The Federal Reserve, Explained | AWM Insights #262

Join AWM Capital’s Justin Dyer and Mena Hanna as they break down the pivotal role of the Federal Reserve in shaping the U.S. economy. In this episode, the duo explores the origins, mandates, and evolving responsibilities of the Fed, using vivid analogies and real-world examples to illuminate complex topics like interest rates, inflation, and monetary policy. Whether you’re curious about how the Fed’s decisions ripple across investments and everyday life, or just want a clear, approachable take on economic headlines, this conversation offers sharp insights on why the Fed truly matters. Tune in to deepen your understanding of one of the world’s most influential financial institutions.

Chapters
(00:00) Why the Federal Reserve Matters
(01:47) Origins and Purpose of the Fed
(03:31) Evolution and the Gold Standard
(05:00) The Fed’s Dual Mandate Explained
(08:00) Structure of the Federal Reserve System
(09:21) The Role of the Federal Open Market Committee
(13:07) Impact of Interest Rates on Investors and the Economy

Connect with Us
• Call or text us: 626-862-0355
• Website: https://www.athletefamilyoffice.com/
• YouTube: https://www.youtube.com/channel/UCc1NxpK21N1vKWEExC45YEA
• LinkedIn: https://www.linkedin.com/company/awmcapital/
• Instagram: https://www.instagram.com/awmcapital/
• X: https://twitter.com/awmcapital
• Facebook: https://www.facebook.com/awmcapital/

Creators and Guests

Host

Justin Dyer

Chief Investment Officer and Chief Operating Officer at AWM Capital

Host

Mena Hanna

Senior Investment Analyst at AWM Capital

What is AWM Insights Financial and Investment News?

A bite sized discussion on timely financial news and investment topics, to help you maximize your net worth and wealth for the next generation with Justin Dyer and Mena Hanna of AWM Capital.

Mena Hanna: Before the Federal
Reserve, it was the Wild West.

People were moving as quickly
as they potentially could.

If there was an issue, if there was
an accident, the whole system got

backlogged and there was no movement.

There wasn't CHP coming
and clearing the accident.

It was just the Wild West and things
stayed broken for a whole lot longer.

Justin Dyer: Hey, everyone.

Welcome back to another
episode of AWM Insights.

It's your host, Justin Dyer, chief
investment officer here at AWM Capital,

joined as always, uh, by Mina Hanna, our
portfolio manager here at AWM Capital.

And we're gonna continue the
conversation around the Federal Reserve.

We teed that up last week, uh, talking
about the importance of, of fixed income,

the foundational piece of, of a sound
portfolio, interest rates being a huge

component of fixed income investing,
and the Federal Reserve being really,

really critical to interest rates.

And so we're gonna do, uh, our best to
go over a quick history lesson of the

Federal Reserve, when it was created, why
it was created, what does it actually do,

um, and set up that conversation for, for
our, our special guest in a few weeks,

who is the insider and gonna be able to
really give us our per-- his perspective

on the Fed, the inside baseball, um, so
to speak, of the Federal Reserve, and,

uh, and tie it into some changes that
are going on with the Federal Reserve.

We just had a, uh, the chairman
of the Fed, Jay Powell, step

down, uh, his term ended.

A new chairman has stepped
into his place, Kevin Warsh.

And so it's been in the news.

It's super important, maybe not
the most interesting, but I wanna

underscore how important it truly
is because it sets interest rates.

We'll get into a little bit more as,
as to why, um, we are saying that.

And in a way, you could think
about it as one of the most

powerful bodies in the world.

So, without further ado, Mina,
let's jump, jump into it.

Um, like I said, let's start
with kind of the basics.

Fed was created in December,
I believe, nineteen thirteen.

Um, why?

What w- what was the impetus?

What was the lay of the land at the time?

Mena Hanna: Yeah.

Uh, the Fed was created to kind of--
Uh, it was created on the back of a

lot of panics, a lot of bank runs.

There were just a lot of issues
that were happening in, in the US

financial systems back in the early
'90s because there was no backstop.

There was no sort of governing agency
that created safe-- that offered

safety, created flexibility, gave kind
of banks and the financial system as

a whole the ability to access capital
in an easy and systematic manner

when there were crisis, when there
were-- when there was a shortage.

Um, so it was really created to
be a backstop and provide a safety

net for financial markets and,
and especially the banking system.

Uh, this was on the back of the
panic of 1907, which no one here

probably knows about or has heard of.

Uh, but there were just a lot more
bank runs, which now we don't have,

and, and for a large reason, that's
because of the Federal Reserve.

I am the numbers guy.

I lack all creativity, so I'm just gonna
go back to the example I used, uh, I used

last week around the freeway, the highway,
and kind of governing that and making

sure that it operates at the right speed.

Before the Federal Reserve,
it was the Wild West.

People were moving as quickly as they,
as they potentially could, and if there

was an issue, if there was an accident,
the whole system got backlogged and

there was no, there was no movement.

There wasn't CHP coming
and clearing the accident.

It was just the Wild West and, and things
stayed broken for a whole lot longer

Justin Dyer: Yeah.

Yeah.

Awesome.

Um, now I think for those astute history
buffs, you might pick up on, okay, hey,

the Federal-- Fed was created in 1913.

We still had the Depression.

We've still had plenty of
ups and downs since then.

Totally, um, fair and, and accurate
observation, and I, I think

it's worth highlighting, right?

The Fed has iterated
and evolved over time.

It's also worth noting that we were on
the gold standard still for quite some

time post, um, post-Fed creation, in
fact The gold standard kind of ended, um,

looking at my notes here, around 1933,
but then ended convertibility, so you

couldn't, you couldn't-- You used to be
able to still from 1933 to 1971, take

a dollar and go exchange it for gold.

So it was a still somewhat of
a gold standard or at least

convertibility piece of it.

Um, and so I say that all to, to, to
at least highlight that there's been

evolution and iteration and whatnot and,
um, and booms and busts still happen.

Markets are cyclical.

Markets are free, certainly here
in the United States, and the

Fed is just trying to stabilize.

Which brings me to the, my next point.

Um, I'm gonna read the specific mandate,
like the actual words, and you can

translate it for, for all of us 'cause
it, it's not, you know, a foreign language

per se, but it's not the clearest.

The Federal Reserve Act, which
created the Fed, instructs the Fed

to conduct monetary policy, quote,
"To promote effectively the goals of

maximum employment, stable prices, and
moderate long-term interest rates."

What does that mean?

Mena Hanna: I'll break it,
break it down into its pieces.

So to promote the goals of maximum
employment, it's super important to just

focus on that word maximum and not full.

We never, and the Fed is never aiming
for unemployment to be at zero.

That creates adverse effects,
um, in, in favor of employees

and people seeking jobs.

What the Fed wants to do is, is create
sort of an even playing field and

create kind of positive tension between
employers and employees to support a

jobs market that is, that is healthy,
one that doesn't get too hot or too cold,

where there are too many people that are
unemployed or potentially underemployed.

So that is, that is their
mandate on employment.

The second component here, stable prices
and moderate long-term interest rates.

Going back to the highway example, it's--
They've, they've set long-term interest

rates and long-term inflation, long-term
inflation, I should say, a target of 2%.

That's sort of like the 65 mile an
hour speed limit on the freeway.

What they wanna do is make sure
that that is consistently 65.

They don't want people running too fast.

They don't want the economy
running too hot because that

is going to impact inflation.

It's going to impact stable prices.

We sort of saw this in
2021 with a lot of things.

Inflation was rampant.

Inflation at one point hit 9.1%.

Every time I went to the grocery
store to buy eggs, they were

a completely different price.

That's exactly what the Fed wants
to avoid, and that's actually

on, on the opposite side.

That's the freeway being way too open.

There were way too many
lanes in the freeway.

Cars were driving at, you know,
120 miles an hour, and that's

not safe or good for the economy.

So what the Fed did, they
raised interest rates.

They effectively took lanes
off of the freeway to get that

speed limit back down to 65.

Now, today, we're still operating
above their target, so let's just

say we're, we're still going at 80.

Uh, but we're, we're getting closer, and
they have this mechanism by increasing

the lanes of the freeway or reducing them
to, to sort of keep the economy moving

at the rate that they want it to move.

They don't want it to move too
quickly because that impacts prices.

We don't want massive and, and gross
inflation in our economy, but we also

want to make sure that there is widespread
economic growth because that's, it's good

for society and it's good for markets.

Yeah.

Justin Dyer: So the, the Fed in kind
of a financial circles, um, compared to

other, um, reserve banks or central banks
throughout the world has a dual mandate.

Many of them only have one.

The dual mandate being what you're talking
about, uh, inflation and unemployment.

Sometimes those two things can be a
little bit in conflict with each other,

and, uh, and most of the time they're,
they're ideally, um, you know, in a happy,

uh, medium or equilibrium, if you will.

Um, cool.

Super helpful.

Let's talk a little bit just
about the structure of the system.

So there…

It's a, it's a hybrid system.

It's a-- It is definitely a
government, uh, adjacent entity,

but in a way it's independent.

There's some, uh, influence from our,
uh, or, or power, if you will, from our

elected officials to appoint people like
the, uh, chairman of the Federal Reserve.

That was the big item in the news in,
in recent, um, months, weeks and months.

But the Federal Reserve i- has
th- really three components.

There's the, um, uh, Board of
Governors, which sit in DC.

There, there's 12 regional banks,
so the, the country is essentially

sliced and diced into 12 regions, and
there's a bank in each one of those

regions and a president of that.

And then the Federal Open Market
Committee, um, which is, you know,

they're, they're, they're all
influential, but what we're talking

about today and the conversation we're
gonna continue to have is around really

the Federal Open Market Committee.

Let's talk about that.

What is that?

What do they do?

Mena Hanna: do?

Take it away.

Yeah.

So what they do is they get together,
I believe it's 10 times a year,

and they determine the direction of
interest rates and, and where interest

rates are actually going to be.

There's 12 voting members, seven of those
governors that you just talked about, the

president of the Federal Reserve Bank of
New York, because I guess New York is,

is the most important, uh, financial…

It is the most important
financial system in the US.

So, so yeah, gotta give, gotta
give New York props for that, not

just, not just the Knicks that
they're, uh, that they're known for.

So, uh, so yeah, and then four out
of the remaining 11 reserve bank

presidents, and they serve rotating terms.

Those 12 get together.

They're actually gonna get together
on July 29th, so in eight days from

this recording, and they're gonna
determine do we hold rates still?

Do we potentially cut rates?

Now we have insights, and we
know that they're definitely not

cutting rates this time around.

Um, and there's a little bit of a slim
possibility that they als- also raise

rates because the economy is moving a
little bit quicker than I would say they

would, they would like it to be moving.

So, uh, there's, there's this, this
governance, this committee that sets

all of these things, and they also give,
outside of just moving interest rates

up, down, holding them stable, they
give insights which financial markets

really scrutinize, um, as to like what
the health of the economy actually is.

If they hold but they, you know, tell
us, uh, and there's some reading of the

tea leaves that happens here, that the
economy is running a rid- a little bit

hot and they're probably gonna raise
rates sometime in the back end of the

year, that is something that financial
markets sort of effectively really look

into and, and also price into assumptions.

So there's a lot that happens both
within the, the tangible things that

the Fed does and call it the, uh, the
loose things that they, that they say

after these announcements to dictate
what they think, you know, the next

six, 12, 18 months are gonna look like.

Justin Dyer: twelve, eighteen
months are gonna look like.

Right.

It's as though they're, you know, u-using
your traffic ana-analogy, the market's not

gonna speed or the cars aren't gonna speed
if they know that there's a cop around

the corner who's gonna r-reel in the,
the speed limit or give someone a ticket.

And, and so you, you know that markets
anticipate that and potentially bake that

into their assumptions about the future.

Um, other thing I wanna note is there
isn't some magic, you know, dial

that this body of, uh, the Federal
Open Market Committee actually, uh,

turns or like a keypad that they type
in their desired inflation number.

The mechanism that they actually, uh,
use to control interest rates, which

ideally control inflation and have an
impact on unemployment and all that

stuff, is simply through the money supply.

Trying to keep this really, really
straightforward, but you want-- if you

want, you know, the economy to speed
up, you would increase the money supply.

Oh, money is-- costs less, if you will.

It-- If there's more of it available,
interest rates are dec-- gonna

decline and vice versa, right?

That is the actual way in
which all of this stuff is, is

controlled, um, if you will.

As we start to bring this to a
conclusion, Mina, I wanna talk about

the importance of interest rates.

The-- We touched on this a little
bit, I think, in the last episode.

You've mentioned it
already a little bit today.

But why are we talking
about the Federal Reserve?

I've mentioned that they're the, uh,
arguably, if not the most, one of the

most powerful bodies in the world.

Why is that?

Mena Hanna: Yeah.

And if you made it this far, now it,
uh, it'll all, it'll all make sense.

Interest rates are probably the most,
call it impactful and important metric

in, in financial markets and, and also for
investors, whether they know it or not.

It dictates what you make on your
bond portfolio, which I know no

one is, is super interested in.

But the way that you actually identify
how much money you're making also or

targeted to make in public markets,
public equity markets, stocks, also

in private markets, is it's just that
number that the Fed sets plus a premium.

There's a premium for public markets.

There's an excess premium
also for private markets.

So they really set where, where the
race starts in a way, and markets move

on from, from then and from there.

The, f- the interest rates also
dictate what you were talking

about, which is the money supply and
financial just activity in general.

If money becomes more expensive when they
intre-- increase interest rates, that is

going to dissuade people from borrowing.

It's potentially gonna dissuade
people from spending, and it's

gonna slow down the economy.

That has knock-on effects inter--
into every other asset class, and it

also has, you know, knock-on effects
in terms of people's, people's homes.

Employment figures are gonna change

Justin Dyer: Yeah … potentially.

Mortgage

Mena Hanna: yeah,
mortgage rates, salaries.

There is just so much impact that
comes from this, this one number.

Um, but, but yeah, as you said,
it's not a magic dial where they can

control all of these knock-on effects.

They are signaling something and,
and ideally setting the ball in the

right place and, and hoping things
work out in, in the right manner.

Now, there are sometimes
delays, there are sometimes they

get too far ahead of things.

This is an imperfect system, but, uh,
the Fed has evolved over the years and,

and they've done a good job, I would
say, especially as of late, in terms of

forecasting what they actually need to
do and, and doing, doing the right thing

for, for markets and for the economy in

Justin Dyer: general.

Yeah.

Awesome.

Well, we'll wrap there.

Uh, hopefully that, that-- certainly
the last piece, and again, hopefully

you made it this far, uh, in our
opinion, very important topic

and to us interesting as well.

But it, it's incredibly important to
you all to understand this i-ideally

in kind of basic forms, and that
was the intent of this podcast.

Hopefully, you walked away, uh, with that.

If you didn't, certainly give us
feedback or, or follow-up questions.

Meena, we'll

Mena Hanna: we'll give you the number.

Yeah, 626-862-0355

Justin Dyer: And we're gonna wrap there.

Again, hopefully, you walked away
with a little bit more knowledge,

understanding of the Fed and
really the, the importance of it.

It, it truly is the, the, you know,
I don't know, the, the, the catalyst,

the governor, uh, whatever word
you wanna use on the US economy.

And because the US economy is so important
in the global economy, it really has

impacts all throughout the world, uh, and
most definitely on investing portfolios,

markets in the US economy, and, and the
journey towards the 100-year family.

Um, so until next time, and as we
build to this conversation, let us

know if you have any questions, like
I said, um, and we will wrap there.

Un-until then, own your wealth,
make an impact, and always be a pro.

Thanks for listening