The highest inflation in decades is not easy to tame, but it’s the job of the Fed to tackle this particular problem. Chairman Jerome Powell was previously focused on maintaining low unemployment to let the country heal from a destructive pandemic, but this philosophy seems to have been eclipsed by the fear of price instability. The NYT reported that April’s price level increases were still some of the highest in 40 years, although it has decreased slightly from previous months. Nevertheless, the Fed is raising the discount rate in half-percentage-point increases, with the first such action taking place this month in May.
Increasing the rate at which banks can borrow from the federal reserve should make taking out loans from banks more expensive, which discourages savings. This should lead to smaller price level increases and less inflation. Would it help here, specifically? I think it depends on what the causes of inflation are. If it is caused by supply chain issues which push the costs of shipping up, then I’m not sure how much of an impact raising rates would do to solve this problem. However, in this situation it would be logical to think that the issue would solve itself over time. The Fed also has to balance a higher interest rate with high home prices.
The amount of time, though, is uncertain. The war in Ukraine has pushed prices up and threatened to reduce wheat and other agricultural exports from that region, just one example of inflationary pressures that don’t have an obvious fix to them. It’s an example of how not just monetary, but also geopolitical decisions can influence the economy here at home, especially in an age of economic interdependence.