The view that higher interest rates help stamp out inflation is essentially an article of faith, based on long-held economic gospel of supply and demand. But how does it really work? And will it work this time around, when bloated prices seem at least partially beyond the reach of conventional monetary policy? It is this dilemma that has Wall Street confused and markets volatile. In normal times, the Federal Reserve is seen as the cavalry coming into quell soaring prices. But this time, the central bank is going to need some help. “Can the Fed bring down inflation on their own? I think the answer is ‘no,'” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “They certainly can help rein in the demand side by higher interest rates. But it’s not going to unload container ships, it’s not going to reopen production capacity in China, it’s not going to hire the long-haul truckers we need to get things across the country.”
Source: CNBC

The Federal Reserve needs to raise interest rates substantially to control inflation but may not be as “behind the curve” as it appears, St. Louis Fed President James Bullard said Thursday. One of the Federal Open Market Committee’s most “hawkish” members in favor of tighter policy, Bullard said a rules-based approach suggests the central bank needs to hike its benchmark short-term borrowing rate to about 3.5%. However, he said bond market adjustments to the Fed’s more aggressive policy, in which yields have surged higher, suggest rates are not that far askew. “If you take account of [forward guidance], we don’t look so bad. Not all hope is lost. That is the basic gist of this story,” Bullard said in a speech at the University of Missouri.
Source: CNBC