Why the Fed’s Tight Rate Stance Damages the Economy

September 14, 2023

by Frank Shostak Mises.org

On August 16, 2023, the Federal Reserve expressed concern about the pace of inflation, saying future rate hikes could be necessary if conditions do not change. Currently, the federal funds target rate is between 5.25 and 5.50 percent, the highest level in more than twenty-two years.

Mainstream economists and journalists think about inflation in terms of consumer prices. To counter a general increase in prices, they believe, the central bank should raise interest rates, which supposedly weakens the demand for goods and services and slows the growth rate of the Consumer Price Index.

But is inflation, at its core, really about the prices of goods and services? Examining the origin of inflation is an essential first step toward answering this question.