The Federal Reserve 4-1-1

Inflation hit a 31-year high last month, more than triple the Federal Reserve’s target rate, according to a Bureau of Labor Statistics report this month.

Supply chain and labor problems have sent prices sky high on everything from housing to hamburgers.

Not that it’s curbed American spending one iota.

While that may seem like something the average person can’t control, economists point out that’s not quite true. Public confidence and habits can help the Fed get prices more reasonable, they say.

Not that most of us even know what the Federal Reserve Bank is. Or care.

We should. It’s the Fed’s job to rein in or expand the economy, and that affects everyone. Such unprecedented times have them between a rock and a hard place, needing to boost employment (helped by low interest rates) while also needing to control inflation (helped by high interest rates).

A financial paradox.

The Federal Reserve System, a.k.a. "the Fed," is the nation’s central bank. Created by Congress in 1913 to respond to the financial panic of 1907, it was designed to give the nation a safer, more flexible and stable monetary and financial system. At the time, ours was the only major financial power in the world without one.

The Fed keeps money relatively stable by regulating and lending money to banks. It sets the interest rates banks pay when they borrow (and pass on to us, thus affecting the economy). That’s the rate typically in news headlines.

The Federal Reserve's responsibilities cover four general areas:

Setting national monetary policy, via credit conditions that trickle down, influencing the economy, employment and prices. That’s done by a committee which manages the nation’s money supply (lower rates mean more cash flowing; higher rates mean less cash flow). The committee meets at least eight times a year, comprised of the Fed’s governors plus five presidents of the 12 regional Federal Reserve Banks — located in major cities across the U.S. (in our region, San Francisco).

Supervising and regulating banks. They use regulations, rating systems, bank examiners, disclosures and penalties to make sure the banking system stays stable.

Maintaining financial stability and containing risk in financial markets, using their day-to-day supervision and monetary policy-setting.

Lending to the government. The Federal Reserve and Department of the Treasury work together to borrow money when the government needs cash. The Fed issues and auctions Treasury securities on the government’s behalf and helps operate and oversee the nation's payments systems.

Why do we need a Federal Reserve Bank? Before we had one, there were literally thousands of currencies in the U.S., and their values were all over the place. Banking wasn’t safe; account holders’ money may or may not have been there to withdraw. We needed money rules and stability.

Why pay attention? Simple: Done right, getting a job, a car or home loan, and most other financial aspects of everyday life are so much easier. If things aren’t going well with the Fed — the way it’s run, the way it deals with the country’s economic problems (and political pressures) — then all those things can get harder for us.

When we have less confidence, we tend to save and scrimp more and spend less, shrinking the economy for a while. In that way, Jane Q. Public joins the Federal Reserve Bank in the economic driver’s seat.

When inflation gets too high, like now, the Fed typically responds by raising interest rates to slow the economy and bring down inflation. This time it’s different.

For now, the Fed is keeping interest rates near zero to give the nation more time to get back to full employment, but plans to phase out some bond purchases (influential in things such as loans and mortgages) to slow things down and hopefully balance things out next year.

Whether or not this strategy achieves some kind of middle ground remains to be seen, depending in part by how the rest of us respond with our pocketbooks.

To learn more: Federalreserve.gov

Sholeh Patrick is a columnist for the Hagadone News Network. Email Sholeh@cdapress.com.