In all our discussions about inflation and the economy, we are hyper-focused on predicting what the Fed might do with regards to interest rates. This is a very powerful tool to control lending demand and its impact on the rate of growth of the economy. But it is vital to remember that this is only the demand side of the equation - the Fed has no control over the supply side of the economy, which is a huge factor in our current inflationary predicament. While access to cheap capital and government aid have contributed to the demand side of recent growth, the pandemic and Russian invasion of Ukraine have each had a huge impact on the supply of goods. And the Fed’s activities have absolutely no impact on either of these. It is entirely possible that the Fed could raise interest rates and decrease the demand for certain goods, while having absolutely no effect on the future supply capacity of those goods, leaving prices still elevated above their pre-pandemic levels. This is something that interest rate markets are potentially not considering, given that they are predicting possible interest rate cuts in 2023 to prevent a deep recession.

Source: Federal Reserve Bank of San Francisco