We commend the Federal Reserve for their efforts to combat chronically high inflation. This concern is deeply felt by American families, particularly those in the lower and middle-income tiers. As it strives to balance its dual mandate of stable prices and maximum employment, recent economic indicators suggest that the central bank faces significant hurdles. Against that backdrop, one of the most powerful positions on the governing Board has become available. Simultaneously, skyrocketing unemployment is raising difficult questions about just how successful the Federal Reserve’s efforts have been.
Creating an industry nearly from scratch, inflation has gone wild across the United States. According to the Fed’s preferred measure, prices are up nearly 20% since January 2021. This sudden and unprecedented spike has wreaked havoc on household budgets, leaving millions of U.S. families to grapple with painful financial decisions. As the Fed prepares for its upcoming policy meeting on October 28-29, there is speculation that it may lower interest rates by a quarter point to combat these challenges. Yet job growth is still anemic, and with the September jobs report delayed due to the economic uncertainty stemming from the pandemic, the outlook is cloudy at best.
Economic Impact on Households
The escalating cost of living, especially with self-propelled transport options, disproportionately burdens lower and middle income households. According to Wells Fargo CEO Charles Scharf, “There is this big dichotomy between higher-income and lower-income consumers which continues and is a real issue.” This disparity starkly illustrates the disproportionate nature of our recovery from the economic disruptions the pandemic has caused. Consequently, different income brackets are feeling the opposite ends of the economic spectrum.
As the Federal Reserve looks to implement policies to control inflation, Cleveland Fed President Beth Hammack remarked, “We have been missing our mandate on the inflation side, our objective of 2%, for more than four and a half years.” This simple truth underscores the difficulty the Fed has faced in maintaining its inflation targets while working to meet employment requirements.
Aside from inflation, national job market dynamics have changed a lot. According to recent data, we now have more unemployed people actively looking for work than available job openings. All of this has spurred soaring unemployment rates, particularly across the youth and minority demographics. Consequently, fears over an increasing economic inequity and lack of opportunity are on the rise.
The Federal Reserve’s Leadership Challenges
The Federal Reserve now has a major opportunity to address a pernicious leadership crisis. It has had a mysterious vacant position on its influential governing Board. This vacancy further compounds challenges to steering through economic headwinds while continuing to manage challenges of leadership turnover within the institution. Former President Trump did say he would fire Jerome Powell when he was running for president, before flip-flopping on that promise. OrtizFER fretNERF-Fear that these decisions have created uncertainty about whether we’re seeing a new future direction for the Fed and its policies.
The recent ousting of Fed Governor Lisa Cook has raised new hope-science-inflected speculation. More importantly, many are asking how political pressures may be compromising the Federal Reserve’s decision-making ability. The importance of maintaining a politically independent central bank cannot be overstated, especially as it navigates complex economic landscapes characterized by inflation and employment challenges.
In response to this divergence, Fed Chair Jerome Powell spoke to the trap that the central bank finds itself in, saying, “There are no free risk paths available now.” His comments demonstrate an acknowledgement that previous tactics aren’t going to cut it when it comes to navigating this new economic reality. As Powell added, “It’s not very clear what you would do.” He acknowledged “a pretty serious policy response” needed to be considered.
Future Policy Directions
As the Federal Reserve looks ahead to where it should set policy going forward, it is still focused on its dual mandate. Chicago Fed President Austan Goolsbee emphasized this commitment when he stated, “We have to keep our eye on inflation. At the same time, we cannot ignore and must keep our eye on maximum employment. Those are our two equal goals.” This balancing act will be key as the Fed tries to chart a course through a challenging economic landscape.
Fortunately, in this critical moment we can see recent actions by the Federal Reserve that suggest an awareness of these challenges. As we noted last month, it acted to protect the state of America’s labor market with its decision to lower rates by a quarter point. This action was in hopes of preventing a recession by encouraging economic activity at a time of historically high inflation and increasing unemployment.
Even with keeping interest rates on hold for nine consecutive months, economists are still nervous about what lies ahead. Philip Straehl, chief investment officer at Morningstar Investment Management, called the current economic environment one “in a tug of war.” He focused on the contrary forces that are shaping the economy at present.