The Fed has a dual mandate. Here’s why they’re dueling now: NPR

You know things are getting tough in the economy when the phrase “Federal Reserve” enters everyday conversation.

By and large, the “Fed” is a rather shaky and sleepy corner of America, known for its surprisingly boring press conferences. When economic sailing is smooth, there isn’t much news coming out of the central bank that is of remote interest to people other than economists or journalists.

But a few weeks ago, I sat next to a woman on a plane. She described herself as knowing “zero” about the economy and then proceeded to ask me if she thought the Federal Reserve would continue to raise interest rates to help fight inflation.

I immediately felt an acute sense of dread: when the Fed becomes a topic of general conversation, it means that big changes are taking place. The Federal Reserve is an immensely powerful organization that is part of the foundation of our economy: its tectonic plates. And, personally, I like my tectonic plates boring, predictable and giving regularly scheduled press conferences surprisingly boring.

But the truth is, right now, we should all be interested in the Federal Reserve. Because big changes are taking place in our economy and the fate of our country may depend on the actions the Fed is taking now and in the coming months.

The two sides of the Fed’s dual mandate begin to duel

In essence, the Federal Reserve has two main functions: to keep inflation low and to make sure that the maximum number of people are employed in the United States. This is known as the “double mandate” of the Fed.

The Federal Reserve is mandated to deploy its formidable powers to monitor and protect both areas, as they are considered the most important building blocks for a strong economy.

“Economic security depends on both jobs and stable prices. Together, these two pillars form the foundation for everything else,” said Mary Daly, director of the Federal Reserve Bank of San Francisco. in a recent speech at Boise State University.

Yet the Fed is currently being challenged in a way it hasn’t been in more than 40 years. And while you’re trying to do one part of his job, you’re hurting the other. In a way, the two sides of her dual mandate are beginning to duel.

High inflation “undermines the basic 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 has risen 8.3% and many things cost much more than that compared to last year: Gas prices were up 25.6%, food prices were up 11.4%, rents were up 6.7%, and health insurance prices were up 24.3%, the biggest increase of history

Daly points out that this level of inflation hits everyone. But it is especially difficult for the most economically vulnerable in the country. “The toll … falls more on those with low and moderate incomes,” he said. “This erosion of real wages is more than painful. It also undermines the basic American promise that if you work hard, you can get ahead. Inflation traps people in an endless loop of running fast and falling behind, with no relation with effort. or input”.

Cinnamon roll moment

For many people, suddenly, often while shopping for a favorite item, they realize that they are paying much more for things than they normally do. Jeff Smith, 54, who works in marketing in California, recalled the first time inflation really hit him.

“It’s really silly, because it’s not a huge item,” he laughed. “I was buying these packaged cinnamon rolls…of all things.”

Smith and his wife have four children, and Smith says they often like to have breakfast together on Sundays and he sometimes buys cinnamon rolls as gifts. “It’s something I’ve bought on a regular basis for years and it was $8 for a six-pack of cinnamon rolls.” He immediately felt that it was about double what he had normally paid. “It felt dramatic,” he said.

After that cinnamon roll moment, Smith took a deep dive into the family budget and realized that his overhead had increased nearly 40%. He and his wife were shocked. “We said, ‘My God! That’s road too. How did we do that? Where we went?'”

It turned out that the Smith family hadn’t done anything different or gone anywhere unusual, the prices of their normal shopping and activities had simply gone up and they had quickly added up to a family of six. So Smith and his family started cutting back a lot: no more eating out, no summer trips to Utah to see relatives.

“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 $150 to ride somewhere now costs three or $400.”

Fighting inflation could lead to job cuts

This is where the Federal Reserve comes into play. Rising prices prompted the Federal Reserve to spring into action earlier this year and start raising interest rates.

When the Federal Reserve raises interest rates, it becomes more expensive for people and businesses to borrow money, so they buy fewer things, demand goes down, and that (eventually) drives prices down.

This is where another problem arises: when spending falls, companies don’t sell as much and don’t make as much money. They often react by slowing down hiring or even laying off staff. Bottom Line: Raising interest rates can be really hard on jobs.

The economic shock of the 1970s and 1980s

The last time inflation really rose in the US was in the 1970s and 1980s. when it exceeded 13%. The head of the central bank at the time, Paul Volcker, was determined to rein in prices. pushed interest rates high–rates peaked at around 20% (to give some perspective, the current interest rate is around 3%).

The result: a huge economic shock. The economy fell into a terrible recession, unemployment shot up to 11%, and people and politicians unleashed all kinds of anger on President Volcker. But Volcker was totally focused on controlling inflation. Eventually, it worked, and inflation went down. But it took years of serious economic problems and millions of people lost their jobs.

To be clear, that is NOT the situation the country is in right now. the most recent job report shows a very strong labor 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 continue raising interest rates to try to reduce inflation.

The worry is that if that continues, the Fed’s two jobs could end up at odds: If it tries to reduce inflation by raising interest rates too much, it could lead employers not only to curb hiring, but also to cut jobs. worked. .

Jobs versus prices is not a choice anyone wants to make. So what will Federal Reserve Chairman Jerome Powell choose?

Actually, it looks like you already made the call… in code. The Fed has a history of communicating in code (or basically not communicating and letting everyone desperately try to interpret things like tie color choice and body language).

This summer Powell dropped a bombsaying, “We’re taking strong and swift action to… keep inflation expectations anchored. We’re going to follow him until we’re sure the job is done.” As unexciting as it sounds, for Fed watchers, this moment was a veritable fireworks show and code for choosing to fight inflation just like Volcker, who fought against 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 september 21Powell made it even clearer that he was willing to take some pain from a slower economy and a “softening labor market,” because inflation was too bad for families and needed to be addressed.

“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 been going up, he’s in trouble, right? away,” Powell said. “We hear from people that inflation is really suffering…it would be nice if there was a way to wish it away, but there isn’t.”

Hopefully, the inflation report due out this Thursday will show that prices are falling and if unemployment stays low, the dual mandate will never have to duel. My conversations on the plane can go back to complaining about legroom and we can all have our cinnamon rolls and pay for them too.