How would the Fed know if the economy was growing fast enoug

How would the Fed know if the economy was growing fast enough where it would want to increase interest rates? What would the Fed do in such a case?

Solution

An increase in interest rates would be a part of a contractionery monetary policy. This is undertaken to reduce borrowing and investment in times of rising prices and inflation. In case inflation rates are high and prices of goods are growing fast then the Fed would want to increase interest rates. The economy would be experiencing a certain threshold level of inflation and so the moment the growth in prices crosses this level the Fed would want to tighten monetary policy to cool down the economy. So in the event of rising inflation and the economy overheating the Fed would want to raise interest rates or conduct open market sales to reduce the inflation rates in the economy.