The Federal Reserve raised interest rates on Wednesday, and the market's initial reaction was strong, as stocks rose. But what do rising interest rates mean for inflation in an economy that's become particularly fixated on rising prices?
Short story: rising interest rates keep inflation in check. The Fed may get more aggressive moving into the rest of the year to keep inflation at a suitable level. Check out a quick take here:
Long story: The Fed has a dual mandate, half of which entails keeping inflation as close to 2% as possible. Inflation has been running below that level, at about 1.7% recently. But here's why the Fed is still keeping inflation stats at the forefront of its policy making.
The economy is projected to accelerate meaningfully moving ahead, as signaled by Powell both in his testimony to Congress recently and in Wednesday's report. Raising interest rates is a means of ensuring that inflation doesn't rise too rapidly as that economic growth takes place.
Even though inflation is below the Fed mandate now, a rapidly expanding economy could bring with it rising prices. Increased interest rates often incentivize consumers to save more money since returns on those savings are higher. With less disposable income leaving households, economic growth is tempered and inflation is kept in check.