The Fed vs Inflation

Jose Luis Magana / AP  

The Fed vs Inflation  

Fed paradox: Weak growth threatens inflation fight  

The Fed's interest rate increases may paradoxically make the fight against inflation more difficult. That's according to a new study presented at the central bank conference in Jackson Hole last month, according to Bloomberg. 

A fundamental truth in macroeconomic theory has long been that higher interest rates dampen demand in the economy, which in turn leads to inflation slowing down.  

But researchers now emphasize that even the supply side is hampered by interest rate increases as they negatively affect investments, risk appetite and innovation.  

For example, increased borrowing costs lead to a slowdown in construction. The consequence is that housing costs, which constitute a significant part of inflation, are kept at high levels.  

The bottom line is that the Fed should consider allowing moderate growth, rather than stifling it altogether