"... they have to manipulate the inflation figures for as long as possible to give the illusion that “all's well!”"

The Fed Won't Be Able to Combat Inflation by Raising Fed Funds Rate
Ed Zimmer

There are any number of ways to say it, but it all comes down to the same thing. The Federal Reserve has reached the rock and a hard place position when it comes to the Federal Reserve Rate.
According to the US Treasury, the cost of paying the interest on the national debt was 413 billion dollars in 2010. Despite the fact that our national debt at the time reached 13.5 Trillion, that was not a record, it was barely an effective rate of 3.05%. Just 10 short years earlier, our effective rate on the national debt was 6.19% and the Federal Funds rate was 3.5%.
So by lowering the Federal Funds rate, we cut a like amount off the effective rate of the interest on the national debt. In fact, since 2000, the effective rate of interest on the national debt has fallen from 6.38% to just 3.05%. During the same period, the national debt rose from 5.6 trillion to 13.5 trillion. (Figures based on Sept 30, end of the federal fiscal year).
Chairman Bernanke has said that the Fed will raise rates to trim any inflation that exceeds their target rate of 2%. According to the Federal Government, inflation has not been a factor, just look at the rise in COLA for the senior citizens on Social Security.
My contention is that the Federal Reserve will not be able to deal with inflation through raising the Federal Funds rate. As it sits now, the 0.25 rate can only be lowered to 0.1 or taken to zero. Moving it in the other direction would increase the already substantial weight of interest on the national economy.
President Obama’s Budget anticipated a revenue stream of 2.5 trillion dollars in 2011. Anticipated to 14.8 trillion and at 3%, would cost the US 444 billion dollars in interest, a 31 billion increase. 444 billion dollars is 17.8% of the anticipated revenue stream, just to service the interest costs on the debt.
Now, what if the effective rate were to rise because the Federal Funds rate is raised to combat inflation?
According to the Government, there is no inflation, or very mild inflation, because the Government is calculating the inflation rate to minimize what every shopper who goes to the store to buy their own groceries already knows. Inflation is running over 4% (according to John Williams over at Shadowstats.com) which if the Federal Reserve was to raise the rate to combat this (by about 2%); the effect on the budget would be staggering. A 5% effective rate on the debt would cost the US 740 billion dollars or 29.6% of anticipated revenues. At that point, 30 cents of every dollar taken in by the Government would be devoured by the interest on the national debt.
And that’s not the whole story. The President’s budget is based on very robust assumptions. Among them, an 18.5% increase in revenues from 2010. GDP is anticipated to be a very strong 4.6%. The increase in revenues assumes a 19.7% increase in Individual Income taxes, a 52.8% increase in Corporation Income taxes and a 6.1% increase in Social Security Payroll taxes (which were cut by 2% for employees, the employer rate remains at 6.2%).
I don’t see individual income taxes rising by nearly 200 billion dollars this year, considering the tax breaks that Congress demanded. On the SS payroll side, if the revenue is being cut 2% (from a total of 12.4 to 10.4%) that would weaken their already rosy prediction of 674 billion to roughly 565 billion dollars, an income loss of more than 100 billion dollars.
Given the declining options for income, the ability of the Fed to combat inflation through the increase in the Federal Funds rate is non-existent. If they increase it, they raise the cost of borrowing money, adding further deficits which in turn would cost more to service. If they can’t raise the rate, they have to manipulate the inflation figures for as long as possible to give the illusion that “all's well!”
Oh, and that increase to a federal fund rate of 2%, which would give us an effective rate of 5% would also give us a service on the debt that would be the largest expenditure on the budget, eclipsing even Social Security.

Link:
http://seekingalpha.com/article/248009-the-fed-won-t-be-able-to-combat-inflation-by-raising-fed-funds-rate?source=email_the_macro_view