When your seatmate on the plane talks about the Fed, you know things aren't right

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You know things are getting dicey in the economy when the phrase "Federal Reserve" enters daily conversation.

Typically, the "Fed" is a pretty wonky and sleepy corner of America, known for shockingly dull press conferences. When economic sailing is smooth, there's not much news coming out of the central bank that is of even remote interest to people other than economists or journalists.

But a few weeks ago, I sat next to a woman on an airplane. She described herself as knowing "zero" about the economy and then proceeded to ask me whether I thought the Federal Reserve would continue raising interest rates to help fight inflation.

I immediately felt an acute sense of dread: When the Fed becomes a topic of general conversation, it means big shifts are happening. The Federal Reserve is an immensely powerful organization that is part of our economy's foundation--it's tectonic plates. And, personally, I like my tectonic plates boring, predictable and giving regularly scheduled, shockingly dull press conferences.

But the truth is, at this moment, we should all be interested in the Federal Reserve. Because big shifts are happening in our economy and the fate of our country may rest on the actions the Fed is taking currently and in the coming months.

At its core, the Federal Reserve has two main jobs: keeping inflation low and making sure maximum number of people are employed in America. This is known as the Fed's "dual mandate."

The Fed is mandated to deploy its formidable powers to watch and protect both areas as they are considered the most important elements to a strong economy.

"Economic security depends on both jobs and stable prices. Together, these two pillars form the foundation for everything else," Mary Daly, head of the San Francisco Federal Reserve Bank, said in a recent speech at Boise State University.

However, the Fed is currently being challenged in a way it hasn't been in over 40 years. And as it tries to do one part of its job it is hurting the other. In a way, the two parts of its dual mandate are starting to duel with each other.

Inflation is on everybody's mind right now. Prices are rising in the U.S. at a pace not seen in over 40 years. Inflation is up 8.3% and many things are costing way more than that compared to last year: Gasoline prices are up 25.6%, food prices are up 11.4%, rent is up 6.7%, and health insurance prices are up 24.3%, the largest ever increase.

Daly points out that this level of inflation hits everyone. But it is especially hard on the country's most economically vulnerable. "The toll... lands hardest on those with low and moderate incomes," she said. "This corroding of real wages is more than just painful. It also undermines the basic American promise, which says that if you work hard, you can get ahead. Inflation traps people in an endless loop of running fast and falling behind, unrelated to effort or input."

For many people, it hits them suddenly — often while shopping for a favorite item — that they realize they're paying a lot more for things than they usually do. Jeff Smith, 54, who works in marketing in California, recalled the first moment when inflation really hit him.

"It's really dumb, because it's not a huge item," he laughed. "I was buying these prepackaged cinnamon rolls...of all things."

Smith and his wife have four children and Smith says they often like to have a big Sunday breakfast together and he will sometimes buy cinnamon rolls as a treat. "It's something I have bought periodically for years and it was eight bucks for a package of six cinnamon rolls." He immediately felt it was about double what he had typically paid. "It felt dramatic," he said.

After that cinnamon roll moment, Smith did a deep dive into the family budget and realized their overall spending had gone up by almost 40%. He and his wife were shocked. "We were like, 'Good grief! That is way too much. How did we do that? Where did we go?'"

As it turned out, the Smith family hadn't done anything differently or gone anywhere unusual, the prices of their normal purchases and activities had just risen and it had added up fast in a family of six. So Smith and his family started making a bunch of cutbacks: no more eating out, no summer road trip to Utah to see relatives.

"My kids complained, 'We, didn't do anything this summer!'" he said. "They were right and it was largely because gas that used to cost us, you know, maybe $150 to travel somewhere now costs three or $400."

This is where the Fed comes in. Rising prices prompted the Federal Reserve to spring into action earlier this year and start raising interest rates.

When the Fed raises interest rates, it becomes more expensive for people and businesses to borrow money, so they buy less stuff, demand goes down and that (eventually) brings prices down.

Here's where another problem comes in: When spending drops, companies aren't selling as much stuff and they're not making as much money. They tend to react by slowing down hiring or even laying people off. Bottom line: Raising interest rates can be really hard on jobs.

The last time inflation got really high in the U.S. was back in the 1970s and 80s, when it topped 13%. The head of the central bank at the time, Paul Volcker was determined to bring prices under control. He pushed interest rates high--rates peaked at about 20% (to give a little perspective, the current interest rate is around 3%).

The result: a big economic shock. The economy fell into a terrible recession, unemployment spiked to 11% and people and politicians unleashed all kinds of wrath onto Chair Volcker. But Volcker was totally focused on bringing inflation under control. Eventually, it worked, and inflation did come down. But it took years of serious economic pain and millions of people lost their jobs.

To be clear, that is NOT the situation the country is in right now. The most recent jobs report shows a very strong employment market with more job openings than unemployed workers and an unemployment rate of 3.5%. This has led many to speculate that the Fed will see this as a green light to keep pushing interest rates up to try and get inflation down.

The worry is if that continues, the Fed's two jobs could end up being at odds: if it tries to bring inflation down by cranking up interest rates too much, it could lead employers to not just put the brakes on hiring, but also cut jobs.

Jobs versus prices is not a choice anybody wants to make. So what will Federal Reserve Chair Jerome Powell choose?

Actually, he seems to have already made the call... in code. The Federal Reserve has a history of communicating in code (or, basically, not communicating and leaving everybody to desperately try and interpret things like tie color choice and body language).

This summer, Powell dropped a bombshell, saying: "We are taking forceful and rapid steps to...keep inflation expectations anchored. We will keep at it until we are confident the job is done." As unexciting as that might seem, for Fed-watchers, this moment was a veritable fireworks spectacular, and code for choosing to fight inflation just like Volcker who battled inflation at the cost of millions of jobs and a recession. That's because the title of Volcker's book was "Keeping at It".

More recently in a press conference on September 21, Powell made it even clearer that he was willing to tolerate some pain from a slower economy and "softening of labor market," because inflation was just too harmful for families and needed to be dealt with.

"If your family is one where you spend most of your paycheck, every paycheck cycle, on gas, food, transportation, clothing, basics of life, and prices go up the way they've been going up, you're in trouble right away," Powell said. "We're hearing from people is very much that inflation is really hurting...it would be nice if there were a way to just wish it away but there isn't."

Hopefully the inflation report that's coming this Thursday will show prices coming down and if unemployment stays low, the dual mandate will never have to duel. My airplane conversations can go back to complaining about legroom and we can all have our cinnamon rolls and afford them, too.