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I came across this statement in a fairly official document, the phrase in bold does not seem consistent. I cannot contact the authors of the said document, so I am posing my question here. Here is the statement.
"Under a mild recession followed by a sluggish recovery and inflationary pressure, interest rates rapidly increase and yield curve flattens."
Why would interest rates rapidly increase? Is it understood that the interest rates here refer to the rates the Federal Reserve sets?
Because interest rates have been at abnormally low levels for quite some time and the Federal Reserve bank is required to pay stockholders' dividends at 6 percent, the Federal Reserve must either issue or collect more money.
Both of these choices negatively impact the value of the US dollar as they both hurt the American economy one way or another.
A mild recession followed by a sluggish recovery may well lead to a politically initiated response that pressures the Federal Reserve to increase the money supply and inflation.
The reason the Federal Reserve concludes that interest rates rapidly increase is because they need the borrowers of this newly created money to pay back their loans sooner (to get their stockholders' 6 percent dividends).
Source: http://www.federalreserve.gov/aboutthefed/section7.htm
