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How can targeting interest rates result in inflation sprialing out of control?

In: Economics, Inflation [Edit categories]

Answer:

It could cause a kind of rubber-band effect on inflation. For instance, if the market is trying to keep interest rates high and the fed keeps dumping money into the market to try to keep interest rates low, one of these forces has to give. The market is going to be suddenly flushed with cash and risks an event that causes what would normally be a natural decrease in interest rates. This would cause a huge interest rate fluctuation and subsequent inflation.

First answer by Sefner. Last edit by Sefner. Contributor trust: 116 [recommend contributor ]. Question popularity: 10 [recommend question].

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