The Fed wants to tell the bond traders that they will not let growth of the money supply and inflation get out of hand in the future. Rising interest rates represent returns on investments that are alternatives to stocks. Besides this, many stock traders are well aware that inflation also could have consequences on long term economic growth of the economy. Higher inflation rates result in a greater variance in inflation rates, which increases economic uncertainty and causes risk averse individuals not to make long term investments. Fewer longer term investments mean less productive capacity in the form of physical capital.
Inflation tends to divert funds from stocks and bonds to real estate, gold and collectible items.
Inflation can discourage saving. Lower long term economic growth is the result of each of these factors. Economists have debated throughout the 1990s about whether inflation is under control. For much of the 1990s, Dr. Huenneke has believed that inflation worries are largely misplaced. Dr. Huenneke has argued to me that global competition has kept the lid on inflation for many years.