The Transmission

This Morning

Vice Chair Philip Jefferson spoke in Boca Raton today. The venue was the Shadow Open Market Committee conference—an audience of monetary economists who track Fed operations closely. The speech covered the usual ground: cautious optimism on the economy, data dependency on rates, the mechanics of balance sheet management.

One section caught our attention. Jefferson spent several paragraphs explaining that the Fed's new "reserve management purchases" are not Quantitative Easing:

"It is important to note that reserve management purchases are not quantitative easing. Each process has a distinct purpose, with different goals and economic implications... These routine purchases are conducted to maintain ample reserves and ensure effective control over short-term interest rates."

— Vice Chair Philip Jefferson, January 16, 2026

The Fed is buying Treasuries again. But don't call it QE. It's just "plumbing."

This framing—operational necessity, not policy choice—felt familiar. We'd seen this pattern before. The careful distinction between what the Fed must do and what it chooses to do. The technical language that obscures who benefits.

So we asked a question: When did the Fed first start distinguishing between the mechanics of its balance sheet and the effects on the economy? When did "transmission mechanism" become something to explain away rather than explain?

We went into the archives.

The Question We Asked

The FOMC Insight Engine contains 280,000 searchable passages from Fed transcripts, staff memos, minutes, and speeches—1936 to 2025. We ran a query:

Did Fed staff acknowledge that QE worked primarily through asset prices rather than bank lending? Did governors discuss who would benefit? When did "wealth effects" become the transmission mechanism, and did anyone object?

The system returned 71 sources. Seven supporting. Two contradicting. Five dissenting voices.

What we found was not a gradual evolution of thinking. It was a pivot—a deliberate choice made in late 2010, documented in the transcripts, and then systematically filtered from public view.

November 3, 2010

The FOMC met to decide on QE2. The economy was struggling. The bank lending channel—the textbook mechanism where Fed asset purchases lead to more bank loans—wasn't working. Everyone in the room knew it.

Chairman Bernanke explained to his colleagues how QE2 was actually supposed to work:

"The way this is supposed to work is by affecting asset prices—changing relative rates of return—and through the changes in asset prices affecting financial conditions and, therefore, affecting the economy."

— Chairman Ben Bernanke, FOMC Meeting, November 3, 2010

Read that again. The Chairman of the Federal Reserve, in closed session, stating plainly: this works by raising asset prices.

Not bank lending. Not credit availability for small businesses. Not mortgage origination. Asset prices. Stock prices. Bond prices. Home prices.

This wasn't a side effect they hoped to manage. It was the plan.

The Dissent

Not everyone agreed to go along quietly.

Thomas Hoenig, President of the Kansas City Fed, spoke next. He understood exactly what Bernanke was proposing—and he was skeptical it would reach ordinary people:

"The Committee takes this action expecting it will incent portfolio adjustments, thus changing relative prices and somehow spurring aggregate demand."

— Thomas Hoenig, President, Federal Reserve Bank of Kansas City, November 3, 2010

Note the word somehow. Hoenig saw the gap in the logic: inflate asset prices, and then... what? Hope it trickles down?

Richard Fisher, President of the Dallas Fed, was more direct. He named what the policy would actually do:

"We can be certain that it will lead to a declining dollar that will encourage further speculation, that it will promote commodity hoarding, that it will accelerate the transfer of wealth from the deliberate saver and the unfortunate to the more well-off, and that it will place at risk the independence of this great institution."

— Richard Fisher, President, Federal Reserve Bank of Dallas, November 2, 2010

The transfer of wealth from the deliberate saver and the unfortunate to the more well-off.

Fisher said this in the FOMC meeting room. It's on page 127 of the transcript. He predicted exactly what would happen over the next fifteen years—the explosion of wealth inequality, the asset boom that left wage earners behind, the growing sense that the economy works for some people and not others.

He was outvoted.

What the Staff Knew

The dissenters weren't the only ones who understood. The Fed's own research staff had already concluded that the bank lending channel wasn't functioning.

Three months earlier, in August 2010, William English—the Director of Monetary Affairs, the person responsible for understanding how policy actually transmits to the economy—made an admission:

"It does not appear that there is the sort of transmission mechanism that I associate with QE operating through bank balance sheets; it just doesn't seem to be there at this stage."

— William B. English, Director of Monetary Affairs, FOMC Meeting, August 10, 2010

The mechanism "just doesn't seem to be there." The textbook story—Fed buys assets, banks get reserves, banks lend more—wasn't happening. The staff knew it. Leadership knew it. They proceeded anyway, with a different mechanism in mind.

By September 2012, this reality was built into the Fed's official forecasting models. David Reifschneider, a senior staff economist, explained the framework to the committee:

"So you can think of it as three channels: cost of capital, wealth effects, and exchange rate. The model says each of those is worth roughly a third of the overall effect... But in terms of what it implies for bank lending, or something like that, no, the model doesn't—"

— David Reifschneider, Senior Associate Director, FOMC Meeting, September 12, 2012

The Fed's primary model for QE's effects did not include bank lending at all. One-third wealth effects. One-third cost of capital. One-third exchange rate. The channel most people assumed was driving the policy wasn't even in the model.

The Gap

Here's what makes this more than historical trivia.

While the Fed internally understood that QE worked through asset prices and wealth effects, public communications told a different story. We pulled the contemporaneous press releases, testimonies, and public statements. The contrast is stark:

The internal language was precise: asset prices, wealth effects, portfolio adjustments. The public language was vague: financial conditions, supporting the recovery, helping the economy.

This wasn't careless imprecision. The Fed employs hundreds of PhD economists and a communications staff that weighs every word. The vagueness was intentional.

Why It Matters Now

Return to this morning's speech.

Vice Chair Jefferson carefully explained that reserve management purchases are "not QE"—they're just operational necessities to maintain "ample reserves." The Fed must buy Treasuries now. It's not a policy choice. It's plumbing.

But why does the Fed need "ample reserves" in the first place?

Before 2008, the Fed operated with scarce reserves. Banks held minimal reserves, the Fed didn't pay interest on them, and monetary policy worked through the bank lending channel. When the Fed wanted to stimulate, it lowered rates, and banks—seeking yield—lent more.

The current framework is different. The Fed maintains trillions in reserves and pays banks interest (IORB) to hold them. Today that rate is 3.65%—roughly $110 billion per year flowing from the Fed to banks just for parking money overnight.

In this framework, the bank lending channel can't function the way it used to. Why would a bank lend to a risky business at 6% when it can earn 3.65% risk-free from the Fed? The "ample reserves" framework itself suppresses the lending channel.

Which means when the Fed needs to stimulate the economy, it has only one reliable mechanism left: asset prices. Wealth effects. The channel that flows first to those who own assets.

This is the architecture Jefferson was defending today. He called it "monetary policy implementation." The transcripts from 2010 called it something else.

The Documents

Everything in this piece can be verified. The Bernanke quote is from the November 2010 FOMC transcript, page 102. Fisher's warning is on page 127. Reifschneider's admission about the models is in the September 2012 transcript. The staff memos on wealth effects are in the Tealbook archives.

For sixty years, these documents were locked away—released only after a five-year lag, buried in PDF archives, unsearchable. You had to know exactly what you were looking for and where to find it.

That's no longer true.

We built the FOMC Insight Engine to make these archives searchable. To let anyone ask questions and trace the answers through staff analysis, committee deliberations, and public statements. To see not just what the Fed decided, but what they knew, what they debated, and what they chose not to say.

Today's speech raised a question. The archives provided an answer. The pattern goes back fifteen years, and it's still operating.

The transmission mechanism is working exactly as designed.

The question is: designed for whom?