The Dual Mandate

The Federal Reserve, the US Central Bank, is as “federal” as Federal Express (FedEx).

They are a privately held bank, owned by many of the country’s largest banks.

This seems like a conflict of interest, but that is a rabbit hole we can go down another time.

Congress granted The Fed their monetary powers and a dual mandate to maintain price stability and maximum employment.

Currently inflation is at a 41-year high, clearly a massive failure of price stability.

Some argue we are currently at full employment, but whether The Fed deserves any credit is questionable.

However, what is not considered in the employment rate are people who have given up entirely trying to find work.

The labor force participation rate is the percentage of people, 16 years or older, that are working or ACTIVELY LOOKING FOR WORK.

This number has declined consistently for TWO DECADES and is at the lowest level since the 1970’s.

By removing this large amount of people from the “work force” mathematically it reduces the unemployment rate by making the denominator (number of people in the work force) smaller.

This brings into question the true unemployment number and whether the Fed has also failed the maximum employment mandate.

The Fed is currently focused on extinguishing red-hot inflation given how it impacts the entire economy.

Unfortunately, this is likely to come at the expense of the labor market (employment).

Because wages have barely risen in 30 years, inflation causes the greatest pain for middle-class and lower income wage earners.

Yet, this is the exact group who will be punished the most by tighter monetary policy.

The blunt tools the Fed will use to cool inflation, the Fed Funds Rate and reducing the balance sheet, will cause economic growth to slow.

However, the US economy has already contracted the last two consecutive quarters, which is what defines a recession.

As a result, the Fed is hiking into a recession, while forward-looking indicators show the slowdown is worsening.

Despite these facts, The Fed has been quite vocal about its intent to reduce inflation by killing demand.

In the process, it is likely they also kill employment and crash the economy.

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