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Chief
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Who says raising interest rates doesn’t impact inflation? It’s not the only factor, but certainly is A factor
Chief
Once you realize the Fed has no idea what it's doing, it all makes sense.
Can you please reference when the fed said increasing interest rates won’t fight inflation?I’m 99% sure that you’re misinterpreting something badly. Saying that something won’t 100% solve inflation isn’t the same as saying it won’t help at all.
here’s a pretty decent analysis, I’m not saying it’s correct but it makes sense. https://axlewise.com/cost-of-gas/
Rising rates = higher borrowing costs for banks = higher hurdle rates when banks lend = fewer loans to low margin or highly indebted businesses + more attractive debt investing which hurts stock prices and raises cost of equity = zombie or marginal businesses struggle to survive = layoffs = demand destruction = lower prices
on the consumer side, higher rates = more expensive for consumers to buy products (car loans, etc) = demand destruction = companies forced to cut prices / reduce production = less demand on supply chain = lower prices / reduced production throughout supply chain = layoffs = more demand destruction
Pro
Fed is attempting to limit consumer spending power by raising rates for presumably a curtailed version of Volker’s move given similar circumstances back in the 70s. https://www.vox.com/future-perfect/2022/7/13/23188455/inflation-paul-volcker-shock-recession-1970s
Rates were also too low during the past 8 years so some of this is just re-balancing. Read up on consequences of low/negative rates on GDPs for countries globally, with Japan as a case study to start.
They realized how much of a bubble everything has resorted to. They need to tame inflation and lower spending/ fix global things like supply chain issues
Chief
Based on your hashtag I’m pretty sure you’re news source is either Fox News or memes. There is no way to explain this in five words like you’re used to, but here’s the BLUF:
The fact is, there is so much free money in existence that the economy will shoot straight to the moon if it’s not held back. And that’s a problem when half the country can’t afford basic things
Democrats control 2/3 of the government this is happening on their watch. I do not use fox or cnn. I am an independent.
The theory that applies is that rates need to be 2x inflation in order to stop it effectively. “Volker method”, google it. Problem is there is too much corporate debt and companies couldn’t service it with the aggressive rate hikes necessary. If we don’t get aggressive things will get ugly fast.
A lot of good answers here. While I don’t disagree, a lot of this is theoretical. we’ve not really been in the situation that I know of. I’m concerned because I think it’s going to do more harm than good. I’m a firm believer in laissez-faire economics. I think when you have too much artificial intervention things like to correct themselves. I also believe, that this is only going to hurt 80 to 90% of Americans, as a lot of them have been utilizing credit at a much higher rate, somewhere around the 40% range. Raising interest rates is only going to make this more difficult for those that don’t have significant money in the bank.
True to a point, but remember nearly everything in America is run on debt, it’s been that way for a while. Certainly feel sorry for people who are in a pinch living off credit cards. However if rates are not aggressively increased to cool off buying and slow down inflation then it will kick off a cascade of hyper inflation making it hard for people to obtain food and basic necessities. It’s a hard road to travel but there is no way to cool inflation without pumping the brakes on spending and consuming. Only way to do that is raise rates.
So what if a different approach was followed. Instead of the same old situations with mixed results, what if the burden of the supply lines was eased with less red tape and paving the way for smaller players to jump in the game and increase competition? Long game type mentality.
I understand and appreciate your reply.. I still think the government needs to ease red tape across the board. For instance the entry level into farming is excessive, Recently there’s been a very opportune chance for smaller players to jump in and market better quality food at slightly higher prices. But even becoming USDA certified as a meat processor or USDA certified dairy class A Can be tens of thousands of dollars. They need to reduce that footprint stop making businesses so costly to start up.
Right now the fed is in no position to lower interest rates in case a recession does materialise. They need to give themselves some breathing room in case the situation worsens.
It will also participate in fighting inflation, even though not the only factor.
Most importantly though, we are in a really unique scenario: inflation + decreasing GDP + really low unemployment is exceptional and really confusing, and there’s no real textbook answer for how to deal with this situation. The fed doesn’t necessarily know what the best reaction is, and it looks like they are choosing to brace themselves in case things go to hell.