The government combats inflation through a coordinated set of levers: the Federal Reserve raises interest rates and shrinks its bond holdings to cool demand, Congress and the President adjust taxes and spending, federal agencies use trade and supply-side tools to expand what’s available for sale, and automatic adjustments to Social Security and tax brackets soften the blow on households. The Fed’s official target is 2 percent annual inflation as measured by personal consumption expenditures, and when prices run hotter than that, these tools stay actively in use.1Board of Governors of the Federal Reserve System. Why Does the Federal Reserve Aim for Inflation of 2 Percent Over the Longer Run As of the Fed’s December 2025 projections, the median forecast for 2026 core inflation is 2.5 percent, still above target, which is why most of the machinery below is currently running.2Federal Reserve. December 10, 2025 FOMC Projections Materials
The Federal Reserve’s Monetary Tools
Congress gave the Federal Reserve a dual mandate in a 1977 amendment to the Federal Reserve Act: promote maximum employment and stable prices.3Office of the Law Revision Counsel. 12 USC 225a – Maintenance of Long Run Growth of Monetary and Credit Aggregates The Fed’s anti-inflation work happens almost entirely on the price stability side of that mandate, using three main tools.
Raising the Federal Funds Rate
The Fed’s most visible move is raising the federal funds rate, the benchmark for what banks charge each other on overnight loans. When the Federal Open Market Committee lifts this rate, the increase cascades through the financial system. Credit card rates climb, mortgage rates follow, auto loans get more expensive. Higher borrowing costs discourage spending and new investment, which eases upward pressure on prices.4Federal Reserve Bank of St. Louis. How the Fed Implements Monetary Policy
The Fed steers this rate mainly through the interest it pays banks on reserves held at the central bank, known as Interest on Reserve Balances. Moving the IORB rate pushes short-term rates across the market in the same direction. This mechanism replaced the older approach based on reserve requirements, which have sat at zero for all depository institutions since March 2020.5Board of Governors of the Federal Reserve System. Interest on Reserve Balances Frequently Asked Questions As of December 2025, the target range for the federal funds rate sits at 3.5 to 3.75 percent, a gradual easing from the aggressive hikes of 2022 and 2023.6Board of Governors of the Federal Reserve System. The Fed Explained – Accessible Version
Shrinking the Balance Sheet
Beyond interest rates, the Fed can pull money out of the system by letting its bond holdings run off. During crises, the central bank buys large volumes of Treasury bonds and mortgage-backed securities to inject cash. Quantitative tightening reverses this, primarily by letting those securities mature without reinvesting the proceeds rather than actively selling them.
The Richmond Fed described the process as allowing maturing securities to “roll off” the asset side of the balance sheet, which simultaneously reduces reserves in the banking system by an equivalent amount.7Federal Reserve Bank of Richmond. The Fed Is Shrinking Its Balance Sheet. What Does That Mean Private markets then have to absorb more of those securities, which tightens financial conditions and makes lending slightly harder. The Fed can accelerate the process by actively selling holdings, but passive roll-off carries less risk of market disruption and has been the default approach.
Forward Guidance
Sometimes the most powerful thing the Fed does is talk. Forward guidance is the practice of signaling what interest rates are likely to do in the future. When the Fed indicates that rates will stay elevated for an extended period, businesses and consumers adjust their behavior today, before any rate change actually happens.8Board of Governors of the Federal Reserve System. What Is Forward Guidance and How Is It Used in the Federal Reserve Monetary Policy That anticipation effect can tighten financial conditions without the Fed needing to move rates at all. Vague or mixed signals can send markets lurching in the opposite direction, which is why FOMC press conferences and meeting minutes are read word by word.
Fiscal Policy: Taxing and Spending
Where the Fed controls the money supply, Congress and the President control the government’s direct footprint. Fiscal anti-inflation policy works by reducing the total amount of money in circulation.
Tax Increases
Raising taxes pulls cash out of the private sector. Higher corporate rates shrink after-tax profits that might otherwise fund expansion or wage increases. Higher personal income taxes reduce disposable income, which means fewer dollars chasing the same supply of goods. Congress can also let temporary tax credits or deductions expire, which functions as a tax increase without requiring an affirmative vote to raise rates. The political difficulty of explicit tax hikes is why expiring provisions often become the default lever.
Spending Cuts
When the government reduces spending on infrastructure projects, defense contracts, or social programs, it shrinks the volume of federal dollars flowing to businesses and workers. Fewer government contracts mean less hiring and purchasing by contractors, which reduces overall demand. The tradeoff is real: cutting spending too aggressively during high inflation can tip the economy into recession, which is why fiscal austerity tends to be politically unpopular even when it’s economically warranted.
Supply-Side and Trade Interventions
Monetary and fiscal policy both work by reducing demand. Supply-side strategies attack the other half of the equation. If you can produce more goods, prices don’t need to rise even when demand stays strong.
Deregulation and Permitting Reform
Lowering the administrative burden on manufacturers, energy producers, and builders lets them bring products to market faster. When a new factory takes two years of permitting instead of five, its output reaches consumers sooner, easing supply constraints. These reforms typically happen through federal rulemaking under the Administrative Procedure Act. The challenge is balancing speed against the safety and environmental protections those regulations were designed to provide.
Strategic Petroleum Reserve Releases
Energy prices flow through the entire economy, affecting shipping, fertilizer, and much of what sits on a store shelf. When oil prices spike, the President can order a drawdown from the Strategic Petroleum Reserve to add supply and moderate prices. Federal law requires the President to first find that a “severe energy supply interruption” exists, meaning either a significant supply reduction has caused severe price increases likely to cause major economic harm, or the release fulfills obligations under international energy agreements.9Office of the Law Revision Counsel. 42 U.S. Code 6241 – Drawdown and Sale of Petroleum Products
A secondary authority allows smaller releases of up to 30 million barrels for up to 60 days when a supply shortage doesn’t rise to the level of a full emergency but still poses a significant risk.10Department of Energy. Statutory Authority for an SPR Drawdown SPR releases are a short-term tool, not a long-term solution, but they can blunt the worst of an energy price shock while other responses develop.
Tariff Reductions
Reducing tariffs on imported goods is one of the fastest ways to increase the effective supply available to domestic consumers. The Trade Act of 1974 gives the President authority to proclaim temporary tariff reductions and increase import quotas to address trade imbalances, though these temporary measures are limited to 150 days and reductions cannot exceed 5 percentage points below the existing rate.11Office of the Law Revision Counsel. 19 USC 2132 – Balance-of-Payments Authority Even modest tariff cuts on construction materials, electronics, or industrial inputs can lower shelf prices, because the savings compound through each step of the supply chain.
Agricultural Support
The federal government uses Farm Bill programs to stabilize domestic food production. Current programs focus on risk management, providing support when weather disasters or market crashes threaten the food supply rather than paying farmers regardless of conditions.12Senate Committee on Agriculture, Nutrition, and Forestry. Farm Bill Ends Direct Payment Subsidies The USDA projects that government payments to farm producers will remain elevated through 2026 as commodity-price-triggered programs activate during periods of market volatility.13Economic Research Service U.S. Department of Agriculture. Direct Government Payments to U.S. Farm Producers, 2022-26F Keeping the agricultural base productive is one of the most direct ways to prevent food-price spikes from spreading through the rest of the economy.
Infrastructure and Logistics
Supply chain bottlenecks cause localized inflation that monetary policy can’t easily reach. If a port can’t unload ships fast enough, goods pile up and prices rise regardless of what the Fed does with interest rates. Investing in port capacity, highway systems, and freight rail reduces the time and cost of moving goods from producers to consumers. When the 2021-2022 supply chain crisis drove shipping costs to record highs, subsequent federal investment in port modernization was a direct response to inflation that couldn’t be solved by raising rates.
Price Rules and Fee Transparency
Direct intervention in prices is the bluntest tool available, and it’s used sparingly because economists broadly agree it creates more problems than it solves over time. During emergencies, it still comes off the shelf.
Price Gouging Laws
Most states have laws that cap how much businesses can raise prices during declared emergencies, covering essentials like fuel, food, and medical supplies. There is no federal price gouging statute. Penalties vary by jurisdiction, with civil fines typically ranging from $5,000 to $50,000 per violation. Price ceilings work as a short-term circuit breaker against panic-driven price spikes. The downside is that they can discourage suppliers from shipping goods into the affected area if the capped price doesn’t cover their costs, sometimes making shortages worse.
Fee Transparency Rules
A less obvious form of price control targets hidden fees that inflate the real cost of goods and services without appearing in the advertised price. The FTC’s Rule on Unfair or Deceptive Fees, effective May 12, 2025, prohibits bait-and-switch pricing for live-event tickets and short-term lodging. Businesses must include all mandatory charges in their displayed total price, and they cannot use vague labels like “convenience fee” or “service fee” without accurately describing what the charge covers.14Federal Trade Commission. The Rule on Unfair or Deceptive Fees: Frequently Asked Questions The FTC can seek civil penalties of up to $50,120 per violation under its penalty offense authority when companies engage in conduct they know to be deceptive.15Federal Trade Commission. Notices of Penalty Offenses Transparent pricing doesn’t lower the underlying cost of goods, but it forces businesses to compete on real prices rather than misleading headline numbers.
Built-In Adjustments That Cushion Inflation
Beyond fighting inflation’s causes, the government maintains several mechanisms that automatically offset its impact on individuals, especially people on fixed incomes who can’t negotiate higher wages.
Social Security Cost-of-Living Adjustments
Social Security benefits increase each year based on changes in the Consumer Price Index. For 2026, beneficiaries and Supplemental Security Income recipients are receiving a 2.8 percent cost-of-living adjustment.16Social Security Administration. 2026 Cost-of-Living Adjustment (COLA) Fact Sheet The adjustment is calculated from third-quarter CPI data, so there’s always a lag. In a year when inflation spikes sharply after September, retirees won’t see the full adjustment reflected until the following January. The mechanism still keeps Social Security checks from losing purchasing power year over year in a way that would compound permanently.
Treasury Inflation-Protected Securities
For savers worried about inflation eroding their returns, the Treasury offers TIPS, bonds whose principal adjusts based on changes in the Consumer Price Index. When inflation rises, the bond’s face value increases and interest payments grow with it because they’re calculated on the adjusted principal. When a TIPS bond matures, you receive either the inflation-adjusted principal or the original face value, whichever is greater, so you’re protected against deflation too.17TreasuryDirect. TIPS Treasury Inflation-Protected Securities TIPS are available in 5-, 10-, and 30-year maturities and can be purchased directly from TreasuryDirect without paying a broker.
Indexed Tax Brackets
The IRS adjusts federal income tax brackets, standard deductions, and many other thresholds annually for inflation. Without this indexing, wages that rose only to keep pace with prices would push workers into higher brackets, and inflation itself would act as a hidden tax increase, something economists call “bracket creep.”18Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill The adjustment doesn’t fight inflation, but it stops the tax code from amplifying its effects on household budgets.
None of these built-in protections eliminate inflation’s sting entirely, and they tend to lag behind the actual price increases they’re designed to offset. Combined with the active tools above, they form a system where inflation is fought at the source and softened at the point where it hits your wallet.