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 Federal Reserve would continue raising 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 big shifts are happening. The Federal Reserve is an immensely powerful organization that is part of our economy’s foundation–it’s tectonic plates. And, personally, I like my tectonic plates boring, predictable and giving regularly scheduled, shockingly dull press conferences.
But the truth is, at this moment, we should all be interested in the Federal Reserve. Because big shifts are happening in our economy and the fate of our country may rest on the actions the Fed is taking currently and in the coming months.
The two parts of the Fed’s dual mandate are starting to duel with each other
At its core, the Federal Reserve has two main jobs: keeping inflation low and making sure maximum number of people are employed in America. This is known as the Fed’s “dual mandate.”
The Fed is mandated to deploy its formidable powers to watch and protect both areas as they are considered the most important elements to a strong economy.
“Economic security depends on both jobs and stable prices. Together, these two pillars form the foundation for everything else,” Mary Daly, head of the San Francisco Federal Reserve Bank, said in a recent speech at Boise State University.
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 U.S. at a pace not seen in over 40 years. Inflation is up 8.3% and many things are costing way more than that compared to last year: Gasoline prices are up 25.6%, food prices are up 11.4%, rent is up 6.7%, and health insurance prices are up 24.3%, the largest ever increase.
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. Jeff Smith, 54, who works in marketing in California, recalled the first moment when inflation really hit him.
“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…
Read More: When your seatmate on the plane talks about the Fed, you know things aren’t