If you had read my earlier articles on U.S. Economy, where I had written on the short term interest rates being increased to keep the inflation at bay, then please read further for the current situation. Well the economy has been trying to pause the increase in the interest rates, to see how the inflation is responding. But there seems to be very little reaction and the Federal Reserve is caught in a dilemma on the Short Term Interest Rates.
Mr. Bernananke, the Federal Reserve Chairman, has been increasing the interest rates in phases such that the interest rates would try to ease out the growth in the inflation rates. For better understanding, let me put it in this way, when the Federal Bank increases the interest rates, further investments are discouraged due to which there is less flow of cash within the economy, while savings try to increase. Given the situation, with less cash in flow the demand for certain goods decreases, especially consumer goods which brings down the inflation rate. But the previous experience has shown that such an act bought about by the Federal Bank, will result in change of Inflation rate only after a years time and not immediately. The Chairman, Mr. Bernananke is of the opinion that the demand for house has come down a little bringing down the exorbitant real estate rates and rent rates. But this is no time for him to relax because the market is y et to respond to the increase in interest rates. Given the two option of increasing the interest rates, thereby pushing the economy into recession or by stalling, which would hamper growth of the economy, the Chairman at the moment is watching over the economy and trying to contemplate the next action.
But history has shown that the economy would eventually respond to the changes in the Interest Rates, thereby resulting in inflation rates, which would definitely be lesser than the inflation rate, which the economy had experienced.