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The Fed Tried to Protect Main Street. Now It May Have to Make Everyone Suffer

Taming inflation could bring on a recession, and that’s bad for stocks and jobs.

Federal Reserve Chair Jerome Powell.

Federal Reserve Chair Jerome Powell.

Photo: Anadolu Agency

It feels like ages ago, but it was 15 short years this month that the Great Financial Crisis hit the front pages, with the collapse of two Bear Stearns hedge funds caught in the subprime mortgage meltdown. The list of casualties would grow to include Merrill Lynch, Wachovia, Fannie Mae, Freddie Mac, and, most famously, Lehman Brothers, all of which ceased to exist as large publicly traded companies. The damage to the financial system was eventually contained—in no small part because of the efforts of the Federal Reserve. Meanwhile, in the real economy, millions lost their jobs and homes.

It wasn’t the first time the Fed appeared to be prioritizing Wall Street over Main Street. Since the 1980s, the US central bank had acted preemptively against inflation, in the process hurting those most marginally attached to the labor force. The thinking was that, if the economy settled into a very, very low unemployment rate, the bid for scarce talent would force up wages. And then those increased labor costs would have to be passed on to consumers, who as workers would then need wage increases just to keep up with rising prices. Fed Chair Paul Volcker’s painful medicine was designed to break exactly such a spiral. And since then, the Fed has focused on keeping inflation down.