Economist Writing Every Day

Anyone who teaches Macroeconomics knows that these concepts are hard for people to understand at first.

A clip about inflation has been making the rounds.

Transcripts provided by CNN show the following

CNN NewsNight with Abby Phillip
Aired April 17, 2025 – 22:00 ET

ABBY PHILLIP, CNN ANCHOR

BATYA UNGAR-SARGON, AUTHOR, HOW THE ELITES BETRAYED AMERICA’S WORKING MEN AND WOMEN

CHARLOTTE HOWARD, EXECUTIVE EDITOR, THE ECONOMIST

PHILLIP: Jerome Powell is the head of the Fed and has a mandate to keep inflation low and employment high. So if there are, you know, macroeconomic things that are happening in the economy that make it very difficult for him to do that, you don’t think he’s going to comment?

UNGAR-SARGON: Do you know what would have really helped? What would be a really good idea right now to help bring down inflation and make sure that things keep running smoothly? It’s dropping interest rates. Why doesn’t he do that?

PHILLIP: Why doesn’t he do that?

HOWARD: So interest rates, if you were to drop interest rates, you would stoke inflation.

GPT expands on Howard’s point: “Dropping interest rates would not lower inflation—in fact, it typically makes inflation worse.

Interest rates are a key tool the Federal Reserve uses to manage inflation. When rates are lowered, it becomes cheaper to borrow money. This encourages people and businesses to take out loans, spend more, and invest more, which increases demand for goods and services.

But when demand rises faster than supply can keep up, prices go up—that’s inflation.

So, in a time of high inflation, cutting interest rates would likely make the problem worse, not better. The Fed raises interest rates to make borrowing more expensive, which slows down spending and cools demand, helping to bring inflation under control.”

Recall that the United States achieved disinflation starting in 2022, largely due to the Federal Reserve’s aggressive interest rate hikes. Tyler calls the disinflation America’s triumph.

As for the commentariat, a diverse array of economists ranging from the Keynesian Paul Krugman to many conservative economists recognized that rate increases and disinflation were necessary and had to be done with promptness and fortitude. And so credibility reigned.