Investor Alert

Jan. 27, 2022, 2:52 p.m. EST

The Fed says it’s raising interest rates — will that mean much for inflation?

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By Elisabeth Buchwald

Federal Reserve Chairman Jerome Powell signaled on Wednesday that the central bank is prepared to raise short-term interest rates in March for the first time in four years.

Powell acknowledged that inflation — which is at a 40-year record high — accelerated much faster over the past few months than the Fed anticipated.

But raising interest rates, which increases borrowing costs throughout the economy and can have direct effects on consumers , won’t necessarily translate to lower prices in the near future, said Dana Peterson, chief economist at The Conference Board.

One reason is that raising interest rates won’t solve supply-chain bottlenecks that are making it more expensive for retailers to import goods into the U.S. and transport them from ports, Peterson told reporters on Thursday during an event hosted by the Conference Board, a membership-funded nonpartisan think-tank.

In order to make a profit, retailers will likely have to continue to charge higher prices compared to before the pandemic, she added.

Similarly, the Fed’s actions won’t mean much for the ongoing microchip shortage, which is contributing to higher prices for cars and some electronics.

“It’s very difficult to build chips overnight — you have to build up a factory that can take multiple years,” Peterson said.

But demand for chips probably won’t subside any time soon.

“As long as businesses are engaging in innovation and digital transformation, consumers are doing more online and want high tech goods, especially cars and gadgets, we’re going to continue to see very strong demand for chips,” she said.

That said, the Fed raising interest rates is “constructive towards addressing these inflationary pressures,” Peterson said.

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