#FedRateCutAffectsDollarTrend When inflation is high, the Federal Reserve (Fed) typically responds by raising interest rates (the federal funds rate). Here’s how it works and why the Fed takes this approach: 1. Why the Fed Raises Rates During High Inflation • Slows Down Borrowing & Spending: Higher interest rates make borrowing more expensive for businesses and consumers. This reduces spending and investment, which in turn slows down demand-driven inflation. • Encourages Saving: Higher interest rates make savings accounts, bonds, and other fixed-income investments more attractive, reducing excess money in circulation. • Cools the Economy: By making credit more expensive, economic activity slows down, reducing upward pressure on prices. 2.