Federal Reserve Financial institution of San Francisco

With inflation reaching a 40-year high, the price of basic goods and services has gone up, and the money in your pocket doesn’t stretch as far as it used to.

Inflation is much too high, and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down. (Federal Reserve Chair Jerome Powell, Press Conference, May 4, 2022)

To help lower inflation, the Federal Open Market Committee (FOMC) has started tightening monetary policy by incrementally raising the target range for the federal funds rate.

In other words, the Fed is raising interest rates.

Why is this important?

This increases short-term borrowing rates for commercial banks. The rate then gets passed down to consumers and businesses, raising interest payments for debt like auto loans, credit cards, business loans and mortgages.

When it costs more to borrow, economic activity tends to slow down, both through reduced investment activity by businesses and reduced spending by consumers.

This reduction in overall demand can offset price pressures and bring inflation down.

With these actions, the FOMC is aiming for a policy path that will bring inflation back to its average 2% goal while keeping the labor market strong.