Summary:
In 2022, the Federal Reserve initiated the fastest start to a rate-hiking cycle in history with the objective of getting the Federal Funds rate into restrictive territory. A restrictive, or “tight,” monetary policy should ultimately lead to a slowdown in economic activity and an increase in unemployment, which is typically the recipe needed to reduce inflation. This process works best in conjunction with “tight” fiscal policy, which can also slow economic activity by increasing taxes and/or reducing government spending. When both monetary policy (the Fed) and fiscal policy (the U.S. government) are in harmony, it may reduce the amount of monetary tightening necessary, improving the odds of escaping a recessionary outcome. However, when there is dissonance between the two policies, one will need to tighten more to offset the other.
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