Movements in interest rates influence a firm’s cash flow and the value of its collateral, all else being equal. Higher interest rates also adversely affect consumer spending and especially residential investment, both by forcing households to devote a greater portion of their income to debt service and by making it more difficult to qualify for a loan because of maximum payment-to-income rules.
If so, this decrease will put downward pressure on core inflation, which was already running somewhat below our 2 percent objective when the downturn began in March. Moreover, as I have indicated previously, I judge that measures of longer-term inflation expectations were, when the downturn began, at the low end of a range that I consider consistent with our 2 percent inflation objective.