The Rundown
Deep Dive: A Brief History of the Federal Reserve (And the Threat It Faces Today)
17 Jan 2026
Chapter 1: What is the Federal Reserve and why was it created?
Welcome back to The Rundown for another weekend deep dive. Today, we are talking about the Federal Reserve. The Fed plays a crucial role in the U.S. economy. Their job is to keep inflation low and employment high. But now the Fed is facing a crisis that could have wide ranging impacts.
So in today's episode, we'll break down what the Federal Reserve actually is, why it was created, how it shaped some of the biggest moments in American history, and why the current beef between President Trump and Fed Chair Jerome Powell might be the biggest threat to the Fed's independence in decades. We got a great one for you today. Let's dive in.
To understand why the Federal Reserve is so important, you have to first look at how things were like before they existed. The American banking system before the Fed was a total mess. See, throughout the 1800s, a financial crisis was like a seasonal event. years, people would lose confidence in their banks. Then everyone would rush to the bank to withdraw their money at the same time.
The bank would then collapse because remember, banks don't keep all their deposits in cash in the vaults. So these bank runs would destroy livelihoods and take down the economy. And this was happening regionally every few years. The breaking point was the Panic of 1907. This bank run was so bad that multiple banks in New York collapsed and the stock market fell 50% in three weeks.
I mean, imagine that happening today. Like we freak out when the markets drop 5% in three weeks, imagine 50%. So things got so bad in 1907 that JP Morgan, yes, the actual guy who made the bank had to step in himself. He gathered the city's top bankers into his private library.
He locked the doors and he refused to let them leave until they agreed to pool their money together and bail out the banking system. After that, Congress finally stepped in. I think they realized that maybe it wasn't a great idea to rely on a handful of rich bankers to bail out the economy every time things went south.
So in 1913, Congress passed the Federal Reserve Act, which created the Federal Reserve. The goal was to create a safer, more stable banking system. Now here's what makes the Federal Reserve unique. It's not a government agency, but it's also not a private bank. It's like a weird hybrid situation. Think of them like a quasi government institution. You know, Congress created the Federal Reserve.
They oversee the Federal Reserve, but the Fed operates independently. They don't, take orders from the president or Congress when it comes to setting monetary policy. And that independence is key, but we'll come back to that because that is at the heart of the beef between President Trump and the Fed today.
Now, the Fed's powers have evolved a lot since 1913, but for the last five decades, it's operated under what's called the dual mandate. This was written into law in the 1970s, and it gives the Fed two main jobs. Number one is to keep prices stable, basically keeping inflation in check. And number two is maximum employment, keeping unemployment low and the job market strong.
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Chapter 2: How did the Panic of 1907 lead to the establishment of the Federal Reserve?
They argued that keeping rates too low for too long would cause inflation to spiral out of control. And this led to a major turning point in 1951 called the Accord. freed the Fed to use monetary policy independently without being forced to support the U.S. Treasury.
See, before this, the Fed was basically taking orders from the Treasury Department, but the accord finally separated them, establishing the Fed's independence. That allowed the Fed to set interest rates based on economic data and not what the Treasury Department wanted or what the president wanted. And it's this accord that is considered the birth of the modern Fed independence.
Now, the next major shakeup for the Fed came in the 1970s. This was a time of great inflation, and the Fed's independence was tested. See, during the 1970s, the Fed kept interest rates low to boost employment. But keeping interest rates too low can cause inflation, and that's exactly what happened. Inflation climbed to double digits in the 1970s.
But here's the thing, a part of the reason the Fed kept rates low was because of political pressure. At the time, President Richard Nixon leaned heavily on Fed Chair Arthur Burns to keep rates low heading into the 1972 election. Arthur Burns gave in and inflation just got out of control. And that's the exact nightmare scenario an independent Fed is supposed to prevent.
So this disaster of the 1970s led to major reforms of the Fed. In 1977, Congress passed the Federal Reserve Reform Act. This was huge because it formally gave the Fed its dual mandate, which we talked about before, which is maximum employment and price stability. This law also required the Fed to report regularly to Congress on how it was meeting those goals.
On top of that, it made structural changes. For the first time, the Fed chair and vice chair had to be confirmed by the Senate and their terms were limited to four years. So this created more accountability at the Fed while still preserving the independents. So then in 1979, Paul Volcker became the Fed chair and Volcker did what needed to be done.
He jacked up interest rates to nearly 20% to break the back of inflation. Now look, this move was very unpopular. It led to economic pain, massive job losses, and a recession. But it worked. By the mid-1980s, inflation was under control. And that is a great example of why an independent Fed is so important.
Because they have to make difficult choices that a lot of times might not be politically popular. So after Paul Volcker tamed inflation in the 1980s, the US entered what economists called the Great Moderation, which was 20 years of low and stable inflation. And during this period, the Fed also became way more transparent.
For most of its history, the Federal Reserve was notoriously secretive, but that started to change in the 1990s. In 1994, the Fed started issuing public statements after every meeting, explaining their decisions. Then in 2007, the Fed began releasing quarterly economic projections so everyone can see where Fed officials thought the economy was headed. And then in 2011 was the big one.
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Chapter 3: What is the dual mandate of the Federal Reserve?
This investigation is supposedly about the cost overruns on the Fed's headquarter renovations. But Jerome Powell made it clear that this criminal investigation was politically motivated because the Fed refused to drop interest rates to the level that the president wanted. I mean, I watched the video on Sunday night.
It was shocking because it was the first time where Jerome Powell responded to the relentless attacks by Trump. Now, I should point out that presidents in the past have pressured the Fed before. Lyndon B. Johnson did it. Richard Nixon also did it. They wanted lower aides to help their poll numbers. But a threat of a criminal investigation against a sitting Fed chair is uncharted territory.
Now, there's been pretty strong backlash to this investigation. Jerome Powell has received bipartisan support from politicians and former Fed officials and even Wall Street veterans. In fact, Republican Senator Tom Tillis of North Carolina, who sits on the banking committee, says he's going to block any nominee to replace Jerome Powell until this investigation is resolved.
There's also Jamie Dimon, CEO of JPMorgan Chase. He weighed in this week saying that anything that undermines the Fed's independence is probably not a great idea. So we'll see if this bipartisan backlash is enough for the DOJ to back down.
What I don't understand, though, is like the timing of all this, because remember, Jerome Powell's term as Fed chair ends in May and Trump is going to replace him with someone who probably shares Trump's views on interest rates. Right now, the leading candidates are Kevin Warsh, a former Fed governor, and Kevin Hassett, Trump's economic advisor.
So Trump will get his chance to change the head of the Fed in just a few months. But despite that, the DOJ is still going after the Fed and Jerome Powell and threatening the Fed's independence. And honestly, this move could end up backfiring for Trump. So what's my take here? Well, the Federal Reserve and its independence plays a key role in how our economic system works today.
And Trump's plan to break that independence to lower rates could end up backfiring. The more that Trump is seen as trying to control the Fed, the less credible the Fed becomes. And if investors start to doubt the Fed's independence, they're gonna demand higher interest rates to compensate for that risk. Now, look, I gotta say, the Fed isn't perfect, okay? They've made mistakes in the past,
including recently in 2021 when they thought that inflation was transitory and they turned out to be wrong. But having a politicized Federal Reserve that makes decisions based on election cycles instead of economic conditions could lead to a terrible economic situation. So personally, I'm glad that Jerome Powell finally responded to Trump's threats.
But remember, Jerome Powell is only gonna be the Fed chair for a few more months. Trump's handpicked Fed chair is gonna take over in May. If the market sees the new Fed chair taking orders from the president, that's gonna shake the market's confidence that the Fed is independent. Is that gonna be enough to spook the markets? I guess we'll have to see.
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