- The mandate of the Federal Reserve is to maximize employment and create stable values.
- The Fed does not believe the labor market is causing this inflation; It is waiting for it to pass.
- Deflation can be a major problem for central banks in the long run.
In 2022, the Federal Reserve is caught in a game of chicken with the US economy. Inflation in sectors such as energy and auto is approaching double digits, increasing costs on consumers.
The central bank previously said inflation figures reported at the end of 2021 are “transient”, although it is now removing that term from the messaging. Earlier in the year, the global supply chain was brought to its knees as trade routes were blocked by traffic. Meanwhile, early retirement ensued and young workers began to leave their jobs at the fastest pace on record.
Lawrence Mitchell, a Distinguished Fellow at the Economic Policy Institute, says, “There are many reasons to think that inflation is temporary. That doesn’t mean it’s going to be two months, it might be a year, but it’s not going to go away.” Ho, you know, 4 or 5% per year for the next five years.”
Fed leaders have a long-term target of around 2% inflation. He believes that this rate can create a healthy and stable economy. But the union’s shrinking membership and expanding global trade have made it difficult to achieve. As a result, the central bank is taking a stance that would invite slightly higher levels of inflation over the long term.
Critics say the Federal Reserve’s approach to policy is flawed because the underlying models are broken.
“I think it’s pretty clear that the Fed cannot control inflation either downward or upward, given current experience,” says Danielle DeMartino Booth of Quill Intelligence.
The central bank can influence certain sources of inflation, such as the wage or housing market. But if they are coming from areas beyond the Fed’s reach, its policies will not necessarily be effective.
Watch the video above to see what, if anything, the Fed can do to slow inflation.