According to Rogé Karma at The Atlantic, many economists believe high rates tamp down inflation largely by influencing people's expectations.
Some Federal Reserve officials have signaled recently that they might be closer to making a cut (or two) in the key interest rate they use as a lever to slow down or speed up economic activity. But it’s clear that when the year is out, rates will be in the same elevated range they are now.
At least those high interest rates are doing their inflation-fighting job. Right? It turns out the answer might not be so cut and dried.
“I think almost every single economist I talked to kind of shrugged their shoulders and said, ‘We actually don’t understand the role that interest rates played in this disinflation of the past few years,'” said Rogé Karma, staff writer at The Atlantic.
In a recent story, Karma tried to get to the bottom of how high interest rates slow the economy and, subsequently, reduce inflation. But what he found in his reporting is that current interest rates may not have weighed on the economy very much, at least not by making borrowing more expensive. There is an alternative explanation, though, that they didn’t have to.
“When you really push economists, they will basically say that a major reason why interest rates work is that they are equivalent of a mass Jedi mind trick by convincing everyone that inflation is going to be under control,” Karma said. “People stop expecting inflation.”
“Marketplace” host Kristin Schwab spoke with Karma about whether the Fed’s interest rate policy was actually contributing to disinflation. To listen, use the media player above.
