What options does the Federal Reserve have to fight inflation?
The Federal Reserve is the central bank of the United States, and its remit is to provide the nation a more stable and durable monetary system. The Federal Reserve, or the Fed, is specifically tasked with maintaining maximum employment while ensuring price stability. The United States is currently experiencing persistent inflation. Typically, the Federal Reserve will raise interest rates when initially trying to combat inflation. The increased rates make lending more expensive, and subsequently discourages capital investment and borrowing. The added cost in turn reduces demand for products and services. Lower demand normally leads to dropping prices to try and motivate potential buyers. The other primary method involves open-market operations. When inflation is running higher than expected, the Fed can reduce the money supply by selling securities and taking currency out of circulation. Since there are fewer dollars in circulation, each remaining dollar is correspondingly worth more than it was before those transactions.