Intelligent Investing #71 Glenn Leest, The Federal Reserve

The Federal Reserve in More Detail

1.      We have covered the federal reserve in previous episodes, why are you doing another episode on it?

a.       The Federal Reserve has been more prominent in the daily lives of Americans over the past 3 years.

b.      The policies they set are impacting all Americans, so understanding its function will help us be well informed. An informed investor is usually a successful investor.

2.      What is the Federal Reserve?

a.       The Federal Reserve System, also known as the "Fed", is the central banking system of the United States. Its primary purpose is to promote a stable and healthy economy by regulating the money supply, managing interest rates, and overseeing the banking system.

b.      The Federal Reserve is composed of twelve regional banks located throughout the country, with a central Board of Governors in Washington D.C. The Board of Governors consists of seven members appointed by the President of the United States and confirmed by the Senate, who serve 14-year terms.

3.      Monetary Policy, what does that mean and how does the Fed effect monetary policy?

a.      One of the primary tools used by the Fed to influence the economy is monetary policy. The Fed can adjust the money supply by buying or selling government securities in the open market, which affects the interest rates that banks charge for loans. By changing interest rates, the Fed can influence borrowing and spending by consumers and businesses, which can in turn impact economic growth and inflation.

b.      Open Market Operations: The Fed buys or sells government securities in the open market to influence the supply of money in the economy. When the Fed buys securities, it injects money into the economy, which increases the money supply and lowers interest rates. Conversely, when the Fed sells securities, it removes money from the economy, which decreases the money supply and raises interest rates.

c.       Discount Rate: The discount rate is the interest rate that banks pay to borrow money from the Fed. By raising or lowering the discount rate, the Fed can influence the cost of borrowing for banks, which can affect the amount of credit available to consumers and businesses.

d.      Reserve Requirements: Banks are required to maintain a certain percentag

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Transcript

The following is paid programming brought to you by WT Wealth Management. Nothing we discussed should be considered as investment advice. This conversation is for informational purposes only. Please do your own research and speak to an investment advisor or financial planner before making any investment decisions.

All right. Welcome to Intelligent Investing with Glenn Leest. Um, we are continuing from last week, uh, part two of this series here on banking. And Glenn, last week we, we got heavily into what your bank does and mm-hmm. F D I C and this was all kind of on the heels of some of the recent bank failures. So, yeah, a lot.

This is on a lot of people's minds, but what we want to do, and we touched on the Federal Reserve last week quite a bit, but we're going to get more into it and, and sliced into this a bit more at some of the history and, and stuff like that. And if you have got any questions for Glenn. Call them anytime. Glen Leest intelligent investing.

Um, at WT what? W ah, let me get the email right. Intelligent investing@wtwealthmanagement.com or call (928) 225-2474. Emerging email and phone numbers at the same time there, Glen. Um, so, when we covered the Federal Reserve last time, I mean talk about, just give us kind of a recap on that and then let's dive deeper into this.

Yeah, so, when we're talking about the, uh, banking system, a lot of times we were referring to the Fed as, um, sometimes a role in the banking system. And so, naturally I thought the next, uh, part of the conversation is, well, what is the Fed? How does it work? How does it operate? Um, because I believe the more that we know, uh, about their function, the more we understand what they're doing, and, frankly, it's been a lot more prominent in the last couple years in our, our daily lives.

Um, what the Fed has been doing, um, has been impacting, um, all of us. And so, it's, uh, important to know who they are, what they do, and why they do it. So, um, thought it'd be a great episode to cover more, probably shouldn't be. So, p. In our lives. Right. We should all know about it. Right. It's, it's, it has become a big part of Yeah.

It is what it is. Yeah. Everyone's life. Yeah. So, known as the Fed, um, talk central banking system. Talk about how they, I guess, regulate them, the money supply. Yeah, so, the Federal Reserve, um, also, referred to as the Fed, their primary purpose is to promote a stable and healthy economy by regulating the monetary supply, managing interest rates, and overseeing the banking system.

Um, they also, it's comprised of 12, uh, regional banks throughout the country. With the Central Board of Governors in Washington, DC and the board of Governors is usually seven members, and those are appointed by the President of the United States and confirmed by the Senate. And they are on 14-year terms.

So, um, they've kind of got different chapters of the Fed. Um, and then they have the big fed, you know, where they, you know, meet. You may have heard them. The Fed's meeting this month. Yeah. You hear Jerome Powell, for example. Yeah. Jerome Powell or Jackson Hole, Mississippi. Yeah. Mm-hmm. So, that's when they're all coming together and meeting for multiple days and reviewing all the economic data.

What's going on in the economy, um, as far as consumer spending and, um, you know, how their banks are doing, housing inflation, how is the unemployment rate? So, so, recently, the Fed has been focusing a lot on controlling inflation. Mm-hmm. Uh, keeping unemployment, uh, Uh, low or healthy. And then now I think they're going to be focusing more on the banking system as well, just to make sure it's solvent, it's healthy, it's stable, and fix any kind of maybe potholes in the road of the banking system that, um, so, that way we can have it just a smoother financial banking system.

When they meet. You often hear about, oh, we're setting monetary policy. I guess what, what does that mean and how does the Fed affect, uh, monetary policy? Yes. When you talk about affecting monetary policy, they've got different tools, um, at their disposal. And one way is the Fed can adjust the money supply by buying or selling, uh, government securities in the open market, which, uh, just affects the interest rates.

The banks charge for loans, um, and by changing interest rates, The Fed can influence borrowing, uh, spending by consumers and businesses, uh, which can in turn impact economic growth and inflation. So, um, they have several different tools. Um, but, um, one of them is, um, through the interest rates and, um, uh, affecting those through, um, what they charge to lend out their money.

They're called the discount rate. What, what is, you know, the background to that? I mean, that's, that's what they call it. Yeah. So, then, I don't feel like I get a discount when I get a loan or something. Yeah. What they're talking about is what, what The Federal Reserve charges banks to borrow money. Okay.

Um, and they call that the discount rate? Um, yeah. It's basically just whatever the bank, uh, must pay to borrow money from the Fed, and so, the Fed can raise or lower that discount rate, um, which influences the cost of borrowing from banks and that. Affects credit cards to, um, mortgages to um, pretty much everything as far as loans go, um, both for businesses and personal.

So, um, last year in 2020, they changed the, um, rate and it's all the way up to four to four and a quarter, um, is kind of where it's at. Um, No, right now it's like 4.5. Yeah. Uh, for this year. So, that's what it costs, um, to borrow money from the, from the Federal Reserve. So, the banks must pay that.

And if you think about that, they're not going to charge 3% for a loan. The, the bank system is not, they're going to charge at Least, um, what they're being charged, plus some, and you reserve requirements. We, we hit on that quite a bit last week. Um, Talk about that real quick. Y yeah. So, the Federal Reserve can make changes to that.

Um, so, for the individual banks? Yeah, yeah, yeah. So, they can say, well, your, your reserve requirement was 10%, we're going to make it 15% so, that way we can create more stability. Um, and so, by raising our, lowering the reserve requirements, uh, the Fed can influence the amount of money that banks can lend, uh, which also, affects, uh, affects the monetary supply and interest rates.

So, um, it's kind of, interesting feature of, um, how they can affect monetary policy. Um, when you talk about it, they say, hey, we get forward guidance. They usually have their meetings, and then you see C N B C flashes, all these reports and all this stuff. What, uh, what is that? Yeah, so, you’ve probably heard the phrase, don't fight the Fed.

Um, and what they're talking about is, um, whatever news comes out of the Federal Reserve when they do those meetings and where they're projecting things or where they're saying they want to get things to, has a huge impact on the stock market. Huge impact on interest rates and, you know, just our, our monetary supply in general.

So, um, a lot of people are very closely looking at every single word they say when they come out of those meetings. And they Release the minutes to see, well what are they going to do in 2023? Well, what's their Ford guidance of their plan for the year? Um, and sometimes they'll be very vague. They say we're going to raise interest rates until inflation has hit a reasonable number.

You know, something like that. You're like, well, what's reasonable? So, sometimes they can choose to be very concise with their rewards, and sometimes they choose to be vaguer. Mm-hmm. And leave it more open-ended to say, well, um, we'll lower interest rates when the economy. Quote unquote healthy. And you're like, well, what is healthy?

What does healthy mean? Yeah, exactly. Is that $8 eggs or $12 eggs? Exactly. Yeah. So, um, yeah, so, that's, when they talk about forward guidance, that's what they're saying. It's just what do they project moving forward and then the markets basically, uh, move according to that forward guidance. Something that I never heard of until the 2008 financial crisis.

Um, and now it's, it's in the lingo all the time. You, you often hear it as we, QE one, QE two, we, infinity, quantitative, quantitative easing. Uh, define that, Glen. What? We'll talk about that. Yeah. So, there's an interesting, um, Uh, documentary. I just was watching the other day. It just came out like three weeks ago.

It's called The Age of Easy Money. Mm-hmm. And it's all about the Federal Reserve, what they've been doing, what they did in 2008. And so, in 2008 they implemented this, um, strategy and it was just. It was an extreme strategy. It has never been done before. Uh, they called it quantitative easing.

And so, what that meant is they were going to inject a large amount of money into the economy. Um, and so, they were able to do that by themselves purchasing, um, long-term securities assets from banks, um, which in turn helps the banks increase their reserve capacity and encourages them to lend more. So, you may have heard of the Fed.

X amount of dollars on their balance sheet. Um, that's them buying stuff. And you're like, well, where did the fed get their money? You're like, good question. Right? It's all just, uh, on a ledger somewhere. So, um, that's where inflation really became an issue is because technically it was money out of thin air.

Mm-hmm. You're like, there's, you know, where did that money come from? Um, and so, as the quantitative easing started in 2008, that really boosted the economy and, uh, lowered interest rates, stimulated economic growth, banks were willing to lend again. Um, because when we hit the depths of the recession, a lot of banks were like, Nope, not lending, not doing anything in, uh, anything risky.

They may have even chopped down credit card limits from. 20,000 to 10,000 because they were just trying to reduce their risk. Yeah. But if you suddenly have more liquidity, um, you've got more reserves, you're going to say, well, things are looking better. We've got more capacity. Um, let's, uh, let's, you know, be a little bit easier on some of those lending policies where we were strict, uh, you know, a little bit.

I remember when they were cutting those credit lines, if you had a home equity line of credit, things like that. Mm-hmm. You'd get a notice back in the great financial crisis, you know, especially into oh nine and 10 that's gone. Something you may have had for a long time. They would cut those down and, um, business credit cards, things like that.

So, I guess the, the, it's contracted, the credit market contracted significantly. Yeah, during the, they impacted a lot of folks during the recession and so, to counter that, they injected a bunch of money back into the system. And during the pandemic they did uh, some more of that too. Um, and it was significantly more Yeah.

Then they did in 2008. And I remember in 2008 it was like this big uproar that they're bailing out some of the banks and they were doing these stimulus checks, which I think was. 300 bucks. Something like sim stimulus check. Yeah. It was something, uh, w George W. Bush. Yeah. Yeah. Cause I remember getting one of them and I, it was like 18 or 19, like, what's all this?

Yeah. You're like, here's your $18 and 83 cents or something. Yeah. Um, but then you think about what they did this round. They just threw everything at trillions. They, yeah. Trillions of dollars at the, um, pandemic. I think it was like almost 8 trillion. Yeah. Uh, money was created. Basically, thin air. So, and then we're wondering why inflation is high.

Well, yeah, exactly. And I, and that was that creating all that money that people were out there trying to find places to dump it and spend it. Yeah. And you think back to oh eight and the whole debate was over, I can't remember exactly, it was either 600 or $800 billion in bailouts and all that. Banks. Yeah.

And that was like, oh, this is, this was a onetime thing, and it was an obscene amount of money. And then you fast forward to 2020, 21, and it was not hundreds of billions. It was trillions and trillions like you said. So, times have changed. What, what will come next? I guess Glen, I, in that documentary and remember hearing this, um, you know, this is during the Obama era, um, and there's all those bank CEOs bonusing them out, tons of money with the bailout money.

And they got so mad at that. They're like, there'll be time to make profits, but now's not the time. Yeah. You know, you need to, you know, make sure your bank is stable, that sort of thing. Not give yourself a massive bonus off the crazy stuff. Bail. Lot of money. Yeah. What do I see moving forward? Um, unfortunately there's not a lot of repercussions these banks are facing, um, when they, um, are just pushing the envelope too much.

Are they too risky or are they just not, um, managing risk appropriately? So, it's kind of this interesting phenomenon where, And the banks, if they take a lot of risk and they make a lot of money, great. But if they take a lot of risk and it goes under, well, they just have a backstop. The government will bail them back, back out.

It's really via the taxpayers. Yeah. It's like how does, that's not a free market economy then? What is that like? That's, um, when it creates more risk and more bad behavior. Exactly right. Yeah. It just, it just encourages that. And, and the same thing will happen with loan forgiveness for student loans. They think that it will help, but it, schools will start charging more money because they know that, hey, this person just got $10,000.

Mm-hmm. Loan forgiven. We can, you know, try and milk 10,000 more out of them. So, uh, yeah. Yeah. You want to, um, have policies that curb bad behavior. And unfortunately, with them bailing out the banks, um, it just, there were no repercussions. And yeah, you want the banking system to be stable, and I know that's a, you know, crazy fearful thing that that bank would potentially fail.

So, I think they're trying to just get more confidence from the US consumer, but long term may not have been the, um, the best move. Yeah. And, and they just, we'll see what comes next and hopefully, People tend to want change after a long time of some going down a certain road. So, maybe the pendulum swings, Glen, we shall see.

I don't, yeah, you look skeptical. All right. If you want to talk with Glen, don't be skepticism. Yeah, there you go. Glen would love to have that conversation with you. 9 2 8 2 2 5 24 74. You can also email intelligent investing@wtwealthmanagement.com. Let. Talk more when we come back, Glenn, about, uh, more in reserve, uh, res the, the responsibilities of the, the Federal Reserve and.

Um, what and how they, they should be used and, and how they use that going forward. So, yeah. Yeah, we'll do that and, uh, hang tight. We'll be back in just a few minutes.

You're listening to Intelligent Investing with Glen Leest. Give Glenn a call right now at (928) 225-2474. That's 9 2 8 2 2 5 24 74. More intelligent investing with Glenn Leest when we come back.

All right. Welcome back. You're listening to Intelligent Investing with Glenn Leest. Email Glen Intelligent Investing WT wealth management.com or call 9 2 8 2 2 5 24 74. That's nine. 2 2 5 24 74. We've been talking about, well, last week. And, and if you want to catch up on, um, more specific on banking issues, uh, private banks, commercial banks, things like that, um, look up intelligent investing with Glen Leest on your favorite, uh, podcast provider.

Been talking about the Federal Reserve and its roles. I, I guess let's talk more about more of the responsibilities of the Federal Reserve to wrap this up time. Yeah. So, Really, really the Federal Reserve, um, the idea of it when it was created was really to be a, um, option of last resort, right? It wasn't meant to save us from every single recession that was supposed to happen, which I think is kind of now the role that they've been filling is, uh, we're going to never really let bad recessions happen in the market, correct.

Themselves. We're just kind of, kind of, you know, helping them through those times, which, it is difficult. So, when really bad times happen, you've already kind of used up all your, your firepower on those, you know, smaller ones. So, um, yeah, they're really, they're meant to be just a, a. A lender of last resorts.

So, if, um, you know, banks were struggling or look like they're about to fail, they can buy up some more of their, um, their mor like their, uh, treasuries, their mortgage-backed securities, some of their assets to provide more liquidity. And they, the Federal Reserve really wants to create stability in the financial system.

So, if there's risk of catastrophic failure, they're going to be aggressive with some of them. Changes and the tools that they can use to help the financial system stay strong. So, um, that's one thing. And then there, we didn't talk a ton about this, but when we talk about the Federal Reserve regulating banks, part of that is they're supposed to go in and make regular examinations, look at their books, looks at their balance sheets, uh, make sure everything is really on the up and up.

And I don't think. I don't know how SVB was able to stay as risky as they were for that long. Uh, which makes me wonder, um, were the inspections not done up to full? Um, you know, full. As much as they should be. They, they weren't, you know, done to a hundred percent accuracy or did they let stuff slide because they Yeah, just slipped.

Yeah. Yeah. They should have, you know, addressed that right on looked the other way because this was an issue for many years. It wasn't just like, oh, this is overnight. Like, they knew about this issue with that bank for a while and they just, for whatever reason, it just didn't get fixed. So, I think, um, the Federal Reserve maybe is going to have to up their game in that, that area of just being, well, you think they would've learned less, learned their lesson in 2008.

You know when, when all that happened, you'd think, but then again, since they got the banks bailed out in 2008, they're like, well, if we fail, we'll just get bailed out, you know, just like they did. So, it kind of sets a bad precedence. Um, and yeah, it would've caused some strain in the financial system if they didn't bail out those big banks.

But I honestly think it would've probably been for the better. Um, because then they would be able to curb some of that bad and risky behavior. Yeah. And then how does the average consumer out there, who's looking to put their money into any bank, how do you know? I mean, it's hard to, is that information readily available?

Do you have to dig deep as far as what, what's this bank look like as far as assets on the book? And then, do you even know what you're looking at if you were to get there, uh, financial records, I guess, uh, for the Yeah, their financial records? Yes and no. It's not always transparent, like what they're exactly.

Investing in, but sad for our clients when, um, we're investing in like a bank product, say like a cd, we do a lot of research on that bank. Make sure they're solvent, look at their reserve requirements, um, and do the best we can to make sure that they're just eve. A solid bank. And of course, they have all the F D I C guarantees too.

Um, but that's, you know, it's part of what the role that we can play. because there's a lot that you must look for and you may not know exactly what you're looking for. Um, when you're trying to evaluate is this bank, um, a good solid bank, but you know, most of the big banks are. Great. And, uh, you know, it's not a big deal, but, um, knock on wood, hopefully that stays the case.

Yeah. Going forward, um, looking at all of this and wrapping this all back up into the past, this episode and the past episode, Glen, um, um, where are we at? I mean, the Federal Reserve is supposed to play that crucial role of maintaining the St. Of banks going forward and the economy too. So, and, and the, so, they threw that in there too, and keeping inflation at 2% or something like that, or, mm-hmm.

There's a lot there. Well, let me ask you this, just off the top of my head. Is that, is it, society asked too much of one? Um, organization and really a small group of individuals, um, for, for the sake of our entire economy. And the bank probably. Yeah. Cause there's some people that have, you've heard the, uh, phrase ban the Fed, right?

They don't, yeah. They don't want that much control to be had by, it's a non-government agency, so, it's not, you know, it sounds like it's a government agency, the Federal Reserve, but it's not. Um, and so, yeah, I think, um, I mean, their original role was just to be a backstop. Mm-hmm. Really just a last resort.

But now they're getting much more involved with interest rates, inflation, uh, economic health. Um, obviously the banking, um, system makes sure it's solvent and good and healthy. That that's no-brainer. They should obviously always be doing that. But some of the areas they're dabbling in, do they really need to?

Um, I don't know. I mean, I, I don't know that all that new additional money, um, now that we're looking back on it was necessarily the best move. Um, because it's caused rapid inflation, so, yeah. Those egg prices, yeah. They're coming down a little bit. Any money you made on your stimulus check; you've had to repay back many times over.

Yeah. In inflation. This, this last year, and a half. Yeah. Going to buy gas for the car. That costs a lot more to go buy the eggs. That costs a lot more on, unless you have chickens. We, uh, we're now up to like 24, so, yeah. Good. We got as many eggs as we need, so, yeah, we've upped our game a little bit too on in that regard.

And, uh, we, we'll see what happens with them, all this, it's so hard when you go to the store and it's like, buy one, get one free. You're like, who could pass up a sale? Yeah. On the chicks. Yeah. On the chicks. Yeah. It's like, especially as spring, get deeper into spring, it's like yeah, we got to move all these chicks out there and mm-hmm.

Um, yeah. It's hard to pass it up because for a few bucks you can get eggs for a few years. Yeah. My kids name every single one of them and I. No. Like two of the 25 names. That's insane. Yeah. All right. So, e everything else is, just switch gears, Glen. Yeah. Um, um, if folks want to get in touch with you, especially in still turbulent times Yeah.

Out there, um, I'm sure you have a lot of people calling you, hey, what do we do here? It's, mm-hmm. It's, it's still just uncertain times. But things are going well and, and, um, the world is rolled on whether there's a, a bank failure or two, or it appears that way what the Fed does. Um, and we will, and I think you bring up a good point, uh, like a year in 2021, everyone thought there were geniuses in the stock market is hard to like to go wrong.

Like you just throw, you know, anything at, you know, any Yeah. Game Stop. Yeah. And they made money. And then, and this year, um, I think there's a, you know, or 2022, I think there's a little bit more of realization that that was just a, um, A short-lived time. It's not always that easy. Like I think in the early nineties when the economy was just rocking and rolling mm-hmm.

You had years there where it was just like, you know, easy money in the stock market is, you really couldn't go wrong. But yeah. Um, that's where like moving forward, having professionals such as us to make sure that we are investing you properly, that we're, um, doing all of our due diligence we're, uh, creating a well-diversified portfolio and really help educating our clients as well.

Um, that's a big thing that I like to do is help my clients understand as much about the investing and money monetary policy and the economy as they want to know. Because uh, a more informed individual is usually a better investor as well. Yeah, it's not the mid to late nineties where if it had a.com after. You made a lot of money for a couple years until you didn't, and then that collapsed.

Early thousands were the company, was it like pets.com that did some absurd Super Bowl ad and just spent a ton of cash? They'd never even made a profit yet. Yeah. Millions of dollars and yeah, what I remember those super bowls of the late nineties, I think it was maybe very early 2000 before the tech bubble burst and every commercial.

Was inter, you know, web-based and that was new, you know, dot com. Dot com, you're going to buy everything. Well, I guess eventually it did work out, but they were a bit early because now people buy so much online. But yeah, it was in its, uh, infancy. Yeah. One of those years the tech sector was up like 80 or 90%.

It's crazy. And then the next, you know when the bubble burst, it was painful. Yeah. Get the time machine. I know in one of your early episodes of intelligent investing, you talk about the DeLorean. Um, or the time machine. Yeah. You built a time machine or we're building one or buy you, you ordered some kit or something?

No, I was going to say I sound like a lunatic. Yeah, that was a fun episode. No, you were younger. I, no, we went on eBay, and we bought, this guy was selling a time machine and it was like this device with all these wires and. Electrical components and we bought it, and we were like, it's not working. And he's like, oh, you got to do this and this and recalibrate this.

Okay, we did that. It's not working. I want to see Abe Lincoln. And that was the funniest part, was just seeing his responses, like he believed this thing worked. It's like, why would you sell it then? Yeah. Why would you sell this? But if only we had a time machine. All right, if you, if you want to talk with Glen, give him a call 9 2 8 2 2 5 24 74 or email Intelligent investing@wtwealthmanagement.com.

That's fun stuff. And look for the Time Machine episode. I think it's well worth it. Look up intelligent investing on your favorite podcast provider. All right, Glen, till next week. Thanks. Thanks Jeff.

The following has been paid programming brought to you by WT Wealth Management. Nothing we've discussed should be considered as investment advice. This conversation was for informational purposes only. Please do your own research and speak to an investment advisor, financial planner before making any investment decisions.