The Fed raised U.S. interest rates several times during 1994 to
prevent U.S. inflation.
I'm not an economist. I'm simply interested in the aspect of economics which doesn't require a degree to understand and appreciate. It might well be better categorized as common sense, if only it were a little more commonly sensed.
Inflation is generally thought of as rising prices. But this diverts attention from who is doing the raising... or who is forcing others to raise prices?
'Price inflation' should be distinguished from 'inflation'. Price inflation means putting prices up. Inflation, on the other hand means causing others to put prices up. How is this done?
Well, governments increase the money supply, through their central banking agents. This i.e. the money supply,is what is really being inflated, which causes a secondary - price - inflation.
When people put up prices, part of that is genuinely finding a suitable price to move goods and services. And the other part of it - the part central planners generally don't like to talk about - is goods and service providers trying to limit the effect of money-supply inflation i.e. the erosion of their currency's purchasing power.
Whenever the Fed raises or lowers rates it is engaging in price-fixing. But to answer your question, when the Fed raises rates, it is making borrowing more expensive and lending more rewarding. So the effect is to encourage investment in capital infrastructure.
The only problem is that the signals, that this change (in the amount of increased investment in any particular industry) emanated from, did not originate from consumers expressing their needs and wants - with the attendant risks which should be theirs to bear or mitigate. No, instead the signal came from a third, intervening, party, who bears virtually none of the risk if the change turns out to have negative consequences for those who's expressed preferences in the market were overridden by the third party i.e. the government agent (the Fed), setting interest rates.
Interest rates are merely the price of money i.e. what 'borrowing it' is selling for on the market. As such, interest rates are like any other price... they should be set by consumers who bear the risk, where they do not mitigate against the risk. They should not be fixed any more than cellphone prices or the prices of bananas, or t-shirts.