When your seatmate on the plane talks about the Fed, you know things aren't right
You know things are getting dicey in the economy when the phrase "Federal Reserve" enters daily conversation.
Typically, the "Fed" is a pretty wonky and sleepy corner of America, known for shockingly dull press conferences. When economic sailing is smooth, there's not much news coming out of the central bank that is of even remote interest to people other than economists or journalists.
But a few weeks ago, I sat next to a woman on an airplane. She described herself as knowing "zero" about the economy and then proceeded to ask me whether I thought the
I immediately felt an acute sense of dread: When the Fed becomes a topic of general conversation, it means big shifts are happening. The
But the truth is, at this moment, we should all be interested in the
The two parts of the Fed's dual mandate are starting to duel with each other
At its core, the
"Economic security depends on both jobs and stable prices. Together, these two pillars form the foundation for everything else,"
However, the Fed is currently being challenged in a way it hasn't been in over 40 years. And as it tries to do one part of its job it is hurting the other. In a way, the two parts of its dual mandate are starting to duel with each other.
High inflation "undermines the basic American promise which says that if you work hard, you can get ahead"
Inflation is on everybody's mind right now. Prices are rising in the
Daly points out that this level of inflation hits everyone. But it is especially hard on the country's most economically vulnerable. "The toll... lands hardest on those with low and moderate incomes," she said. "This corroding of real wages is more than just painful. It also undermines the basic American promise, which says that if you work hard, you can get ahead. Inflation traps people in an endless loop of running fast and falling behind, unrelated to effort or input."
The cinnamon roll moment
For many people, it hits them suddenly — often while shopping for a favorite item — that they realize they're paying a lot more for things than they usually do.
"It's really dumb, because it's not a huge item," he laughed. "I was buying these prepackaged cinnamon rolls...of all things."
Smith and his wife have four children and Smith says they often like to have a big Sunday breakfast together and he will sometimes buy cinnamon rolls as a treat. "It's something I have bought periodically for years and it was eight bucks for a package of six cinnamon rolls." He immediately felt it was about double what he had typically paid. "It felt dramatic," he said.
After that cinnamon roll moment, Smith did a deep dive into the family budget and realized their overall spending had gone up by almost 40%. He and his wife were shocked. "We were like, 'Good grief! That is way too much. How did we do that? Where did we go?'"
As it turned out, the Smith family hadn't done anything differently or gone anywhere unusual, the prices of their normal purchases and activities had just risen and it had added up fast in a family of six.
"My kids complained, 'We, didn't do anything this summer!'" he said. "They were right and it was largely because gas that used to cost us, you know, maybe
Fighting inflation could lead to job cuts
This is where the Fed comes in. Rising prices prompted the
When the Fed raises interest rates, it becomes more expensive for people and businesses to borrow money, so they buy less stuff, demand goes down and that (eventually) brings prices down.
Here's where another problem comes in: When spending drops, companies aren't selling as much stuff and they're not making as much money. They tend to react by slowing down hiring or even laying people off. Bottom line: Raising interest rates can be really hard on jobs.
The economic shock of the 1970s and 80s
The last time inflation got really high in the
The result: a big economic shock. The economy fell into a terrible recession, unemployment spiked to 11% and people and politicians unleashed all kinds of wrath onto Chair Volcker. But Volcker was totally focused on bringing inflation under control. Eventually, it worked, and inflation did come down. But it took years of serious economic pain and millions of people lost their jobs.
To be clear, that is NOT the situation the country is in right now. The most recent jobs report shows a very strong employment market with more job openings 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 get inflation down.
The worry is if that continues, the Fed's two jobs could end up being at odds: if it tries to bring inflation down by cranking up interest rates too much, it could lead employers to not just put the brakes on hiring, but also cut jobs.
Jobs versus prices is not a choice anybody wants to make. So what will Federal Reserve Chair
Actually, he seems to have already made the call... in code. The
This summer, Powell dropped a bombshell, saying: "We are taking forceful and rapid steps to...keep inflation expectations anchored. We will keep at it until we are confident the job is done." As unexciting as that might seem, for Fed-watchers, this moment was a veritable fireworks spectacular, and code for choosing to fight inflation just like Volcker who battled inflation at the cost of millions of jobs and a recession. That's because the title of Volcker's book was "Keeping at It".
More recently in a press conference on
"If your family is one where you spend most of your paycheck, every paycheck cycle, on gas, food, transportation, clothing, basics of life, and prices go up the way they've been going up, you're in trouble right away," Powell said. "We're hearing from people is very much that inflation is really hurting...it would be nice if there were a way to just wish it away but there isn't."
Hopefully the inflation report that's coming this Thursday will show prices coming down and if unemployment stays low, the dual mandate will never have to duel. My airplane conversations can go back to complaining about legroom and we can all have our cinnamon rolls and afford them, too.
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