One of the main reasons Federal Reserve officials don’t fear inflation these days is the belief that they have tools to deploy should it become a problem.
Those tools, however, come with a cost, and can be deadly to the kinds of economic growth periods the U.S. is experiencing.
Hiking interest rates is the most common way the Fed controls inflation. It’s not the only weapon in the central bank’s arsenal, with adjustments to asset purchases and strong policy guidance also at its disposal, but it is the most potent.
It’s also a very effective way of stopping a growing economy in its tracks.
The late Rudi Dornbusch, a noted MIT economist, once said that none of the expansions in the second half of the 20th century “died in bed of old age. Everyone was murdered by the Federal Reserve.”