Why the Federal Reserve is making everything more expensive in order to make things less expensive

It seems like a contradiction: How would increasing the cost of monthly credit payments help to bring down the price of goods and services in the economy?

It seems like a contradiction: How would increasing the cost of monthly credit payments help to bring down the price of goods and services in the economy?

But that is the logic Federal Reserve officials are following as they raise interest rates to 5.5%, their highest point in more than 22 years, to combat a pace of inflation that Fed Chair Jay Powell said Wednesday remains "much too high."

As Americans are now well aware, the cost of seemingly everything — hotels, cars, dining out — has gone up at a pace the Fed is deeply uncomfortable with.

“My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation,” Powell said.

By making it more expensive for consumers and businesses to borrow money, it hopes to reduce overall economic activity — too much of which tends to cause inflation.