You’ve likely seen the headlines about the Federal Reserve, but why do its decisions matter to everyday consumers?
According to Georgia Gwinnett College (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%.
“The unemployment rate measures the percentage of the workforce – people who are working or actively seeking work – who can’t find a job,” he said. “The Fed also considers other indicators, most notably ‘discouraged workers,’ or people who have stopped looking for work altogether.”
When it comes to inflation, the Fed mainly focuses on a specific measure known as the core personal consumption expenditures (PCE) index.
“This measure excludes volatile prices like food and energy,” said Delaney. “The Fed is looking for a stable, long-run inflation rate rather than short-term price swings.”
For consumers, the most noticeable impact of Federal Reserve decisions often comes through changes in interest rates and affordability.
“The challenge with using monetary policy to improve affordability is that it mostly shifts what is expensive,” Delaney said. “Higher interest rates raise the cost of borrowing – 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.”
Ultimately, Delaney said, true affordability depends on a different economic force.
“Both historical data and economic theory show that productivity gains driven by investment are what improve affordability over time,” he said. “The Federal Reserve’s ability to directly increase productivity through monetary policy is very limited.”
Instead, broader economic growth plays a central role.
“If we want to improve real affordability, the tools aren’t primarily monetary,” Delaney said. “We need private-sector innovation and public investment in areas like infrastructure, research and transit – the kinds of improvements that raise productivity and expand what the economy can produce.”
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 ’20s saw economic growth surge by 42% due to electrification and mass production. The “Long Boom” 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’s 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.