The Federal Reserve’s Big Experiment



Major sell-off across Europe this morning.


Investors are spooked by the growing number of infections outside China.


The Dow plunging again today. The 11-year bull market has ended.


The people have gone now without four or five or six or seven paychecks, and it’s starting to catch up.


When the pandemic created unprecedented financial upheaval, the nation’s central bank, the Federal Reserve, intervened.


The Federal Reserve cut interest rates to near zero —


The market has been open for 30 minutes and we’ve gone straight up.


— the Dow rising nearly 18%, its best performance since 1987.


The Fed helped stabilize the economy, and the pandemic would become a blip in the longest bull market in history.


It is the most powerful and least understood institution in the country. And it really is difficult to overstate how big this story is and how much it matters.


That’s financial journalist Dion Rabouin, from our film The Power of the Fed. Dion joins me now, with producer James Jacoby, to discuss the Federal Reserve’s actions, who’s been benefitting and at what cost. I’m Raney Aronson-Rath, executive producer of FRONTLINE. And this is The FRONTLINE Dispatch.


The FRONTLINE Dispatch is made possible by the Abrams Foundation: committed to excellence in journalism. And by the WGBH Catalyst Fund. Support for The FRONTLINE Dispatch also comes from the Massachusetts General Hospital Cancer Center. Early detection is key to catching and treating many cancers. You can learn more about the innovative programs at Mass General Cancer Center: everyday amazing.


James and Dion — thanks so much for coming on The Dispatch with me.


Thanks, Raney.


Yeah, Raney. Thanks so much for having us.


So, James, you've led so many investigations for FRONTLINE. I'm thinking about Facebook, Amazon. And now, of course, you've looked at the Federal Reserve. I remember our first conversations and how we were both perplexed about — how are you going to make a documentary about the Fed? Tell me about how you got going on it?


I'm still amazed we were successful doing it, Raney. The prospect of making a documentary — something visual and compelling — about monetary policy was super daunting. But, as we discussed in those early days, I mean, it's such an important part of our economic life, our political life. And it's kind of this invisible force that [laughs] — that is so massive in its scale, very few of us actually spend the time to think about it.

But basically, our guiding principle was that this was a massive experiment. That the Federal Reserve has taken on a much more active role in trying to manage our economy, basically, since the financial crisis in 2008-2009. And then the experimental policies that they put into gear at that point really never left us. You know, it's led to all sorts of unforeseen, unintended consequences that we're all contending with now.


Yeah, I mean, one thing that I was really struck by is that there's such a range of perspectives on this, some supportive, obviously, and others really critical of the Fed’s policies. Dion, can you help us better understand one of the critiques which is — you know, at the heart of this — some people believe that the Fed policies drove wealth inequality that we've seen on the rise in America?


Yeah, absolutely. You know, I think that's one of the things that's actually really not in contention, right? Like, I don't think there's really anyone on the other side of that issue saying: “No, no, no. The Fed’s policies have not driven or increased wealth and income inequality.” Except for maybe Fed chair Jerome Powell, himself.

The Fed actually just released a report on the state of wealth, as in: who has it, where it's disseminated and who doesn't. And the wealth of the 1%, they've seen their wealth increase by about $5 trillion. The lower 90% of folks have seen their wealth increase by $1 trillion over the past year or so. So literally 1% of people have seen their wealth increase by five times the amount that the entire 90% of the rest of the country has, because most of that wealth appreciation has come through the stock market.

The stock market has gotten a very big leg up as a result of the Federal Reserve's policies, and the other part of it has just been that the Fed hasn't been able to deliver the same kind of powerful punch or backing to, you know, Main Street America — to businesses, to households — that it was able to deliver to financial markets and to large companies.

And so that obviously drives this massive inequality that we see. And the Fed has been really reluctant to take responsibility for that, in kind of an opposite way to the way that they have really taken responsibility for the good things that they've done, which is, you know, help steady the economy, guide and steady financial markets, and those other things.


OK, so you mentioned the Fed policies. We’ve got to get into this, and this is something, James, that you and I spoke a lot about: How do we explain the concept of quantitative easing? Because this is one of the central concepts and central policies.


Quantitative easing was a policy that was developed in theory quite a long time ago and has been put into practice by the Fed after the great financial crisis in 2008-2009, where essentially they are creating money out of thin air and and pumping it into the banks and the financial system, with the hopes that that will spur lending, by lending institutions like banks, and also will basically be a tool to lower interest rates across the board.

They figured during the great financial crisis, one of the big troubling areas was housing, and they wanted to get the housing market back up and running, and to make it easier for people to refinance loans that they probably couldn't pay off.

So this was this experimental tool to be able to lower rates. And the Fed likes to say that it's been very effective in doing that. And indeed, it has. Rates have been lowered. And that does have knock-on benefits to people. But it's a big question — and the film grapples with this — as to whether the benefits are as great as the costs.


Yeah, the way I like to explain QE to people is, you know, as James said, when the Fed lowers interest rates, it makes it more attractive for folks to borrow money and less attractive to save money.

So we're seeing this in real time, in the economy, where, if I said to you: “Hey, Raney. I will loan you $100, and you can keep that for a year. And in a year, I'm gonna want $150 back.”

You'd say: “Oh, I don't know about that. I — yeah, I need this $100 right now, but I don't want to have to pay you back $150 next year.”

And let's say I say: “OK, I'll tell you what. Instead of $150 next year, pay me back $105 next year.”

And you'd say, “Hmm. OK, well, that's — you know, I just have to pay you back an extra $5. I get to keep the money for a year. That's a pretty good deal for me.”

What QE does is, it says: “Well, instead of paying me back $105 next year, just pay me back $100 and 1 cent next year.” Well, that's really attractive.

And so now maybe not only do you want to borrow $100, now you're like: “Hey, let me get $200. In fact, let me let me get $1,000.”

And I say: “Sure, yeah, $1,000. Give me back $1,000.10 next year.” So, I'm incentivizing you to borrow money.

On the other side, you know, if you're going to put money away in a savings account, I say, as the bank: “OK, well, I'm only going to pay you 10 cents for that $1,000.”

So quantitative easing pushes those rates down even further and further incentivizes people to take on debt to borrow, to spend and reduces the, you know, the attractiveness of saving.


And what's interesting, Raney, is that you get all sorts of distortions. You get all sorts of unintended consequences. That this policy makes it very unattractive to save, as Dion said, and so therefore, it makes it much more attractive to invest it and to try to get returns — bigger and bigger returns on that money. So the stock market became very attractive to people, to invest their money there. And there's been this self-reinforcing mechanism where more and more money has piled into the stock market. And you’ve had this extraordinary rise concurrent with quantitative easing over the past 12 years or so.


Dion, I'm hoping you can help me — something that you did say in the film that I was really struck by, was this so-called mania that involves everyday Americans and not just the risk takers on Wall Street. Can you tell us more about that? And just help us understand that better and how the Fed, of course, contributes to that.


Yeah, well, I think James really alluded to it very well in his last answer, when he talked about, you know, this idea of saving being unattractive and the stock market being very attractive. If, right now, the average U.S. savings account pays me 0.06% interest on what I deposit, if I put $10,000 into a bank savings account — the average bank savings account — I earn $6 at the end of the year on my $10,000 deposit.

The stock market last year, I think, returns in the S&P 500 were about 20%. So where am I going to put my money, right? You see a company like Tesla, which went from a $100 billion valuation at the beginning of 2020 to now being valued at $1 trillion.

When I see that, I think: “Oh, I don't want to save my money. I don't want to put it away for a rainy day in the bank, because it's, literally, it’s eroding.” Right? That same $10,000 that I put into a bank savings account has lost — at the current rate of inflation — 5% of its value. Versus, if I put that money into the stock market? Well, you know, if I just put it into a bland vanilla index fund, that's going to yield me a 20% return.

And how this goes to the Fed is: Jerome Powell has put in place what folks refer to as the “Powell Put” or the “Fed Put.” And essentially what that means is, if stock prices fall too far, Jerome Powell will step in, take some action in the market that will result in easing financial conditions, making borrowing cheaper and more attractive, and reducing sort of the risk of investment.

When investors see that, well, they want to buy more stocks. They want to borrow more money so that they can buy more stocks. And that's, again, what quantitative easing is supposed to do: It's supposed to make risk more attractive. It's sort of created an environment where there is no real risk, because you can't lose, because the stock market only goes up.

And that really has encouraged a lot of regular folks who have just watched this happen over the past 10 years or so and said: “Man, I'm missing out. I got to just throw my money in the stock market.”

Well, when they got their government stimulus checks, or when they got their enhanced unemployment checks, they said: “You know what, I'm gonna put this in the stock market. I'm going to put this in Bitcoin. I'm going to put this in, you know, some other crypto assets or NFTs — non-fungible tokens — because the value of everything keeps just going up.” And there's really no reason that I should expect for it to do anything other than that.


That is really something. So, one thing I wanted to ask you, you know, watching the documentary, Dion, because of course, we interviewed you for it — super appreciative about that. What did you think when you saw that documentary yourself?


You know, I felt like someone was reading my diary, in film version. [Laughs]




No, it was, it was really great to see, because a lot of this stuff is stuff that I am kind of trying to explain to people on a daily basis, right? What the Federal Reserve has been doing in markets, to markets. The way that they have sort of made it, you know, unsustainable to not be invested in stocks. The way that they have created this environment where saving money won't yield you any money, right?

They've just completely changed the paradigm of investment, of spending, of saving. Of, you know, the idea that $1 today costs you more tomorrow. That's been true throughout, kind of, the course of money. That's not just the Federal Reserve; it’s central banks globally. But the idea that it costs money to borrow money.

And that story is something that I've been trying to document through the newsletter that I've been writing, because it's behind so much of what's happening politically, what's happening socially. All of these things are really guided by the fact that we are living in a more unequal world than we ever had. And certainly, here in the U.S., a more unequal, you know, currency and economic environment than we've ever really experienced.


I appreciate what you said about your diary, because we've been reading your newsletter, which is essentially, you know, one of the best guiding lights for the film, so we appreciate that. So, I want to listen for a moment to Peter Fisher, who had something to say about this experiment and what's been going on lately. Let's listen for a minute.


When I look out at what's been going on the last six months, I see financial mania. I don't know what the right value of some companies is. But when they change by 50% in six months, I think we should all recognize, boy, that's hard to estimate the value of that. If it's 50% higher now than it was six months ago, I guess we were pretty bad on estimating its value six months ago.


I assume you're somebody who has assets, who's invested, and that this has been a good period for someone like you, in part because you own assets.


The Fed, having pumped asset prices to historically high levels, doesn't make me feel comfortable. I feel as anxious today as I've ever felt about the financial world, because of my belief that the Fed has been pumping up asset prices in a way that is creating a bit of an illusion. I think the odds are now sort of one in three — very high — that we will look at this as an epic mistake and one of the great financial calamities of all time.


So, James, why does Fisher say that?


Yeah, well, Peter Fisher, first of all, is a very credible voice. He’s somebody who was very senior at the Federal Reserve Bank of New York for many, many years. And then was also a very senior person at BlackRock, the largest asset manager in the world. And when he says something like that, we should all listen up.

It refers back to the things we've been discussing here: that this is a distorted environment. That the Fed has taken on this activism in the economy. And that he's really concerned that we're really in for an epic disaster.

And, you know, I remember, Raney, when you first saw that clip of Peter Fisher, and you're like: “Wow, that's really arresting. And, you know, are we on good ground putting it in here? And are we leaving people with, with too great a statement, in some ways, about the vulnerability of the system and the illusion of this whole thing?”

And we came to the conclusion that it's, it's so important for people to understand that very credible voices out there believe that we are really making a grave mistake. And they may be proven wrong. But Peter Fisher really does feel as though the Fed has gone on this unbridled journey and that there's really no good way to pull it back.


How does the Fed respond to something like that? I mean, this is a pretty known criticism, and James is right. One of the questions I asked him was: Is this response a responsible one, right? So, how would the Fed respond to Fisher?


This Fed, the Powell Fed, has really shocked me in the way that they have responded to this criticism, because their response has generally just been obfuscation and denial. And you saw it in the documentary with Minneapolis Fed President Neel Kashkari. It's, you know, when this criticism is brought to him, he just says, “Oh, well then, you know, I don't agree with that.” Or, you know, “Who's telling you that?” Or, “Oh that's just, you know, Wall Street talking.”

And, you know, one of the things that I've said to folks when talking about this documentary is like, yeah, this criticism all comes from Wall Street, because Wall Street's the only group of folks who have a real concrete understanding of what you all are doing.

Most folks out here on Main Street, most folks in Congress, the average American, the average, just person out there, understands probably that the Federal Reserve, what it is, and that it exists, but what it actually does, how it impacts the economy, the way interest rates and quantitative easing, and those things really, actually impact the financial system and the economy? They have no actual idea.

And that's unfortunate. Because it does affect so many people's lives. And even the Fed’s own research. There was a New York Federal Reserve paper that came out earlier this year that said the Fed’s policies do more to increase wealth and portfolio assets that are held by the wealthiest people — who are generally white and male and older — than it does to decrease the gap in inequality, in terms of jobs.

So, the Fed’s policies are actually increasing inequality in the country. Certainly, they have kept the U.S. out of a potential Great Depression and prevented the economy from collapsing after COVID hit. And, you know, they have been — and rightfully so — applauded for that.

But when you bring up these, you know, the sort of collateral damage that's occurred as a result of it, they really actively deny and evade any sort of criticism or responsibility for it. And it's been just really strange to watch.


I think, you know, the perspective that you hear in the film from Neel Kashkari — and others at the Fed, essentially in their, in their defense — is that: “While, yes, maybe our policies have been good for the rich and good for Wall Street; had we not done this, it would have been bad for everyone.”

It's very, very difficult to argue that, because there is no counterfactual there. Because they're basically saying: Doing nothing would have been worse than doing something. And I was just so surprised, you know, picking up on what Dion was saying about their approach to just even very basic questions. I found that Neel Kashkari in that interview was extraordinarily defensive from the get-go.


Right? I mean, let's talk about that Kashkari exchange and let's listen for a moment.


What, if any, responsibility or accountability does the Fed have for the financial system having been so risky and so vulnerable to a shock?


Well, I think all financial regulators that have a seat at the table have responsibility for what was left incomplete after 2008 and where we go from here. We need to use this crisis to finish the work that we did not finish after '08.


With all due respect, I wonder if you could be a little bit more explicit with me. What will the Fed own when it comes to the vulnerability of the system?


Well, I reject the thesis. I actually don't think it's been the Fed's monetary policy that has led to these vulnerabilities. I think it's been incomplete regulatory policy that has led to these vulnerabilities.


What we just heard is pretty, is pretty heated, James. What did you, what did you think when this was happening? And tell me about what, what went down here.


Well, the film up until this point had been essentially telling the story of how the financial system was growing bigger and bigger in the wake of the financial crisis — in large part, enabled by the Fed. At the same time, there was, you know, there were large swaths of the financial system that were increasingly unregulated. So you had risks growing, you had a vulnerable system, and you had a lot of risk-taking, in part engendered by the Fed’s policies.

And so, basically, I was trying to ask Kashkari, “Will the Fed take any responsibility for that?” And he says no. He thinks that it was up to other regulators. That it had nothing to do with the Fed’s policies of low interest rates and quantitative easing for such an extended period of time.

And it is heated, in part because I wanted to come back to him a few times on that, because it struck me as a little bit blind, to say that they weren't a part of this. I think that one of the things that, that comes up over and over with Fed folks is that, you know, we should be very appreciative of what they do in a crisis.

And in 2009, they certainly saved us from the brink of a terrible situation. In 2020 with COVID, absolutely. Their emergency measures undoubtedly helped to stave off what would have been an horrific event, if the financial system had collapsed at the same time as our economy was going into shutdown. And they're very proud of that, you know, that role that they play.

And that's, in part, why they were created, was to stave off panics in the last century. And that kind of gives them this hubris, to some extent. Especially when they look just down the street and see a very dysfunctional Congress, for that, for the past decade or so has been unable to really do much to spur economic growth.

And so, they've kind of taken it on themselves to be what some have called the only game in town. So, they see themselves in this really heroic role.


OK, both of you. Last question. So, the Fed has recently signaled that it will soon begin to taper or at least slow down its quantitative easing program. What's the very latest? Because I mean, everybody's curious what's going to happen next. Dion, you go first.


The Fed has signaled that they're going to taper — a.k.a. reduce — their asset purchases. And, you know, bring that down from the record unprecedented bond purchases that have been happening since March 2020, of $120 billion a month.

And again, to go back to what that means: The Fed creates $120 billion out of thin air. It uses that money to buy U.S. government bonds, which is the debt that the country issues, and that holds down interest rates and makes it cheaper for the government to borrow, and also for everyday Americans to borrow money.

Whether they'll actually do that or not remains an open question, because, as analysts and economists have pointed out, Jerome Powell and the Federal Reserve aren't really in charge anymore. The market is in charge. So, if the stock market and the bond market and money-market funds start throwing a conniption, Jerome Powell will likely respond to that.

But Powell has been very, very careful to not say that the Fed will do this or it absolutely is going to take these actions. It says, “Oh, we'll be data-dependent.” And what a lot of cynical folks on Wall Street would say is, “Yeah, that data is the S&P 500.” If the S&P 500 continues to rise, then the Fed will take these actions.

So, we will see. They have said that they are planning to do these things.

What they have pointed to is the jobs recovery and the labor market. Which, you know, has gotten much better since March or April of 2020, but remains — you know, we’re still millions of jobs below or behind where we were in February of 2020. A lot of folks have dropped out of the labor force, have not come back in. As you can see, you know, any time you go out to eat, or, you know, go to a mall, there are still a lot of businesses trying to hire.

And so, the Fed has kind of pointed to that and said, “Well, we’ve got to get that moving.” Even though, again, a number of economists and analysts would say that QE doesn’t really have that strong an effect on the job market.

So, that’s the plan right now, is to reduce this $120 billion dollars of quantitative easing, of bond buying every single month, down to zero over the course of the next, you know, ten, eight months or so. And at that point, maybe start — if God be willing, and the creek don’t rise — to normalize interest rates, as they would say, back to some level where we don’t have negative real interest rates. Which is where the interest rate that you get paid on a government bond is less than the rate of inflation, which right now, it’s the most negative that it has ever been.


Right. I mean, that was a great explanation, because there’s a lot of buzz about this right now. James, do you have anything to add to that?


Wow, that — Dion really covered that one. I think the only thing I’d add to that is just this is an extraordinarily tricky dance that they have to play here, and they are very aware of that. There’s known unknowns in this arena, where they’re extraordinarily concerned about financial stability. And it’s not just that the market goes into a tizzy. It’s also whether certain players in the market can actually withstand that. That’s something that’s certainly on their radar, but they don’t really talk much about publicly.


Well, I mean I think the message is that — you know, even though we did this big film on the Fed — we’re going to have to keep following this, and I appreciate that. And Dion, thanks so much for your insights. And James, thank you, as always.


Thanks, Raney.


Yeah. Thanks so much for having me.


Since my conversation with James and Dion, the Federal Reserve has announced it will begin tapering its quantitative easing program later this month. For more reporting on this story, and to watch our full documentary The Power of the Fed, you can go to

This podcast was produced by Erika Howard and Miles Alvord, with production support from Megan McGough-Christian and Paula Moura. Katherine Griwert is our editorial coordinating producer. Frank Koughan is our senior producer. Lauren Ezell is our senior editor. And Andrew Metz is our managing editor. I’m Raney Aronson-Rath, executive producer of FRONTLINE. Music in this episode is by Stellwagen Symphonette. The FRONTLINE Dispatch is produced at GBH and powered by PRX.

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