Can someone tell me why raising the interest rate will help lower inflation?

[Paper Roses]

To those of us with mortgages, who have to buy food, pay insurance. car payments and utilities will suffer. I can't understand why raising interest rates will help any of us. Maybe you know, I can't understand the reasoning.

I'm struggling like so many others. The rise in interest rates will make everything we buy or pay for much more costly. I'm about ready to give up!

[barbaraann]

1. I read somewhere that it was like killing the dog to stop it from barking.

[unblock]

6. Hahaha that is awesome and yeah, pretty accurate.

I think it's fine to reduce growth from 7% to 2% or fight inflation. But actually causing a recession to fight inflation, I have a problem with.

In the current environment, raising interest rates while unemployment is super low is fine. But I don't think they should raise rates do much it kills a job market that's finally decent for workers.

[onecaliberal]

2. It cools demand. People don't spend when rates are higher.

[Sympthsical]

3. As simply put as possible, it slows demand

When there's more demand than supply, prices go up.

Increasing rates discourages demand by making borrowing more expensive, so prices come down.

That is the most simplified form of the idea.

[unblock]

4. Broadly, it reduces demand.

If it's more expensive to buy a house or car due to rising interest rates, there will be fewer people to push up prices on those items.

And if you're spending more on interest payments, you're spending less on other stuff, reducing upward price pressure on those items.

All of this means less economic activity, i.e., less growth if even recession. That's part of the trade-off for fighting inflation.

[Blue Dawn]

5. I think this John Oliver video explains it pretty well.

I hope it is somewhat helpful. I learned quite a bit from watching it.

[Mosby]

24. Thanks.

Very informative.

[elleng]

7. Not I. By Robert Reich:

This week, the Fed is expected to further raise interest rates to slow the economy. It's predictable, but a big mistake. It may plunge the U.S. into another recession.

The last thing working people need is for the Fed to raise interest rates right now. It would be far better for Congress to stand up to price gougers and profiteers.

The best remedy for the current inflation is a combination of a windfall profits tax, price controls and anti trust enforcement to reduce the pricing power of big corporations -- not higher interest rates that will slow the economy, cost jobs, and reduce wage gains.

https://www.facebook.com/search/posts/?q=Robert%20Reich

[DetroitLegalBeagle]

14. Reichs ideas are not politically feasible

Raising interest rates is. And price controls don't have a great track record of working. They tend to cause shortages, which isn't exactly what we need when we already have shortages.

The choices right now is either raise the rates or do nothing and hope inflation goes away on its own. Everything else requires Congress to have the political will to do something, which they currently do not have.

[jimfields33]

22. I hear that they may raise it 3/4 of a percent. That's not enough

I think it should go closer to two percent which is equalize everything. Interest rates are embarrassingly too low for a long time.

[MichMan]

26. Price controls ?

The government determines how much everything should cost and tell companies that's all they can charge?

Doesn't seem very feasible

[ProfessorGAC]

8. In Theory,...

...it reduces consumption thereby causing fewer dollars to chase goods & services.
Since inflation hit energy & food so hard, I don't know that raising rates would have the historically expected effect.
BTW: 78% of mortgages in the US are 15, 25, or 30 year fixed rate so the rate increase won't impact the great majority of those with mortgage payments.
The other 22% will feel some sting.
Now, having to curtail other spending because the house payment went up, still reduces consumption. The Fed, alas, doesn't make their decisions based on compassion for consumers. For them, inflation hurts everybody, raising rates hurts some. They'll take the option of hurting fewer without compunction.

[Bleacher Creature]

9. Inflation is mostly determined by the money supply on a macro level.

Increasing interest rates discourages borrowing and favors saving available cash, which brings down the money supply. It obviously hurts individuals and families, which is what we saw in the late 70s and early 80s, but the point is to address the issue at the macro level.

[egduj]

10. It's either that or standing up to the corporations who are price gouging.

Raising rates is easier.

[Big Blue Marble]

11. Actually, it should be both.

It is clear that price gouging is occurring. Biden should speak out about it.

[elleng]

12. and foolish.

'The best remedy for the current inflation is a combination of a windfall profits tax, price controls and anti trust enforcement to reduce the pricing power of big corporations -- not higher interest rates that will slow the economy, cost jobs, and reduce wage gains.'

https://www.facebook.com/search/posts/?q=Robert%20Reich

[DemocratSinceBirth]

13. It destroys demand by raising the cost of borrowing.

[elleng]

16. because who will need gas, milk or bread, once interest rates are increased.

Sorry, I gotta get out of this discussion, as it's RIDICULOUS!

I'll repeat this once more, from Robert Reich:

This week, the Fed is expected to further raise interest rates to slow the economy. It's predictable, but a big mistake. It may plunge the U.S. into another recession.

The last thing working people need is for the Fed to raise interest rates right now. It would be far better for Congress to stand up to price gougers and profiteers.

The best remedy for the current inflation is a combination of a windfall profits tax, price controls and anti trust enforcement to reduce the pricing power of big corporations -- not higher interest rates that will slow the economy, cost jobs, and reduce wage gains.

https://www.facebook.com/search/posts/?q=Robert%20Reich

[genxlib]

15. It sucks that it happens on Biden's watch

Because he will unfairly take the blame for the slow down. Of course there are those that will say it is his fault since it is in reaction to "his" inflation but we can likely all agree that would be a BS argument as well.

However, the interest rates have been stupidly low in recent history. It has contributed bubbles in both the stock market and the housing market.

In my opinion, the rates are simply heading back to where they need to be. It is just terrible timing that we get blamed for the inevitable pain that those policies are going to cause.

I may get flamed for this but any prime rate under 5% should be an expansionist tool reserved for getting us out of an economic hole. Running low rates when the economy is going well just over-heats it and results in wild speculation and fluctuations.

[Shermann]

17. Those with debt (including mortgage debt) can be helped by inflation

If your debt has a fixed interest rate like most mortgages over the past decade, the amount you owe is effectively reduced by the inflation rate every year. If your interest rate is less than the inflation rate, you are coming out ahead.

Those who are truly on a fixed income will suffer. Income sources that adjust for inflation (like Social Security) should keep up. Social Security's COLA adjustments are based on the CPI-W Consumer Price Index, which seems to lag behind the higher inflation rate seniors typically see. So that's not so good.

[Big Blue Marble]

18. First the interest rates were lowered at the beginning of the pandemic two years ago.

It was part of the overall stimulation of a flagging economy. The rates are returning to about what they were
in 2019. To continue the rates at the historically level of the last two years would overheat demand and
increase the cost of everything.

It is also important to remember that those who lend the money need to be compensated enough
to provide the funds. If interest rates are too low when inflation is high, the sources of financing will
drive up. Interest is the price of money. And inflation exceeding interest rates makes it a losing investment
for those who fund the loans

And thirdly, some us of who depend on our savings to live, have seen their value shrink at a shocking
rate as we had little or no return the savings we depend on over the last two years. . And this year the loss of
value has increased.

[Nululu]

19. Shrinking the money supply

The PTB see inflation as caused by too much money chasing too few goods. Raising interest rate decreases borrowing and the money supply.

Of course they could raise taxes on the rich to decrease the supply. Or tax excess profits to limit the money supply.

They could act more forcefully to end Russian expansion in Ukraine to expand the gas and grain supply.

Also improve the supply chain. End Thor power tool ruling and other regulatory actions to aid in that.

[elleng]

20. Thanks

[roamer65]

21. It cools demand by slowing consumer spending.

I think with energy prices coming down, inflation should start to cool a bit.

Higher interest rates do not shrink the money supply, but they do slow the velocity of money.

The Federal Reserve eventually will try to reverse QE, in other words the selling of financial instruments in its portfolio into the open market.

[BadgerKid]

23. Financial institutions "need" overnight interest on $2T.

And the last CPI report was probably over shooting the importance of energy because it had been coming down since the CPI report looked at the data