On the surface, the relationship between interest rates and inflation is obvious: When prices get too high, the Federal Reserve counteracts by raising target interest rates. That makes borrowing money more expensive, which causes individuals and businesses to contract spending. That, in turn, lowers demand and, in theory, prices.
As a very simplistic, ground-level explanation, that fits. However, much as the calm surface of a lake hides an infinitely complex ecosystem below, there’s considerably more to the story. Failure to consider the complexities behind the surface explanation is why we’ve seen several predictions in late 2023 and throughout 2024 that have not come true, such as the idea suggested by well-respected financial organizations that the Fed would begin lowering interest rates early this year.
