Inflation rates

When the Fed sells bonds it reduces the money supply by replacing money with bonds. This will help to fight inflation but it will increase interest rates. During the two years of the pandemic the Fed sold bonds and increased the money supply from $15 trillion to $21 trillion. Over the past two years, as the Federal Reserve fought to rescue the economy from the clutches of the coronavirus, the central bank’s emergency remedies increased the nation’s money supply by an astonishing 40 percent. Now they must reverse the process and have started selling off bonds at $95 billion per month. At this rate it will take almost 5 years to get back to pre-pandemic levels. If interest rates rise too quickly it will lead to recession but it will take some time to get through this mess. In late 1980 and early 1981, the Fed once again tightened the money supply, allowing the federal funds rate to approach 20 percent. Despite this, long-run interest rates continued to rise reaching a high of 16.3%. Inflation rates decreased rapidly from 13% in 1980 to 4% in 1982.