Tag: inflation

The Federal Reserve: Power, Purpose, and Peril in an Era of Political Pressure

.Reading time 10 minutes.

A collaboration between Lewis McLain & AI

In the architecture of American governance, few institutions occupy a loftier perch in public imagination and policy importance than the Federal Reserve. Often reduced in popular debate to a symbol of elite influence or an abstract “bank” lurking behind markets and interest rates, the Fed is simpler and yet more profound: it’s the central bank of the United States, charged with guiding the entire economy through monetary policy while being intentionally set apart from the pulsations of election-cycle politics. As the Fed’s chairmanship transitions under political pressure in early 2026, understanding what the Fed is, what it can do, and what happens when it is pressured beyond healthy boundaries isn’t just a matter for economists—it’s a matter for any citizen who cares about the stability of jobs, prices, and financial markets.

Origins and Structure: Designed for Stability, Not Political Convenience

The Federal Reserve System was established by Congress in 1913 to serve as a lender of last resort and a stabilizer of financial markets. Its modern day structure was solidified by the Banking Act of 1935, which placed monetary policy decision-making authority in a corporate-government hybrid structure designed for insulation from short-run political winds.

Three interlocking components define the Fed:

  • The Board of Governors in Washington, D.C.: seven members appointed by the President and confirmed by the Senate to staggered 14-year terms, intentionally overlapping multiple presidential and congressional cycles to prevent wholesale turnover with each election.
  • Twelve Regional Federal Reserve Banks: operating across major U.S. regions, these corporations bring local economic information and supervisory functions into the system.
  • The Federal Open Market Committee (FOMC): the body that actually sets monetary policy—the target range for short-term interest rates and guidance for the economy. It includes all seven governors, the president of the Federal Reserve Bank of New York, and four rotating presidents from the regional banks.

This intentionally multilayered architecture ensures that monetary policy isn’t dictated by a single individual, political branch, or immediate electoral pressures, but through a committee integrated with regional insights and national oversight.

The Dual Mandate: What the Fed actually tries to do

The Federal Reserve’s statutory charge—often called its dual mandate—comes from amendments to the Federal Reserve Act in 1977. It directs the Fed to conduct monetary policy so as to promote maximum employment and stable prices (alongside moderate long-term interest rates, which help foster economic planning).

  • Price stability means keeping inflation low and predictable so that money retains purchasing power over time and businesses can plan for the future. Public inflation expectations matter as much as current prices: if people and firms believe prices will rise sharply, behaviors shift in ways that can make inflation self-fulfilling.
  • Maximum sustainable employment means fostering conditions under which as many people as possible who want to work can work without triggering undue inflationary pressures.

Though these objectives are conceptually complementary, they can pull in different directions. In practice, monetary policy—a handful of interest-rate decisions and balance-sheet adjustments—tries to balance them based on evolving economic data.

Tools and Limits: What the Fed Can and Cannot Do

Contrary to casual belief, the Fed does not have unilateral control over all economic outcomes:

What the Fed can influence:

  • Short-term interest rates and financial conditions through the FOMC’s target rate, administered rates like interest on reserves, and open market operations.
  • Financial stability indirectly by shaping credit availability and price expectations.
  • Bank supervision and regulation through the Board of Governors.

What the Fed cannot control directly:

  • Supply-side shocks like sudden spikes in energy prices, global shipping constraints, or wars that affect commodity costs.
  • Structural employment factors such as demographic shifts or education mismatches.
  • Congressional fiscal policy or technological shifts that redefine economic potentials.

The Fed’s influence is effective within a medium-term horizon of 12–36 months but is inherently limited by factors outside monetary tools.

Independence and Political Pressure: The Current Crossroads

A less widely understood but crucial feature of the Fed is its operational independence—a concept that means monetary policy decisions are made without direct interference from Congress or the White House, even when politicians publicly disparage or pressure the institution.

This insulation is not absolute or detached: the President nominates the governors (and the chair from among them), and Congress conducts oversight. But once appointed, governors’ long, legally protected terms and multilayered voting rules limit rapid political reshaping of policy.

In early 2026, this independence was tested dramatically. President Donald Trump, frustrated with the Fed’s decision to hold interest rates steady and opposed to the level of rates relative to his preferred economic agenda, publicly increased pressure on Chair Jerome Powell to cut rates and signaled imminent replacement of the Fed’s leader. What’s more, the administration’s efforts included a Justice Department investigation into Powell and a high-court challenge to the removal of another governor—moves viewed by many observers as attempts to influence monetary policy through legal and political pressure.

Powell’s term as chair expires in May 2026, and the White House has signaled its intention to announce a successor; shortlisted candidates reportedly have varying philosophies on rate policy, including support for more aggressive rate cuts. At the same time, Powell could remain on the Board of Governors beyond his chairmanship, potentially serving as a swing vote if he chooses to stay, making the Board’s composition strategically significant.

What Happens When Politics Pushes the Fed Past Its Best Judgment?

Assuming the Fed’s leadership sincerely strives to deliver on the dual mandate, what dangers arise when political pressure forces decisions that deviate from evidence-based judgment?

1. Inflation Expectations Unanchor

If the public begins to believe the Fed no longer prioritizes price stability, inflation expectations can rise. Higher expected inflation feeds into wage demands and price setting, ultimately making inflation harder and costlier to control.

2. Boom–Bust Cycles Intensify

Policies that keep interest rates artificially low to please political goals can overheat parts of the economy—fostering debt bubbles and misallocations of capital. Eventually, sharper tightening may be required, triggering recessions that could have been avoided with steadier policy.

3. Financial Instability

Ultra-loose policy pressures investors into riskier pursuits of yield, elevating leverage and fragility in credit markets. When markets turn, the Fed may find itself scrambling to contain systemic stress.

4. Credibility Erodes

Perhaps the Fed’s most important asset is credibility—confidence that it will act to stabilize prices and employment over the medium term. Undermining that credibility for short-run political convenience can increase volatility across markets, raise term premiums on debt, and ultimately make policy less effective, not more.

5. Communication Becomes Noise

Central banks rely on clarity and consistency. If political influence muddies the message—“we’re cutting, but we’re independent”—markets become jittery, making even well-intended policy harder to implement.

Conclusion: Independence Isn’t Privilege—It’s Stability

The Federal Reserve is not an ivory tower. It is a public institution governed by statute, accountable to Congress and, through it, to the public. Its independence isn’t an escape hatch for technical elites—rather, it is a structural safeguard that allows monetary policy to function according to economic signals rather than political cycles.

At its best, the Fed uses its tools to smooth economic fluctuations, support employment, and keep prices predictable. At its worst—if forced into policy choices that serve the short-term preferences of those in power—it risks amplifying inflation, destabilizing markets, and forfeiting the very credibility that underpins economic confidence.

In a moment when political discs are sharpening around the Fed’s leadership and direction, it matters that the public grasps not just the myth of Federal Reserve independence, but the mechanics and risks of deviating from tested, evidence-based monetary stewardship. A central bank’s strength doesn’t come from being immune to politics—it comes from being structured so that market actors and policymakers alike trust its compass even when its course is hard.

Affordability, Not Ideology: What the 2025 New York City Election Might Be Really Saying

.Reading time 13 minutes.

A collaboration between Lewis McLain & AI

I find it easy, given my own anti-socialist and anti-communist persuasion, to dismiss the recent New York City election as another swing toward unsustainable government expansion. Yet, setting that aside for a moment, can I look at the undercurrents and learn something? It is with that tone that I ask the reader to do the same.

1. Beneath the Headlines

The surface story was political: a progressive candidate, Zohran Mamdani, wins the mayor’s office on a platform of rent freezes and expanded public services. The deeper story, however, may have little to do with ideology and everything to do with survival.

By mid-2025, Manhattan’s median rent had climbed above $5,000. Outer-borough rents rose by double digits. Nearly one-third of New York households spent more than 30 % of their income on housing. Real wages, adjusted for inflation, stagnated. Even a two-income household found itself slipping behind.

So, when voters filled out their ballots, were they embracing socialism—or simply trying to breathe? Never underestimate the mind of one gasping for air.

2. The Language of Livability

Affordability has quietly replaced ideology as the true dividing line in American cities. Once, debates centered on party and policy; today, they revolve around whether an ordinary worker can stay in the place they serve. It’s not “left” or “right”—it’s whether the math still works.

When groceries, utilities, childcare, and transportation rise faster than wages, the question becomes practical, not philosophical: How long can I keep this up?

And while official inflation may appear calm at 2–3 %, that number hides what many households actually feel—what I call “personal inflation.” It’s the unmeasured rise in daily living costs that comes from housing, insurance, food, and utilities outpacing wages year after year. (See Appendix A.)

3. Misreading the Message

Some national voices called the election a socialist surge. Perhaps that’s a comforting narrative for those who like clean storylines. But what if it was instead a referendum on affordability itself—a protest against unlivable economics, not capitalism?

People who can no longer afford their city don’t vote for theory; they vote for relief. To interpret that desperation as a political movement risks missing the lesson entirely.

4. A Mirror for Other States

It is no secret that Texas has been one of the largest beneficiaries of the affordability exodus from both New York and California. Companies, families, and entire industries have moved to Texas in search of lower taxes, less regulation, and a livable cost structure. That success is worth celebrating—but it should also serve as a warning.

When infrastructure begins to wear out, when roads, power grids, and water systems reach their limits, and when taxes inevitably rise to repair them, the same logic that drew businesses here could just as easily justify their departure. If our cost of living rises unchecked, Texas could become tomorrow’s cautionary tale.

Economic migration obeys no loyalty. It follows cost, opportunity, and predictability.

5. The Numbers Behind the Feeling

Nationwide indicators tell the same story:

  • The United States faces a housing shortfall of roughly 4.5 million homes.
  • Nearly half of renters are now “cost-burdened,” spending over 30 % of income on housing.
  • Real wage growth since the pandemic lags inflation by about one percentage point per year.
  • In large metros, home-price-to-income ratios have hit historic highs, locking out first-time buyers.

These are not partisan statistics. They describe a system under strain. The vote in New York, then, may have been less about political faith than about financial fatigue—and compounded by the gap between official and personal inflation.

6. What a Professional Reader Might Conclude

A city—or a state—cannot sustain endless cost escalation without losing its workforce and its investors. The “affordability signal” from New York should not alarm us ideologically but alert us practically. It says: If you neglect cost control, people and capital will find somewhere else to go.

For policymakers, that means:

  • Treat affordability as infrastructure—as essential to maintain as highways or water lines.
  • Encourage balanced housing growth, removing unnecessary zoning friction while preserving standards.
  • Manage public debt and taxation with restraint, so long-term costs don’t erode the very advantage that drew new residents and firms.
  • Invest in maintenance before crisis, since deferred repairs always cost more later.

These aren’t partisan remedies; they’re managerial ones.

7. Asking Instead of Declaring

Still, the most productive posture may not be to prescribe but to ponder. What if the real issue beneath New York’s vote was not belief but endurance? What if the new political currency isn’t ideology but livability? Could affordability, quietly, be the next great civic value—the measure of whether a city still works for the people who build it?

If so, the warning is clear and shared: when living becomes unaffordable, no philosophy can hold a city together.

8. Closing Reflection

So, before we dismiss the New York outcome as a drift toward socialism, we might instead see it as a flare on the economic horizon. It reminds us that affordability—whether in New York, Los Angeles, Austin, or Dallas—is not a slogan but a threshold. Cross it, and even the most loyal residents and businesses will leave.

The lesson is not political; it is operational. Affordability is the quiet foundation on which every ideology, every enterprise, and every community must stand.

Appendix A: Personal Inflation — The Hidden Multiplier of the Affordability Crisis

Every few weeks a headline reassures us that inflation is “under control,” that the national rate has settled near 2 % or 3 %. Yet nearly everyone you meet feels poorer, not richer. The explanation is both simple and unsettling: the inflation that matters most is personal, not official.

1. The Illusion of Average

The Consumer Price Index (CPI) measures national averages across hundreds of goods and services. It was never designed to mirror the reality of any one household. It’s the economic equivalent of averaging the temperatures of Alaska and Arizona and calling it a mild day.

The CPI basket assigns weights based on the average U.S. household—an imaginary blend that includes homeowners, renters, retirees, students, and high earners alike. But your household’s spending profile—your personal basket—is unique. When your largest costs are housing, insurance, utilities, and groceries, the “average” CPI number becomes almost meaningless.

2. The Real Basket Most Families Carry

Consider two households:

  • Household A, a retired couple with no mortgage and stable investments, spends mainly on travel, entertainment, and medical care.
  • Household B, a working family renting a home, paying for childcare, commuting daily, and carrying health and auto insurance.

Both face an “official” inflation rate of 2 %, yet Household B experiences cost increases closer to 8 – 10 %. Why? Because its essentials—housing, food, energy, and insurance—rise far faster than the discretionary goods that dominate CPI weightings. Economists call this the distributional effect of inflation: the same average conceals drastically different outcomes depending on what you buy.

3. Lagged Housing, Hidden Pain

Housing is the largest single cost in most budgets, yet it enters the CPI through a lagged and diluted formula called Owner’s Equivalent Rent. The index assumes homeowners “rent to themselves” and spreads changes over twelve months, muting spikes in real rents and mortgages.

By the time the official numbers catch up, renters have already moved, landlords have already raised rates, and affordability has already deteriorated. This delay creates a comforting illusion of stability while real budgets collapse.

4. Substitution and Shrinkflation

The CPI assumes that when prices rise, consumers substitute cheaper goods—switching from steak to chicken, name brands to generics. On paper, that keeps inflation low. In reality, it disguises a decline in living quality.

Shrinkflation compounds the deception: packages get smaller, ingredients cheaper, and value erodes while prices stay “flat.” Statistically, that looks stable. To families, it feels like theft by a thousand cuts.

5. The Arithmetic of Erosion

Even modest inflation compounds powerfully. A 4 % annual rise in essential costs over five years represents a 22 % real loss in purchasing power. If wages rise only 2 %, the gap widens relentlessly. The result is what we now see in every major city: households squeezed not by recession but by attrition—the slow bleed of paychecks that never quite stretch to the end of the month.

This is why polls show that even as official inflation cools, more than 70 % of Americans still feel the cost of living is worsening. Their perception is mathematically valid: their personal inflation truly is higher.

6. The Broader Consequence

When policymakers rely solely on headline inflation, they misread the economy’s pressure points. The data may suggest calm while households experience crisis. That false sense of stability delays corrective policy and allows affordability to deteriorate invisibly until it erupts as political unrest or migration.

This is the quiet multiplier behind the affordability crisis. Personal inflation erodes stability one paycheck at a time, magnifying every other vulnerability—housing shortages, wage stagnation, and public frustration. By the time the official metrics confirm distress, the damage is already systemic.

7. Texas and the Next Test

Texas currently enjoys the reputation of affordability that New York and California have lost. But the same arithmetic applies. Housing in major Texas metros has risen more than 40 % since 2019, property taxes are climbing faster than wages, and infrastructure maintenance is overdue. If local cost pressures continue unchecked, the same personal inflation that hollowed out coastal states could quietly take root here as well.

Economic migration follows cost mathematics, not state pride.

8. The Real Lesson

Maybe the story of the 2020s isn’t about whether the Federal Reserve hits its 2 % target, but about whether ordinary citizens can still afford to live with dignity. The charts may show victory, yet the grocery carts tell another story. Personal inflation—unseen, unmeasured, but deeply felt—is how an affordability problem becomes a societal one.

Until policymakers, employers, and communities account for this hidden inflation, they will continue to mistake quiet erosion for progress. Affordability will keep slipping, not because prices explode, but because the numbers that define “normal” no longer describe reality.