Quick, name a government institution whose behind-closed-doors deliberations have a huge impact on society. The Supreme Court? Well, yes, but I was thinking about the Federal Reserve Bank – the much-discussed and often misunderstood “Fed.”
Despite the Fed’s massive role in our economy, some Americans still have limited understanding of the organization and what it actually does. Sure, there’s the dual mandate of the Fed – to monitor interest rates and inflation. But, I wanted to go deeper.
To help rectify that situation, I recently invited Atlanta Federal Reserve Bank CEO and President Raphael Bostic to join me on my podcast.
In his role, Bostic represents the Sixth District of the 12 Federal Reserve Banks of the United States. The Atlanta Fed covers Alabama, Florida, and Georgia, the eastern two-thirds of Tennessee, the southern portion of Louisiana, and southern Mississippi. So, the reach of the Sixth District is extensive, and Bostic heads it all up.
When I met with Bostic for our interview, a multi-layered process emerged as the purpose of the Fed. He offered some great insight and helped demystify the Fed’s role in our everyday lives.
The Federal Reserve has three essential jobs. Its first two missions are to promote price stability and maximum employment. The third responsibility – which is not a part of its mandate, but that it took on after the financial crisis – is to maintain the stability in the US banking system. The Fed achieves this by “stress testing the banks to make sure our system is on a stable footing.”
Let’s start at the top.
What does price stability mean, and why is it so important? Bostic explained that keeping prices in the US stable and close to the Feds 2% inflation target helps consumers and business owners make informed and confident financial decisions.
Unpredictability and uncertainty are anathemas to an economy. If we had inflation of +10% in one year, then -10% the next year, people would be understandably hesitant to engage with the future. We are far more likely to spend more, invest in new projects, buy real estate, start businesses, and otherwise grow the economy when we have confidence that prices will rise at a slow, steady pace. Herein lies the importance of maintaining inflation as steadily as possible near 2%.
Stability is also an objective when it comes to employment, according to Bostic. The Fed, he says, is really looking to achieve maximum sustainable employment. We don’t want to see a 2% unemployment rate only to have massive layoffs during the next economic downturn. This type of unpredictability and instability could very well drive unemployment up to 10%. Until recently, full employment was defined as unemployment of about 5.5% range.
That number has dropped to the sub-4% range, thanks mainly to technology-driven efficiencies in the labor market. Workers and employers can now find each other through technology. Thanks to job websites, resume screening software, and on-site digital recruitment kiosks, workers can apply for a new job over lunch.
Just as better tech has brought down the natural rate of unemployment, our ever-evolving tech has had a clear downward influence on inflation. We all know that TVs, computers and smartphones (for the most part) have continued to become less and less expensive. But, the value in what these tech devices deliver has grown substantially.
And we are better, faster, and stronger because of it. It’s a virtuous cycle. This growth has improved: shipping across countries, the availability and cost of books (care of Amazon), the cost of consuming content via streaming services (as opposed to a cable bill), the manufacturing of clothes and furniture, and the tech of today’s cars. So, this innovative sector has had an enormous influence on the majority of goods in America.
I was fascinated by Bostic observations on the economy here in the Southeast. He describes the nature of his region as “a near-perfect replica of the US economy as a whole.” Unlike the financial-service heavy Northeast or energy-driven Texas, Atlanta and the Southeast are not overweighted in one industry sector. This diversity gives Bostic useful insight when it comes time to share his thoughts on the economy with Federal Reserve Board Chairman Jerome Powell.
Here are some of Bostic’s thoughts on other key issues:
The impact of the US-China trade war:
- Consumers will start to feel the effect of tariff-driven price hikes in the next few months.
- Businesses in the Southeast have not, in large part, been hit by the tariffs. But the on-again, off-again trade talks are creating uncertainty and leading to less business investment. Resolution of the trade war could prompt businesses to invest and increase their spending above current levels.
Tweets from President Trump directed at the Federal Reserve:
- Fed board members are accustomed to being “told what to do” by talking heads on financial news channels and other opinion mongers. So, they don’t find it difficult to ignore Presidential tweets. They simply put their heads down and focus on the job of assessing business conditions in America and making decisions on monetary policy, i.e., raising or lowering interest rates.
The direction and trajectory for wages in the Southeast:
- Employers in the Southeast are beginning to be forced to raise their pay rates to keep employees. This point is in contrast with the slow wage increases we previously have seen since the great recession. Says Bostic: “In the last 6-12 months I’m starting to hear different things from employers. They are starting to show a continuing increase or willingness to start the auction on wages.”
The inverted yield curve:
- This economic variable isn’t necessarily a sign that the US economy will go into recession. It may say more about lower interest rates around the world pushing down US rates.
The sustainability of low unemployment:
- The new natural or sustainable unemployment rate has moved lower due to technological advances in the labor market.
The impact of innovation on inflation:
- Technology has clearly had a downward influence on inflation. Technological advancements have pushed down the costs of just about everything in the US. TVs, computers, and other electronics, for example, have continued to become significantly less expensive despite delivering more features.
- Unfortunately, this trend has not extended to health care, where it seems advancements in medical technology seem to be driving prices up, not down.
On the affordable housing problem:
- This is a thorny issue. Across both rural and metro areas in Bostic’s district, there are issues with affordable housing.
- Bostic gave two definitions and a few reasons why we are experiencing a lack of affordable housing. He was also quick to note that the problem isn’t limited to the Southeast – many other areas in the US are facing the same challenges.
- The government definition of “affordable housing” is the situation in which Americans spend no more than 30 to 40% of their income on housing. Another way of framing the issue is that affordable housing is based on income. Bostic explains with an example: “Your living – if you were paying 15% and now you’re paying 22% – you will have noticed the change. And, if you leave and will have to pay 28%, then you’re really going to notice.
- Generally speaking, housing is less affordable today for both owners and renters. In many cases, people’s wages aren’t sufficient to afford the housing that’s out there. Say you make 20,000. Take 30% of that income each year, and the $7,000 you have may not be enough for access to affordable housing
- A positive note to this troublesome problem is that Atlanta Mayor Keisha Bottoms recently issued a housing plan. Called the City of Atlanta Housing Affordability Action Plan, her proposal is intended to provide a roadmap to increase the supply of housing in Atlanta for the full spectrum of residents. Historically, Atlanta hasn’t had a mayoral housing plan, so It’s noteworthy that Mayor Bottoms created one. In it, she has offered solutions byway of $1 billion in public and private funds. Personally, I like the idea of mixing public and private funds when it comes to addressing systemic issues within our communities, small and large.
You can listen to the full-length version of my interview with Rafael Bostic here. I hope you’ll find our conversation informative and in-depth, with a straightforward approach to our economy’s strengths and challenges. I certainly did.