A weathered merry-go-round pony with cracked paint gazes wildly up at a similarly-cracked dove, the rest of the carnival ride blurred behind a trippy, psychedelic haze.

A Day in the Life at the Fed

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  • 6 minutes

Inflation Meets Recession (and I, a Silver-White Dove)

You wonder why anyone would desire to rise to the ranks of POTUS. Sure, you have your career public servant who, from their youth, was groomed to be so inclined. But you'd think that somewhere along the line, they would perceive that all the money in the world for post-retirement speaking gigs and fulfilling their lifelong dream of having an eponymous library are an ineffectual end not justified by the means.

On the other hand, the chosen few who serve as Fed Chair might consider POTUS a break in the action. Indeed, there are moments when the Fed seems to be at another level of madness. Take this current inflation v. recession sorcery as an example.

It takes me back to my post-graduate days interning at the Fed. The first thing you notice, aside from the faint smell of Alexander Hamilton's Glen plaid suit fitted to a plus-size mannequin combined with a freshly degassing Twister mat and vintage tongue oil, is that the rotation of background music is dominated by American jazz-rock band Blood, Sweat & Tears' (BS&T) Spinning Wheel* (say yes to David Clayton-Thomas). And you learn real fast why.

A few days in, I was asked to take minutes at a meeting with various what seemed like mid-level Fed people. I had no idea what they did, but they sure knew things. And there was a girl there dressed as a silver-white dove insisting she was Janet Yellen. We’ll get to that—later.

My parents were open-hearted but did not approve of sass or in-house cursing. Two words that would earn you a stern gaze were inflation and the R-word, recession. To them, this qualified as incendiary language and was not tolerated.

At this meeting, those wannabe Fed oiks spoke of inflation and recession in a way that would have made mom and dad blush. I submit for the record, Inflation & Recession 101, an uncensored digest of their brazen manifesto:


According to the Federal Reserve, inflation is a general increase in the overall price level of goods and services in the economy. To many of us, inflation is kind of a bad word; but truthfully, it’s not all bad. For those with physical assets—e.g. real estate property or saleable goods—inflation has the benefit of a boost to the relative value of their holdings. And unemployment often diminishes with moderate inflation since employers can nominally keep wages the same while the "real wage"—that is to say, the wage adjusted for inflation—decreases.

In fact, most economists agree that low, steady and predictable inflation is ideal for an economy. This measured rate of inflation encourages consumers to spend instead of hoarding cash, as goods are expected to increase in cost over time. It also works as a kind of insulation against recessions, allowing the labor market to reach equilibrium more quickly in a downturn and reducing the risk of a "liquidity trap," a situation in which monetary policy cannot stabilize the economy.

But inflation can become an issue if prices for goods and services increase too much or too rapidly. When these higher levels of inflation are expected to continue, people may begin to acquire durable commodities as stores of wealth to hedge against losses due to cash’s decreasing value, leading to shortages of the hoarded goods. And if inflation becomes too severe, use of the currency can naturally stall, further accelerating the inflation rate. Without a counterbalance, runaway inflation could quickly render cash all but worthless.


While talking heads tend to use the term gratuitously, the National Bureau of Economic Research’s (NBER’s) Business Cycle Dating Committee is the official entity entrusted with determining whether the United States has experienced a recession. While varied opinions exist on what constitutes a recession, NBER defines it as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Although the colloquial rule of thumb suggests that any two successive quarters of a decline in gross domestic product (GDP) can be deemed a recession, the complexities of a national economy can’t be determined by a single data point.

Semantics aside, economic downturns, in general, are very much a normal part of a healthy economy. A gentle, temporary economic decline, also called economic contraction, can help to stabilize an economy. Although growth is usually assumed to be a positive, too much of an economic boom can result in distortions like asset bubbles and runaway inflation. Regular, mild economic contraction can effectively counteract the adverse effects of an overheating economy.

Much like inflation, it’s when economic contraction occurs too rapidly or persists for too long that it warrants concern. Only then would we expect to see the problems typically associated with an economic recession.

The Fed

The Federal Reserve’s primary raison d'être is to safeguard the national economy from coming off the rails in either direction—neither too much boom nor bust. This is done through adjustments to monetary policy, foremost of which is tweaking what’s called the federal funds target rate. This rate influences interest rates throughout the economy. By effectively guiding the cost of credit across the nation, the Fed thus encourages both consumers and businesses to either curtail spending or lean into credit, as the case may be.

So how does the federal funds target rate work? The Federal Reserve sets this rate as a reference for the rate at which large commercial banks charge one another for overnight loans. These short-term loans occur so that banks stay compliant with liquidity requirements. A higher federal funds rate means more costly bank-to-bank loans, which works to reduce demand among financial institutions to borrow money. These higher borrowing costs are eventually passed on to banks’ customers, who can expect to see higher interest rates for their own borrowing—things like mortgages, business loans and credit usage. At the same time, returns offered on deposit accounts will tend to increase as banks themselves benefit from greater liquidity. As loans are discouraged and saving is rewarded, the supply of money in circulation is effectively reduced, which tends to lower inflation and moderate economic activity. And as might be expected, the converse is also true: a lower federal funds rate makes borrowing more affordable, leading to a surge in economic activity and growth.

In theory, the federal funds rate is relatively simple; in practice, erm—not so much. Because a change to the federal funds rate affects not only the mechanics of the national economy but also—inevitably—market psychology. This means that while the anticipated logical results slowly propagate, media pundits and day traders react less slowly and implicitly prejudice less-logical behaviors. Importantly, these behaviors—which are more typically short-sighted—can exponentialize the originally intended market outcome.

Case in point: from March 16, 2020 to March 17, 2022—for two years—the target rate was quite literally at rock bottom. This allowed for cheaper financing and encouraged economic growth despite a global pandemic. But as the threat of COVID-19 lessened and enticing consumers to spend became less challenging, the Fed recognized the need to adjust rates for the changing economic landscape. And despite continued efforts—no less than eight rate hikes in the last 12 months—the economy’s rapid about-face has brought on concerning levels of inflation.

Now, as the Fed’s higher target rates have finally begun to bring inflation back down toward manageable levels, we’re told to fear the opposite, that a recession is coming and, therefore, the sky is falling. Well, maybe. But that depends on your R-word criteria vis-à-vis more objective benchmarks.

Still, is an economic cooling necessarily a bad thing? On the contrary, if things go as the Fed intends, it could be exactly what’s needed to steer things back to a BS&T-like financial groove. You know, “what goes up, must come down / Spinnin’ wheel, got to go ‘round.”

And again, there’s always the possibility of overshooting—of inducing too much cool-down. But then, there’s also the possibility of unforeseen variables, like, you know, global pandemics or sudden international military conflicts.

But that’s, as I came to know, all just another day in the life at the Fed. Also learned that the R- and I-words are neither slang nor vulgar. If only my family were so informed. Because if you rely on media teasers, notes or commentary, you’re left to your fears without meaningful assuagement and plenty of time to ruminate. The horror.

Oh, yes, and back to that silver-white dove. Turns out she wasn’t Janet Yellen. Nor was I an intern at the Fed but a victim of what turned out to be one heck of a psychedelic cosplay. Even so, I loved her madly.

In conclusion, and more importantly, your life-coach lesson is, in the words of BS&T: “Drrrrrop all your troubles by the riverside, uh / Catch a painted pony on the spinnin’ wheel ride.” I mean, who doesn’t love a carnival carousel?

* No 2 on the Billboard charts in 1969, from the album Blood, Sweat and Tears, Album of the Year in 1970.

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