Why do the inflation and interest rate move in the same direction in these tables from WSO guide?
Does anyone know why here, the inflation and interest rate move together? I suppose when the interest rate goes up, less money will be spent so inflation drops? can anyone explain the relations b/w them? Thanks!
When inflation moves up investors demand a higher yield on their bonds to compensate. Without an increase of yield/ interest rate then investors would face lower returns real (adjusted for inflation) returns
Could this argument be valid too? As inflation rises, central bank would increase rates to curb inflation -> Interest rate increases and bond prices dip
Yes, this is also valid. As inflation rises, FED will try to slow it down by increasing rates
Yes the fed can raise rates by selling bonds on the open market, curbing inflation.
However, the fed has no meaningful control over the long term rates as they are set by the market, and can serve as a good indicator of future economic activity, including factors such as inflation.
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