Policy tightening can also lower stock prices by increasing the expected equity premium—for example, by weakening the balance sheet of leverage firms and making their stocks riskier. 20  - 14 overall demand for goods and services in the economy, thereby reducing the demand/supply imbalances we have seen, and, consequently, reduce inflationary pressures.
As a result, the inflation rate should fall back toward 2 percent, the FOMC’s inflation rate target. A key question is how much the tightening of financial conditions since late 2021 has contributed to reducing aggregate demand and inflationary pressures. In figure 8, you can see that inflation, measured using the personal consumption expenditures price index, has started to come down.