a century, by having an independent Fed, we lose the gold standard. And ultimately that costs the American economy. And it also, most importantly, costs American workers. (Inskeep 2025)
Reining in the Fed—and freeing it from economists’ groupthink—is the best thing Congress could do to improve economic performance, and that—by itself—will ensure strength of the dollar. It would also be good if Congress could rein in presidential overreach and cancel the inflationary and job-killing tariffs and sanctions that are turning countries away from use of the dollar. But that is a reach. What Congress can do is assert its control over the Fed and thus prevent the executive branch’s attempt to usurp its power to control the Fed.
In conclusion, we agree with [Elizabeth] Warren that the Fed should be independent of presidential meddling; however, it is not, should not be, and cannot be independent of Congress. It is a public agency created to fulfill the public purpose. As Fed officials themselves have proclaimed over the years, “[t]he Fed is not independent from government. It is independent within government” (Warsh 2010).
[Elizabeth] Warren is also correct that the Fed has been “too easy on the banks.” Congress should step up and direct the Fed to focus on its core functions: regulating banks, managing the payments system (supplying reserves as necessary for the functioning of the payment system), making and receiving payments for the federal government, acting as a lender of last resort in financial crisis, and stabilizing the base interest rate. It is time for Congress to revisit the Humphrey-Hawkins Act and to assign tasks that are within the Fed’s ability to achieve. We recommend:
(1) Setting a target range for the fed funds rate of 1–2 percent. This will promote investment and housing construction while reducing interest spending on mortgages, consumer debt, and student loan debt. It will reduce federal government spending on interest—which is currently reaching a trillion dollars. That is inefficient spending that does nothing to improve US competitiveness or living standards, as it goes to foreigners, financial institutions, and high-wealth individuals.
(2) Prioritizing the maintenance of financial stability
- by reducing swings of market interest rates that cause capital losses and encourage financial engineering;
- through use of proper oversight of financial institutions; and
- when the next financial crisis hits, acting as lender of last resort while taking necessary precautions to reduce moral hazard and risky behavior.
It is time to drop the fantasy that the central bank can use the overnight interest rate to hit inflation and unemployment targets. The Fed’s main role should be to promote financial stability that encourages sustainable growth with high employment and a more equal distribution of income.
References
Bessent, S. 2025. “The Fed’s New ‘Gain-of-Function’ Monetary Policy.” The International Economy. Spring 2025.
Felkerson, J. A. 2012. “A Detailed Look at the Fed’s Crisis Response by Funding Facility and Recipient.” Public Policy Brief No. 123. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College. April 10.
Inskeep, S. 2025. “Sen. Warren says banking panel should focus on Trump’s attacks on Fed independence.” NPR. September 4, 2025. https://www.npr.org/2025/09/04/nx-s1-5526013/elizabeth-warren-trump-stephen-miran-fed-independence
Warsh, K. 2010. “An Ode to Independence.” Speech at the Shadow Open Market Committee, New York, NY. March 26, 2010. https://www.federalreserve.gov/newsevents/speech/warsh20100326a.htm
Wray, L. R. 2004. “The Fed and the New Monetary Consensus: The Case for Rate Hikes, Part Two.” Public Policy Brief No. 80. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College. December 21.
Wray, L. R. and S. Fullwiler. 2011. “It’s Time to Rein in the Fed.” Public Policy Brief No. 117. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College. April 5.
Wray, L. R. and Y. Nersisyan. 2022. “Is It Time for Rate Hikes?: The Fed Cannot Engineer a Soft Landing but Risks Stagflation by Trying.” Public Policy Brief No. 157. Annandale-on-Hudson, NY: Levy Economics Institute of Bard College. April 12.
[i] https://www.federalreserve.gov/aboutthefed/fract.htm
[ii] https://www.c-span.org/clip/senate-committee/user-clip-jerome-powell-why-2-percent/5171721
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1 The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system. The FDIC insures deposits; examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships (https://www.fdic.gov/).
Ikus Warren Mosler-ek bankugintzaz —> 1. FDIC-rako proposamenak.
2 Ikus Bill Mitchell: inportazioak eta esportazioak (gehi W. Mosler eta R. Wray) —> Towards a Libertarian/Austrian Modern Money Theory (https://realprogressives.org/towards-a-libertarian-austrian-modern-money-theory/).
3 Ikus Bill Mitchell: inportazioak eta esportazioak (gehi W. Mosler eta R. Wray —> Shoring Up the Green Party (https://realprogressives.org/shoring-up-the-green-party/).
