How many percentage points will the fed have to raise rates to keep inflation at bay ?

Question

7 points -3 points - 1 point - 1/2 a point etc - ? or do you think they will not raise rates at all or even lower them while talking tough about inflation?

Answer 1

Well, because the FED only controls short-term interest rates, and their ability to do so is restricted by the enormous lags in monetary policy, you can see that by the FED's recent inactivity that this is their current response to inflation fears.  Over the past year they have been extremely worried about expected growth, while the inflation hawks have been screaming that were going in the wrong direction.

Bernanke and the FED understand that their cuts to the discount rate and federal funds rate will take time and they will wait as many markets correct themselves before making further action.

Answer 2

You'll have a better answer to that when the unemployment rate exceeds 5 percent. And hope that does the trick.

In normal times there is a correlation between inflation and the "full employment" number. If you see (in theory) inflation going higher, you raise rates until business activity abates and more are unemployed. Then you start looking again for equilibrium again. Check Okun's law.

The difficulty is "stagflation." It occurred as a result of Nixon's policy and it was difficult to change. In that case, you have business stagnation, high unemployment and high inflation. Paul Vocker as Fed Chairman tamed stagflation but Jimmy Carter paid a high price for it.

There is considerable speculation that we're now in stagflation, but it usually takes time for the numbers to catch up to make that judgment.

My guess is that key fed rate will rise to approximately 8 per cent.