Governments control inflation with four broad sets of tools: central bank interest rate policy, contractionary fiscal policy, supply-side reforms, and, in emergencies, direct price controls or currency intervention. The Federal Reserve aims for a 2 percent annual inflation rate as the point of stable growth, and as of early 2026 the Consumer Price Index sits at roughly 2.4 percent over the prior twelve months, close to that benchmark.1Federal Reserve. Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run? Every tool carries a trade-off. Tighter money slows hiring, tax hikes cut take-home pay, and price freezes tend to cause shortages. Knowing which levers policymakers pull, and why, helps you read the forces behind your mortgage rate, your savings yield, and the price of groceries.
The Federal Reserve’s Monetary Tools
Monetary policy is the fastest and most visible response to rising prices. The Federal Open Market Committee meets at least eight times a year to set it.2Federal Reserve. The Federal Reserve Explained – Section: A Federal Committee Setting the Nation’s Monetary Policy Its decisions overlap in the real economy, but the individual levers are worth pulling apart.
Raising the Federal Funds Rate
The federal funds rate is the interest banks charge each other for overnight loans, and it sets the floor for borrowing costs across the economy. When the Fed raises it, credit card rates, auto loans, mortgages, and business lines of credit all get more expensive. That discourages spending and investment, cools demand, and eases the pressure on prices. As of March 2026, the FOMC’s target range sits at 3.50 to 3.75 percent, down from the highs reached during the post-pandemic inflation fight.3Federal Reserve. FOMC’s Target Range for the Federal Funds Rate
Selling Government Securities
The FOMC also buys and sells Treasuries to control how much cash circulates through the banking system. Section 14 of the Federal Reserve Act authorizes these transactions.4Federal Reserve. Section 14 – Open-Market Operations Selling Treasuries pulls money out of banks. With smaller reserves, they have less to lend, and credit tightens across the economy. When inflation needs to come down, the Fed leans on selling.
Interest on Reserve Balances
The old textbook lever, reserve requirements, is gone. In March 2020 the Fed dropped the ratios to zero for all depository institutions, and as of 2025 they remain there.5Federal Register. Reserve Requirements of Depository Institutions The replacement is the interest rate on reserve balances (IORB), currently 3.65 percent.6Federal Reserve Bank of St. Louis. Interest Rate on Reserve Balances (IORB Rate) The Fed pays banks this rate on money they park at the central bank, so a higher IORB gives them a guaranteed return for not lending. It tightens credit through incentives rather than mandates.
Quantitative Tightening
During the pandemic, the Fed bought trillions in Treasuries and mortgage-backed securities to keep markets functioning. Reversing that expansion is called quantitative tightening: the Fed lets securities mature without reinvesting the proceeds, shrinking its balance sheet over time. QT ended in December 2025 with roughly half of the pandemic-era balance sheet growth reversed.7Congressional Research Service. The Federal Reserve’s Balance Sheet Total Fed assets stand at approximately $6.66 trillion in early 2026.8Federal Reserve. Factors Affecting Reserve Balances – H.4.1 The gradual drain reinforces higher rates without requiring more hikes.
Anchoring Inflation Expectations
This may be the most important tool of all. When businesses expect prices to keep climbing, they raise their own prices preemptively, workers demand higher wages, and lenders charge more interest. Those decisions become self-fulfilling. The Fed counters this by communicating its 2 percent commitment clearly and repeatedly through press conferences, projections, and formal statements.9Federal Reserve. Inflation Expectations and Monetary Policymaking If households and businesses trust the target, they moderate their own pricing and wage decisions. Lose that credibility, and every other tool becomes more expensive to use.
Contractionary Fiscal Policy
Congress has its own levers, though they move slowly because they require legislation. The concept is simple: take more money out of the economy through taxes while putting less back in through spending.
Tax Increases
Higher personal income tax rates leave households with less to spend, which softens demand. Corporate tax increases work through business budgets, reducing capital available for expansion and hiring. The federal corporate rate currently sits at 21 percent.10Office of the Law Revision Counsel. 26 U.S. Code 11 – Tax Imposed Congress can also target specific spending through excise taxes on fuel, alcohol, or tobacco, raising sticker prices at the register. Every dollar collected is a dollar that can’t chase goods.
Spending Cuts
Cutting federal outlays does the same work from the other direction. When funding drops for infrastructure, defense contracts, or transfer programs, the businesses and workers who depended on that money see their incomes decline, and reduced demand ripples out from there. A budget surplus actively pulls money out of circulation. In practice, cuts at the scale that would meaningfully move inflation are politically difficult and rare.
Indexing Tax Brackets
One fiscal mechanism runs without any vote. As wages rise during inflation, workers get pushed into higher tax brackets even when real purchasing power hasn’t changed. That “bracket creep” acts as an automatic inflation brake because people pay more in taxes with no legislation required. To keep it from becoming punishing, the IRS adjusts bracket thresholds annually for inflation using the Chained Consumer Price Index. For 2026, brackets were adjusted upward by roughly 2.7 percent on average, with the One Big Beautiful Bill Act providing a 4 percent adjustment for the two lowest brackets.11Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates The adjustments preserve the real value of deductions and thresholds so the tax code doesn’t quietly feed the fire it’s meant to help contain.
Supply-Side Tools
Monetary and fiscal policy attack inflation from the demand side by reducing how much money people have to spend. Supply-side tools do the opposite: make production cheaper and faster so supply catches up to demand. Prices can stabilize without anyone tightening their belt.
Deregulation and Competition
Regulations that add cost to production usually land on consumers as higher prices. Streamlining permits, easing compliance for manufacturers, and opening markets to new entrants can lower the cost of doing business. Deregulation of trucking, airlines, and telecommunications in the late twentieth century offered textbook examples of new competition bringing prices down. On the enforcement side, the FTC and Department of Justice investigate price-fixing and anticompetitive behavior, though there is no express federal price-gouging statute outside emergency contexts.
Infrastructure and Supply Chains
Clogged ports, degraded highways, and limited rail capacity all show up as higher prices because goods take longer to reach shelves. Public investment in transportation networks, energy, and digital systems moves products faster and more reliably. Targeted industrial policy can address specific bottlenecks, as with federal semiconductor investment aimed at reducing reliance on foreign supply chains that proved fragile during the pandemic.
Labor Market Efficiency
When employers can’t find qualified workers, they bid up wages, and higher labor costs feed into consumer prices. Workforce training, occupational licensing reform, and immigration policy all influence how quickly the labor supply can respond. These take years to produce results, but they address structural causes rather than managing symptoms.
Direct Price and Wage Controls
Price and wage controls are the most aggressive option, and they come with the biggest asterisk. They make it illegal to charge above a set price or raise wages beyond a set cap, which stops inflation on paper. In practice, they tend to produce shortages and black markets, which is why no modern U.S. administration has used them outside of emergencies.
The last major American experiment came in August 1971, when President Nixon invoked the Economic Stabilization Act of 1970 to freeze prices, rents, wages, and salaries for 90 days.12The American Presidency Project. Executive Order 11615 – Providing for Stabilization of Prices, Rents, Wages, and Salaries The Act authorized the President to stabilize prices, wages, rents, interest rates, and corporate dividends, guided by standards requiring fairness, allowance for productivity changes, and prevention of shortages. That authority expired on April 30, 1973.13Federal Reserve. Economic Stabilization Act of 1970 The initial freeze was popular and effective at halting visible price rises. The phased controls that followed were a mess. Businesses couldn’t adjust prices to reflect real cost increases, meat and gasoline shortages appeared, and when controls were lifted, prices surged. The episode left most economists skeptical of direct controls as anything other than a short-term measure to buy time while other policies work.
Exchange Rate Management
A country’s exchange rate affects the price of every import, from electronics to crude oil. A strong dollar makes imports cheaper and pulls down the overall price level; a weak one raises import costs and makes inflation harder to control.
The Treasury Department manages the Exchange Stabilization Fund, established under the Gold Reserve Act and codified at 31 U.S.C. § 5302, which authorizes the Secretary of the Treasury to deal in gold, foreign exchange, and other credit instruments to stabilize the dollar’s exchange value.14Office of the Law Revision Counsel. 31 USC 5302 – Stabilizing Exchange Rates and Arrangements In practice, Treasury can buy dollars and sell foreign currency reserves to push the dollar up, making imported raw materials and consumer goods cheaper. The fund operates under the exclusive control of the Secretary with presidential approval.15U.S. Department of the Treasury. Exchange Stabilization Fund The United States doesn’t peg its currency, so exchange rate management is a supporting player rather than a primary tool, most useful when global commodity prices are spiking.
Why the Tools Are Used Together
The 2021–2023 inflation surge showed how the pieces interact. The Fed raised rates at the fastest pace in four decades and ran quantitative tightening at the same time. Congress passed no major contractionary fiscal legislation. Supply chains gradually healed. Inflation came down, and picking one tool to credit is nearly impossible. Rate hikes cooled housing demand, QT drained excess liquidity, supply normalization brought goods prices back in line, and anchored expectations kept the episode from becoming a wage-price spiral.
The real risk in inflation control isn’t picking the wrong tool. It’s overdoing the right ones. Every demand-side measure that reduces inflation also reduces economic activity, and the line between a soft landing and a recession is famously hard to see in real time. The best inflation control looks boring from the outside: steady, predictable policy that never lets expectations slip.
Protecting Your Savings While Policy Works
Policy tools take months or years to bring prices down. In the meantime, several government-backed instruments help you keep your savings from losing value.
Series I Savings Bonds
I bonds combine a fixed interest rate with a variable rate that adjusts every six months based on the CPI. For bonds issued from May through October 2026, the composite rate is 4.26 percent, built from a 0.90 percent fixed rate and a 3.34 percent annualized inflation component.16TreasuryDirect. Fiscal Service Announces New Savings Bonds Rates, Series I to Earn 4.26%, Series EE to Earn 2.40% The inflation component ensures your return keeps pace with rising prices by design. You can buy up to $10,000 in electronic I bonds per calendar year through TreasuryDirect, and you must hold them for at least one year.
Treasury Inflation-Protected Securities
TIPS are marketable Treasury bonds whose principal adjusts up with inflation and down with deflation, based on the CPI. At maturity, you receive either the inflation-adjusted principal or the original face value, whichever is greater, so you’re protected even in a deflationary environment.17TreasuryDirect. Treasury Inflation-Protected Securities (TIPS) TIPS are available in 5-, 10-, and 30-year terms. As of mid-2026, the 5-year TIPS real yield sits around 1.78 percent, meaning you earn that rate on top of whatever inflation turns out to be.18Federal Reserve Bank of St. Louis. Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Inflation-Indexed Unlike I bonds, TIPS trade on the secondary market, which makes them more flexible for larger portfolios.
Social Security Cost-of-Living Adjustments
If you receive Social Security benefits, the annual cost-of-living adjustment partially shields your income. The 2026 COLA is 2.8 percent, affecting roughly 71 million beneficiaries starting with January 2026 payments.19Social Security Administration. Cost-of-Living Adjustment (COLA) Information The adjustment doesn’t perfectly match every retiree’s actual cost increases, since healthcare and housing costs often rise faster than the overall CPI, but it prevents benefits from losing ground to broad inflation over time.