This comes as the Fed altered its inflation target, meaning it will allow inflation to rise “somewhat” above its 2% target. The low level of interest rates might help explain why markets are more tolerant of large, persistent budget deficits. It could increase interest rates to maintain foreign (and domestic) demand for dollar assets, at the cost of damping economic growth. Or it could keep interest rates low and allow the dollar to weaken, which would push up inflation as imported goods and services became more expensive. The result was inflation, with the Fed forced to raise interest rates to double digits in the late 1970s and early 1980s.

Source: The Herald February 28, 2021 11:37 UTC