Fed Dove Games Out How Rate Increases Can Address Supply Shock Inflation

Federal Reserve officials have said repeatedly that if inflation proves to be persistently high, they have the tools to bring it under control. The problem for the Fed is that the current surge of inflation may be of a type not well suited for the main inflation fighting remedy: interest rate increases.

The inflation surge striking the U.S. economy stems largely from supply shortages, not excessive demand. When supply problems are pushing up inflation, it is far from clear that raising short-term borrowing costs would be able…

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