(NewsNation) — The U.S. consumer price index, released Tuesday, showed prices shot up 8.5% in March compared to 12 months earlier, according to a report by the Labor Department. It’s the fastest inflation increase in 40 years. Now, Americans are wondering what the Federal Reserve can do to fight record-high inflation.
First, the Fed can raise interest rates, which it has already committed to doing. This process increases borrowing costs for companies and consumers throughout the economy. The aim is to slow economic activity, which should cause inflation to cool off.
Another option includes reducing the reserve requirement. Reserve requirements are the amount of funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals. So, if banks have less money to lend, consumers will borrow less.
The final option to shrink inflation rates is to reduce the overall supply of money in the economy. The Fed does this through contractionary policies; it puts some limits on the active amount of money in the economy by raising taxes or giving customers more money back if they buy government bonds.
However, economists generally doubt that even the sharp rate hikes that are expected from the Fed will reduce inflation anywhere near the central bank’s 2% annual target by the end of this year. In the 1980s, runaway inflation was controlled by a Fed policy of major interest rate increases and money control; a possible solution for the current economic situation.
The biggest factors influencing inflation are the war in Ukraine and the global supply chain issues.