The stock market has been off to a rough start in 2022, with some Wall Street analysts forecasting that important stock indexes like the S&P 500 will fall by as much as 20% from their highs before markets turn around. Several trends are to blame for the recent turbulence on Wall Street, including growing tensions between Russia and Ukraine and the omicron surge. But perhaps the greatest reason increasing numbers of investors are bolting for the exits is the Federal Reserve, America’s central bank that people generally know as the Fed.
The Fed was established by the Federal Reserve Act of 1913 in order to oversee the nation’s monetary policy and ensure the stability and security of our financial system. One of the core functions of the Fed is setting interest rates — or, more specifically, the federal funds rate, the overnight interest rate that banks lend to other banks — in order to strike a balance between economic growth and inflation. During economic downturns, the Fed has historically lowered interest rates in an effort to avert a recession or help the economy recover. In times of economic growth and prosperity, the Fed tends to dial up interest rates to stave off inflation and prevent the economy from overheating.
While the Fed lowered interest rates to combat the economic downturn triggered by COVID-19, it has appeared reluctant to raise rates even as economic growth — and inflation — have taken off like a rocket ship. Last year, the economy grew by nearly 6%, the strongest performance in almost four decades. While such robust growth is a sign of a healthy economy, it comes with a spike in inflation, which is squeezing people and businesses alike. The Consumer Price Index (CPI), a key metric used by the Fed to measure inflation, rose almost 6% in the past 12 months, the fastest jump since 1982.
Though Federal Reserve Chair Jerome Powell has signaled rate increases are on the way, the Fed has taken too long to adopt tougher policies to fight inflation, with interest rates still near zero to this day. Even with rate increases now in sight, the Fed’s timetable of action is less aggressive than necessary. The reason? Higher interest rates slow down economic growth by making it more costly for consumers and firms to borrow money. That in turn harms investors in the stock market, which — especially in an election year like 2022 — is politically undesirable. That is why the Fed faces immense pressure from high-powered investors and hedge funds to keep rates low. Though the folks on Wall Street may complain, it’s imperative the Fed turns its focus away from stock gains and toward the Americans on Main Street hurting every day from inflation.
A poll from last fall found nearly nine in 10 Americans were “highly concerned” about inflation. One place inflation’s grasp is nearly inescapable is the supermarket, where price increases have made it more expensive for Americans to put food on the kitchen table. According to the Bureau of Labor Statistics, food prices rose over 6% between December 2020 and December 2021. Consumers buying meat and poultry face some of the greatest increases. But inflation hasn’t spared vegans and vegetarians either, with prices of fruits and vegetables jumping faster than they have in 10 years. Outside of food, it’s now far more expensive for Americans to fill up their cars at the gas pump, with analysts warning prices are in the “danger zone.” More broadly, energy prices have skyrocketed 30% while used car costs are close behind. Rent prices have also increased, and while the root cause might not be inflation alone, many Americans are pulling far more from their wallets to put a roof over their heads. Though inflation has contributed to an encouraging rise in wages, rapid price increases across the board have cancelled out any gains for employees.
Inflation is bad for people from all walks of life, but it’s particularly harmful for lower-income Americans. “The coronavirus pandemic has led to a new era of inflation inequality, economists warn, in which poor households bear the brunt of rising prices,” Ylan Mui writes for CNBC. “That’s because a bigger portion of their budget goes toward categories that have spiked in cost.”
While Americans who are well off have the ability to devote their savings toward more costly goods and services, the poor and middle class, who often lack savings, are stretched more thinly than ever. At the same time, the booming pandemic stock market has disproportionately benefited the wealthy. While the top 10% of Americans own almost 90% of U.S. stocks, the bottom 50% have less than 1%. The poor have now been hit twice: first by missing out on the steep stock gains of the past two years, and second under the weight of inflation.
The data is clear: Americans are worried about inflation, and, in spite of the boom in GDP, they are struggling. The least well off in the country are challenged even more by the staggering trend of inflation. Federal Reserve Chair Powell must take a more aggressive stance against inflation and accelerate the timetable for action. While markets will inevitably fall temporarily — as they already have — the American people should be the first priority. It’s critical the Fed puts Wall Street investors and politics on the back burner and does the right thing for the economy and country.
Evan Stern is an Opinion Columnist and can be reached at erstern@umich.edu