Federal Reserve Board Chairman Jerome Powell speaks during a news conference.
Image by Samuel Corum / Getty
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Image by Samuel Corum / Getty
Federal Reserve Board Chairman Jerome Powell speaks during a news conference.
Image by Samuel Corum / Getty
You know things are going badly in the economy when the phrase “Federal Reserve” enters everyday conversation.
Typically, the “Fed” is a rather noisy and sleepy corner of America, known for its shockingly dull press conferences. When the economy is smooth sailing, there isn’t much news from the central bank that interests people other than economists or journalists.
But a few weeks ago, I sat next to a woman on an airplane. She described herself as someone who knew “0” about the economy and then proceeded to ask me if I thought the Federal Reserve would continue to raise interest rates to help fight inflation.
I was immediately apprehensive: When the Fed becomes a topic of general conversation, it means big changes are happening. The Federal Reserve is an incredibly powerful institution that is part of our economy – the tectonic plates. And, personally, I like my tectonic plate to be boring, predictable, and regularly hold boring, shocking press conferences on a schedule.
But the truth is that at this point, we should all care about the Federal Reserve. Because major changes are taking place in our economy and the fate of our country may depend on what actions the Fed is taking now and in the coming months.
The two parts of the Fed’s dual mandate are starting to play against each other
At its core, the Federal Reserve has two main jobs: keeping inflation low and ensuring the maximum number of people working in America. This is called the Fed’s “dual mandate”.
The Fed is tasked with deploying its formidable powers to monitor and protect both sectors as they are seen as the most important factors for a healthy economy.
“Economic security depends on both employment and stable prices. Together these two pillars form the basis of everything else,” said Mary Daly, head of the Federal Reserve Bank of San Francisco. in a recent speech at Boise State University.
However, the Fed is now being challenged in a way it hasn’t been in more than 40 years. And when it tries to do one part of its job, it is hurting the other. In a way, the two parts of its dual mission are starting to duel each other.
High inflation “undermines the fundamental American promise that if you work hard, you can get ahead”
Inflation is on everyone’s mind right now. Prices are rising in the US at a rate not seen in more than 40 years. Inflation increased 8.3% and many things are costing much more than last year: Gasoline prices rose 25.6%, food prices rose 11.4%, rents rose 6.7% and health insurance prices increased 24.3%, the biggest gains ever.
Daly points out that this level of inflation affects everyone. But it’s been especially hard on the country’s most vulnerable economy. “Tolls … hit people with low and middle income hardest,” she said. “Erosion of real wages is not merely painful. It also erodes the fundamental promise of Americans, which says that if you work hard, you can get ahead. or input.”
Cinnamon roll moment
For many people, it comes as a surprise – often while shopping for a favorite item – that makes them realize that they are paying more for the things they normally do. Jeff Smith, 54, who works in marketing in California, remembers the first moment when inflation really hit him.
“It’s really silly, because it’s not a big deal,” he laughs. “I bought these prepackaged cinnamon rolls…everything.”
Smith and his wife have four children, and Smith said they often like to have breakfast together on Sundays and sometimes he buys cinnamon rolls to treat. “It’s something I’ve been buying periodically for years and it’s eight dollars for a pack of six cinnamon rolls.” He immediately felt it was twice what he normally paid. “It feels dramatic,” he said.
After that cinnamon roll moment, Smith dug deeper into the family budget and found their overall spending had increased by nearly 40%. He and his wife were shocked. “We said, ‘So sad! That’s Street too much. How are we supposed to do that? Where did we go? ‘”
As it turns out, the Smith family didn’t do anything different or come up with anything unusual, the price of their normal buying and selling activities just went up and it went up quickly in one family. six people. So Smith and his family started making a series of cuts: no more eating out, no summer trips to Utah to see relatives.
“My kids complain, ‘We, don’t do anything this summer!'” he said. “They were right and it’s largely because gas used to cost us, you know, maybe $150 to travel somewhere now costs $3 or $400.”
Fighting inflation could lead to job cuts
This is where the Fed comes in. Rising prices prompted the Federal Reserve to take action earlier this year and begin raising interest rates.
When the Fed raises interest rates, it becomes more expensive for people and businesses to borrow money, so they buy less stuff, demand falls, and that (eventually) drives prices down.
This is where another problem comes in: When spending drops, companies don’t sell as much, and they don’t make a lot of money. They tend to react by slowing hiring or even firing people. The bottom line: Rising interest rates can be really tough on the job.
Economic shocks of the 1970s and 80s
The last time inflation was really high in the US was in the 1970s and 80s, when it topped 13%. The head of the central bank at the time, Paul Volcker, was determined to control prices. He pushed interest rates up– interest rates peaked around 20% (for a bit of perspective, interest rates are currently around 3%).
The result: a massive economic shock. The economy fell into a terrible recession, the unemployment rate skyrocketed to 11%, and people and politicians took all their fury out on President Volcker. But Volcker was entirely focused on controlling inflation. In the end, it worked and inflation came down. But it took many serious economic years and millions of people lost their jobs.
Just to be clear, that is NOT the situation the country is in right now. The most recent employment report shows a very strong job market with more job opportunities than unemployed workers and an unemployment rate of 3.5%. This has led many to speculate that the Fed will see this as a green light to keep pushing interest rates up to try and lower inflation.
The worry is that if that continues, the Fed’s two jobs could end up contradicting each other: if it tries to bring down inflation by raising interest rates too much, it could cause employers to not only stop hiring but also cut jobs. .
Job versus price is not an option that everyone wants. So what will Federal Reserve Chairman Jerome Powell choose?
In fact, it looks like he made the call… in ciphers. The Federal Reserve has a history of communicating in code (or basically, not communicating and letting people desperately try to interpret things like tie color choices and body language).
This summer, Powell drop a bomb“We are taking strong and swift steps to … keep inflation expectations in place. We will keep it there until we are confident the job is done. “That doesn’t sound exciting, to Fed watchers, this moment is a really spectacular shot and the code to choose against inflation just like Volcker, who fought inflation with what price is millions of jobs and recession. That’s because the title of Volcker’s book is “Keep it there“.
More recently in a September 21 press conferencePowell made it more clear that he is willing to endure some pain from the slower economy and “soft labor market,” because inflation is too bad for families and needs to be addressed.
“If your home is where you spend most of your paycheck, each pay cycle, gas, food, transportation, clothing, life basics, and prices go up. the way they’ve risen, you’re in trouble, aren’t you. Powell said, “We get a lot of comments from people that inflation is really damaging … it would be nice if there were some way. to wish it off but there isn’t.”
The hope is that the inflation report released this Thursday will show prices will fall and if unemployment remains low, the dual mandate will never be due. My airplane conversations could go back to complaining about legroom and we could all have cinnamon rolls and afford them.
