The Federal Reserve's Plan For Inflation Will Bring "Pain" to Americans

Here's What You Can Do to Prepare for Price Increases

Photo by Sharon McCutcheon

A public announcement regarding the most current interest rates will be made by the Federal Reserve (Feds) on the 21st of September. At this time, the potential increase in the surge might range anywhere from 0.5% to 0.75%, depending on a number of factors like the economy and employment. Simply based on the intentions of the Feds, which we will detail below, I trust it is possible that the rates will increase to 0.75%.

We are having this conversation about the Federal Reserve's plan to raise interest rates because it is an integral aspect of the strategy to combat core inflation. We rely on core inflation measures as they account for the removal of more volatile prices like food prices and energy prices. It's possible that the inflation rate has the most important effect on our day-to-day lives. The Federal Reserve intends to bring it under control by increasing interest rates and, to put it more clearly, temporarily halting the economy's expansion and economic activity.

In the following paragraphs, I will explain what that means, how we arrived at this point, and what you can do to ensure that you are able to withstand the "pain" that the federal government intends to bring about.

Background on Inflation in Advanced Economies

Inflation. That word has been used quite frequently within the past couple of months. We see it everywhere; we talk about it, and it's all over the news. But what does it all mean?

For starters, inflation is defined by Webster as "a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services." Think of the balance between supply and demand, which we'll address soon.

Figure 1: Supply and Demand Balanced

Inflation is also measured in a percentage and usually stays around 2%. However, due to recent events and policies (i.e., covid pandemic spending), which we'll discuss later, inflation is roughly 9%.

Figure 2: Increased Demand Leads to Increased Prices which Causes Inflation

With this unprecedented calamity facing us, the Federal Reserve plans on doing all things possible to bring inflation down. Recently, Federal Reserve Chair (think like CEO), Jerome Powell, informed America of his plans to tackle inflation and warned Americans that there would be "pain" to come to reduce the price spike.

From his speech¹, we read the following:

“Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” - Jerome Powell, Federal Reserve Chair, Aug 26th, 2022.

So, the three-step plan is higher interest rates, slower growth, and softer labor conditions. How does this affect us?

Figure 3: Demand Needs to be forcibly Decreased

For one, with higher interest rates, this means major purchases, such as a house or car, will cost more as the interest on those loans is increased; this increases borrowing costs. The economy - powered by businesses - should not be as prosperous with slower growth. Finally, softer labor conditions mean that we need to increase unemployment rates.

If that makes it seem as though things are only going to get worse, then you are quite right in thinking that. Powell was alluding to this kind of agony in his statement. However, to comprehend what actions are required of us to lessen the impending impact, we need to first comprehend how we arrived at this point.

Bad Budgeting Skills

There are many complex theories and suggestions about how we got here, but in the words of Business Improvement guru Eliyahu M. Goldratt², "...every situation, no matter how complex it initially looks, is exceedingly simple." With that being the case, we'll look for a simple explanation.

Clear Value Tax has a YouTube video that explains this perfectly, but to summarize:

• The United States Government has a spending problem. It spends more money ($6 trillion) than it brings in ($4 trillion).

• It borrows that additional money from the Federal Reserve, which prints out that money.

• The printing of that money ultimately increases the assets of the Federal Reserve.

Ultimately, the way we handled COVID and the multiple relief packages passed by Congress is how we got here. The New York Times states³:

…A chorus of economists point to government policies as a big part of the reason U.S. inflation is at a 40-year high. While they agree that prices are rising as a result of shutdowns and supply chain woes, they say that America’s decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends.

If federal policies are how we got into this mess, are we sure that federal policies will be the way out?

As a millennial, the last time I recall conversations about inflation and recession was back in 2008 when the housing market crashed. I was a child, but I remember how the banks were "too big to fail." Here, the increase in inflation is the monster that the Fed must defeat. No matter the cost.

Not even if that cost, as thebalance.com⁴ states, “risks dragging the economy down so much that a recession and mass layoffs ensue.” This strategy looks to affect the middle class the most.

Speaking of 2008 and even further, it appears that America’s middle class has begun to wither. According to pewresearch.org⁵, the middle class has decreased within the past 25 years:

In next week's article, I discuss if this shrinking away of the middle class is typical or if we're seeing the deliberate elimination of the middle class. (Be sure to subscribe so you don't miss it!) But for now, we're going to focus on the inflation battle at hand.

For one, we must realize that the Fed is serious about tackling inflation. As mentioned in his speech⁶, this will not be a minor occurrence. This plan of action is intended to last up until next year:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants’ most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023. - Jerome Powell, Federal Reserve Chair, Aug 26th, 2022.

The current interest rate by the Feds is at the target of 2.25 to 2.5 percent. Powell states that next year, we may need to go up to roughly 4 percent. Here's what you need to do to make sure you're prepared.

Preparing for the War against Inflation

Here at Unorthodoxy, we're not here to only report on prominent events. We're here to provide steps and solutions. With the current topic of inflation at hand, I'd first recommend you familiarize yourself with the players here, specifically the Federal Reserve.

For example, did you know that the Federal Reserve - the U.S.'s central bank - isn't part of the United States Government?

From the balance.com, we read⁷ that “though they may be established by a governing body, central banks are independent authorities.” From Federalreserve.org, we read that:⁸

In addition, though the Congress sets the goals for monetary policy, decisions of the Board—and the Fed's monetary policy-setting body, the Federal Open Market Committee—about how to reach those goals do not require approval by the President or anyone else in the executive or legislative branches of government.

James Corbett has an excellent documentary explaining the Federal Reserve and its origins that can bring anyone up to speed.

Second, with interest rates going up for the next year, it's best to eliminate any credit card debt. As USA Today⁹ points out:

Credit card interest rates are notoriously among the highest ones you'll pay with annual percentage rates already near record highs, but they're going even higher. That means your debt is going to keep getting more expensive this year unless you act now.

Third, if you haven't had the time to set up a budget, now's the time. Ramit's book, I Will Teach You To Be Rich, has an excellent way to perceive your budget. Not as something restrictive but more as a "conscious spending" plan.

Lastly, we can take the words of Feds Chair Jerome Powell for our last bit of advice. Here he speaks regarding where our attention goes and how mighty our attention could be:

If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation. During the 1970s, as inflation climbed, the anticipation of high inflation became entrenched in the economic decisionmaking of households and businesses. The more inflation rose, the more people came to expect it to remain high, and they built that belief into wage and pricing decisions. - Jerome Powell, Federal Reserve Chair, Aug 26th, 2022.

This quote speaks to the power of attention. As Powell states, if we expect inflation to stay high, it becomes a self-fulfilling prophecy. In my book, A Unorthodox Truth, I dedicate an entire chapter to the power of attention and intention. I will drop book excerpts in the upcoming weeks, so be sure to subscribe.

Last but not least, with "quiet quitting" floating around, this may not be the time to do so. Actually, this may be the time to go above and beyond. With company growth being stifled and the Feds looking for increased unemployment, the bare minimum at work may write your ticket to unemployment.

If you're unhappy with your job, it may be time to apply some resources to get new skills that either get you a higher salary or supply your income. Autonomy is an excellent place to start.

What Happens Next with the Current Inflation Rate?

I trust that the Federal Reserve, a central bank that the United States borrows from, will raise its interest rates within the next two weeks. The raising of interest rates is one component of their plan to bring inflation under control. The Federal Reserve intends to continue raising interest rates through 2023.

Another component of the Federal Reserve's approach, which they will implement if it becomes necessary, is to take measures that will slow down the economy and raise unemployment rates. Around this time, inflation stands at 9% according to the consumer price index, and the Federal Reserve is prepared to fight a bloody battle if it becomes necessary.

The typical person has options available to them that will allow them to learn more about the Federal Reserve. A level of awareness is absolutely necessary in order to comprehend the financial policies that originate from the Reserve. Eliminating debt accrued on credit cards and developing a spending strategy are two further steps that can be taken.

One's awareness of their focus is the final step, which is essential. In spite of the fact that inflation is all around us, we shouldn't dwell on it to the point where it causes the prophecy to come true. The coming year should be devoted to one's personal development to flourish despite the challenging circumstances.

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1. Jerome Powell’s Speech at Jackson Hole Symposium | https://archive.ph/1UANS#selection-3715.0-3715.586

2. Eliyahu Goldratt | https://en.wikipedia.org/wiki/Eliyahu_M._Goldratt

3. New York Times | https://archive.ph/LKdVy#selection-595.0-595.365

4. Thebalance.com | https://www.thebalance.com/fed-fights-inflation-with-second-super-sized-rate-hike-6281143

5. Pewresearch.org | https://www.pewresearch.org/fact-tank/2022/04/20/how-the-american-middle-class-has-changed-in-the-past-five-decades/

6. Jerome Powell’s Speech at Jackson Hole Symposium | https://archive.ph/1UANS#selection-3715.0-3715.586

7. Central Banks | https://www.thebalance.com/what-is-a-central-bank-definition-function-and-role-3305827

8. Federal Reserve.com | https://www.federalreserve.gov/faqs/about_14986.htm

9. USA Today | https://archive.ph/KaD9t#selection-1023.0-1023.254