How the Federal Reserve Fights Inflation by Raising Interest Rates

Senior Federal Reserve officials watched inflation data come in very hot for months before policymakers decided to cut monetary policies that were stimulating the economy.

A chorus of analysts, economists and former policymakers chimed in, saying it was a mistake.

“The forecast, overall, has slowed the Fed’s response to the inflation problem,” former Federal Reserve Chairman Ben Bernanke told CNBC.

Treasury Secretary Janet Yellen also acknowledged the misdiagnosis coming from her own department and that of current Fed Chairman Jerome Powell.

“We both could have used a better word than ‘transitional,'” she told senators in June when asked about their remarks about inflation last year and their slow response to price pressures. .

It is the Fed’s job to bring inflation under control, which is unfolding at a pace not seen in four decades. To do this, he raised interest rates at a rapid pace.

According to economists like Judd Cramer, controlling inflation may require more aggressive monetary policy measures than those adopted by the central bank in recent years. His research indicates that the Fed may need to raise rates to levels not seen in decades to force the rise in prices to recede.

“If inflation is going to be high and stay higher, that means the neutral rate in the economy is also going to be higher because the price of goods is going up,” he told CNBC.

A June survey of inflation expectations from the New York Federal Reserve suggests the price hikes aren’t over yet. The group predicts that by June 2023, prices will have increased by around 6.8% from their current levels.

Maintaining stable prices and maximizing employment are the Fed’s primary responsibilities. Jobs look plentiful in the United States, which could give the central bank cover to raise interest rates at an aggressive pace through 2023.

The Federal Reserve has been contacted for comment but is in a media blackout ahead of the rate announcement expected later today.

Watch the video above to learn more about the Fed’s inflation missteps, as well as its plan to get the economy back on track.

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