Some Federal Reserve officials have signaled in recent days that they may be close to cutting (or cutting) their key interest rate, which they use as a tool to slow or speed up economic activity, but it's clear that rates will remain as high as they are now going into the new year.
At the very least, high interest rates act as a hedge against inflation. Right? The answer may not be that simple.
“I think just about every economist I've spoken to has shrugged and said, 'We don't really understand the role that interest rates have played in the deflation of the last few years,'” said Roger Calma, a reporter for The Atlantic.
In a recent article, Karma tried to understand how high interest rates slow the economy and therefore suppress inflation. However, what he found in the article is that current interest rates may not have been weighing so heavily on the economy, at least by making borrowing costs higher. However, there is another explanation why they didn't need to do that.
“If you really corner an economist, they'll basically tell you that the main reason interest rates work is because they're the equivalent of a Jedi mass mind trick to convince everyone that inflation is going to be under control,” Kalma says. “People stop expecting inflation.”
“Marketplace” host Christine Schwab spoke with Karma about whether the Fed's interest rate policy is actually contributing to deinflation. To listen, use the media player above.
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