When inflation rises sharply, the Federal Reserve (often referred to as the Fed) typically responds by implementing measures to slow down economic growth. The primary reason for this is to stabilize prices and maintain the purchasing power of the currency.
Inflation indicates that prices are rising, which can erode consumers’ ability to buy goods and services. If left unchecked, high inflation can lead to a variety of economic problems, including reduced savings, uncertainty in spending, and decreased investment.
To combat inflation, the Fed often raises interest rates. Higher interest rates make borrowing more expensive, which tends to reduce consumer spending and business investments. As a result, this slowdown in economic activity can help temper inflationary pressures.
In summary, the Fed aims to slow the economy during periods of high inflation to bring prices back in line and ensure long-term economic stability.