Fed bank

Increase in Interest Rates from in the Early 1980s
Name
Institution
By the start of the 1980s, the United States economy was going through a painful inflation and the Federal Reserve Bank come up with a policy of raising the interest rates. The high inflation forced the federal bank to hike the interest up to 19.5%. The bank also increased interest rates for other monetary instruments (Ireland, 2015). Interest on short-term treasury bonds almost doubled from 9.3% to about 17% while that on long-term bonds increased by about four points. On the peak of inflation, the rates had risen to 20%. However, the economy started performing better, and the fed bank loosened the rates from the mid 1985s.
Inflation is witnessed when the general prices of commodities increase as a result of an increase in the amount of money circulating in the economy. The policy on interest rates was geared towards raising the interest rates so that people could save more to get more interests and spend less (Ireland, 2015). When people reduce spending and increase saving, the money circulating in the economy would decrease, and consumers would not frequently buy goods and services. There would be an imbalance between demand and supply bringing the prices down, and inflation reduces.
Once the policy was put into effect and interest rates hiked, inflation went down though not immediately. From around 1984s, the Fed Bank policy was felt at the local level where the short-term market rates reduced from about 20% at the start of the decade to less than 10% (Ireland, 2015).

However, the long-term bonds’ interest did not go below 10% until in mid-1985. The policy was contradictory and it worked since inflation reduced slowly by slowly and by 1990, the country was back on track. The policy slowed down the rate of inflation from more than 13% in 1980 to about 4% in 1989.
References
Ireland, P. N. (2015). Interest rates, inflation, and Federal Reserve policy since 1980. Journal of Money, Credit and Banking, 417-434.