You鈥檝e likely seen the headlines about the Federal Reserve, but why do its decisions matter to everyday consumers?
According to 91原创 (GGC) professor of economics Dr. Jason Delaney, the Federal Reserve has a dual mandate: keep unemployment as low as possible while maintaining inflation at a target rate of 2%.
鈥淭he unemployment rate measures the percentage of the workforce 鈥 people who are working or actively seeking work 鈥 who can鈥檛 find a job,鈥 he said. 鈥淭he Fed also considers other indicators, most notably 鈥榙iscouraged workers,鈥 or people who have stopped looking for work altogether.鈥
When it comes to inflation, the Fed mainly focuses on a specific measure known as the core personal consumption expenditures (PCE) index.
鈥淭his measure excludes volatile prices like food and energy,鈥 said Delaney. 鈥淭he Fed is looking for a stable, long-run inflation rate rather than short-term price swings.鈥
For consumers, the most noticeable impact of Federal Reserve decisions often comes through changes in interest rates and affordability.
鈥淭he challenge with using monetary policy to improve affordability is that it mostly shifts what is expensive,鈥 Delaney said. 鈥淗igher interest rates raise the cost of borrowing 鈥 making homes, cars and credit card debt more expensive. Lower rates make borrowing cheaper, but they can also drive up prices for everyday expenses like rent, food and services as spending increases.鈥
Ultimately, Delaney said, true affordability depends on a different economic force.
鈥淏oth historical data and economic theory show that productivity gains driven by investment are what improve affordability over time,鈥 he said. 鈥淭he Federal Reserve鈥檚 ability to directly increase productivity through monetary policy is very limited.鈥
Instead, broader economic growth plays a central role.
鈥淚f we want to improve real affordability, the tools aren鈥檛 primarily monetary,鈥 Delaney said. 鈥淲e need private-sector innovation and public investment in areas like infrastructure, research and transit 鈥 the kinds of improvements that raise productivity and expand what the economy can produce.鈥
Historically, major periods of economic growth in the United States were fueled by those very forces. The Industrial Revolution (1865-1900) transformed the nation into an industrial powerhouse through coal production, steel manufacturing and railroad expansion. The Roaring 鈥20s saw economic growth surge by 42% due to electrification and mass production. The 鈥淟ong Boom鈥 from 1982-1997 followed advances in computing, deregulation and stable monetary policy, while the 1990s dot-com boom was driven by personal computers, the internet and a soaring stock market.
So what鈥檚 next?
That question, Delaney suggested, may depend less on interest rates and more on where the nation chooses to invest its innovation and resources next.