How does the constant upping the interest rates help with inflation?

Question

With the interest rates hitting 6% a year, lowering the interest rates will help with inflation, not raising them. People who bought their houses at 3% cannot afford to sell their houses to move up because most often they can't afford to buy a new house because it is selling for more. What am I missing? Explain!

WASHINGTON—The Federal Reserve lifted interest rates by 0.75 percentage points

How does the constant upping the interest rates help with inflation?

to combat inflation and signaled plans to keep raising them, though possibly in smaller increments.

Fed Approves Fourth 0.75-Point Rate Rise, Hints at Smaller Hikes© Graeme Sloan/Bloomberg News
Fed officials in a Wednesday policy statement acknowledged it could take time for rapid increases this year to be reflected in the economy. “The committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments,” they said at the conclusion of a two-day meeting.

The statement said continued rate rises were needed “to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”

lightbulb27 · Accepted Answer

"[Dorothy...], Pay no attention to the man behind the curtain". How dare you challenge the great..."wizard of oz"... lol.

It moves the money around, harder for people and business to afford investment, businesses cannot expand as much. So productivity growth slows, fewer jobs, less production, people don't move around as much, buy less... economy slows down, job losses.

This may actually cause a bigger mess though... if the problem is insufficient supply. Supply will be further tightened resulting in more inflation. e. g. imagine lumber prices going up more because of less supply... house prices go up... more inflation.

There are two sides to this and you are right..."Dorothy"... the Fed may be boxed into a corner they created and what they are doing... won't work right...

The Fed said last year... they wanted inflation to run hot... and that is what is going to happen I suspect. The underlying problem is govt has been spending like a mad wizard, more than it takes in, spare no expense, money is "free"... for decades, spending on war and military, bailouts, etc. So to pay for it all... they are stealing the $ out of your bank account. Kiss your purchasing power... and thus your savings... goodbye.

Your only ally in this is compound interest... not sure even gold will help, since they control it. Not sure what Dorothy would do... probably buy a farm... but can't afford to run the tractor and fertilize to grow anything. Wish I had a crystal ball.

BeMuse · Accepted Answer

M*V= P*T

where,

M = Money supply

V = Velocity of money

P = Price level

T = volume of the transactions

The Fed Purposely pumped up M to crash the economy as a policy decision because they are loyal to the WEF/UN/Great Reset not to the American citizens. The USD is the main world reserve currency.

Thus P went up in response to the rise in M (inflation). Now they are beginning to reduce M. Economies are a product of supply and demand. Some individuals have more demand for present money than their current reserves allow them to spend. To get more present money to cover their expenses, these people have to borrow money in the credit markets from people that have excess money on hand. When demand exceeds supply, there is a shortage so the cost of money (interest rates) go up as people bid for access to present money in exchange for future returns. As the money supply shrinks, there is more risk that lenders will not see their money return, thus they need to be compensated more heavily for increased risk.

FilmGuy93 · Answer

It won't.

Before I can answer this question, you have to understand that not all inflation is the same. There's two kinds: inflation due to lack of supply, and inflation due to too much demand. Both cause the currency to lose value because the amount of value you have to exchange to obtain the exact same product or service goes up. The difference is that in one case, the product to sell than expected, in the other case, the number of people all trying to obtain the product is greater than expected.

Raising interest rates addresses inflation caused by too much demand. It does that because the interest rates determine how favorably people/banks can borrow money. Assume for the purpose of our conversation that any time you're spending money, you are effectively borrowing it because our economy runs on something called "fiat currencies" (which is a conversation for another time). Because it costs the bank more to give you access to your money, there's less money to spend. We can always generate more product to meet the demand, with this kind of inflation.

Now, the problem we are facing right now is caused by a lack of supply. Inflation is going up because the amount of product we have available to purchase is less than what we need.

So the Fed is trying to address the problem of companies not being able to produce enough product, by making it harder for customers to buy product...

Telekinetic-Potato · Answer

I don't really understand this stuff, but I think the mentality is supposed to be that higher interest rates mean debt needs to be paid off quicker. Since our money isn't really backed by anything, having lots of money that only exists ad debt is going to lower the worth of real money.

So to give real money (money that exists beyond debt people owe eachother) more worth, the amount of debt needs to be lowered.

Kinda like the principal of supply and demand only the supply can be tainted but it's worth goes down all the same.

When less of a percentage of all money in circulation is debt, then I would think that should lower inflation.

Would appreciate someone who knows what they're talking about clearing this up though.

Oigit · Answer

It's going to hurt for anyone that isn't making six figures, but what we need is a market correction. Because in general the fed and Biden are doing is kicking the can down the road, hoping that the market doesn't start correcting itself while our current admin is in office. But by doing so they are only ensuring that the coming market correction is going to be worse then it would be if both simply stepped back and stopped attempting to kick the can down the road.

But I don't see that happening. Given that Biden's admin did tweet about how we should be happy about inflation due to people getting higher SSI checks. Only for said tweet to be quickly deleted after it was fact checked. Because the higher amount given on peoples SSI checks is due to the dollars drop in value, mainly due to the inflation we supposedly should be happy about. So it's like giving someone 25 dollars and telling them to be happy about it. Despite a dollar only being wroth 15 cents.

AviatorTom · Answer

I'm not an economist, but I understand the logic goes like this.

By raising interest rates, things get more expensive, which forces people to spend less for the same amount of goods, or buy less, reducing overall demand. The law of Supply and Demand says that prices fall when demand is less, which means that raising interest rates ultimately leads to a drop in prices, and less inflation.

It's not that easy though. Rising interest rates can cause companies to increase wages, in order to keep employees, which allows people to buy more, which can lead to more inflation. That's the balance the Fed has to try to manage.

Fireguy17 · Answer

I could be wrong, but it helps to curb spending so there isn't such a demand for things, so with supply and demand, there is less demand.

When I bought my first house the interest rate was over 8% on a home loan.

My new house I did a refinance and I'm just a bit under 3%, so at least for me I'm good.

So hopefully the return on my investments will start to go up.

I have gone through double digit inflation before, I forgot who had the WIN buttons, it stood for whip inflation now.

Also price controls, where companies couldn't raise the prices they charged, to the opposite getting 12 to 18% return on you investments.

It ends up working itself out, and things get back to normal and then years down the road it starts all over again.

You are young enough, so you will go through the cycle a few times in your life.

DJB72 · Answer

Inflation is reduced by reducing the amount of money in circulation. Raising interest rates encourages investment (in theory) and reduces the cash circulating.

Historically, anyway.

Reserve Bank policies don't take the need for a living wage into consideration. Macroeconomic policy works eventually but most people live microeconomic lives. Prices were relatively stable until the end of the 19th Century then prices started to climb as bigger stores appeared looking to increase profits by hiking prices. Workers then demanded higher wages to be able to pay and this monster was created.

So now we have houses selling for millions that were built for hundreds. It's all bullshit. Government policies are just 21st Century Robber Barons screwing the poorest to increase the wealth of the richest 5% globally.

leonidas84 · Answer

What you're describing may apply to some home owners. Otherwise, in theory: raising interest rates raises borrowing costs for companies, etc. There's less of an ability to spend if borrowing costs are higher, so inflation would be somewhat stabilized. But this situation is unique compared to historical inflationary environments. It seems they're too aggressively raising rates too much vs. doing it gradually.

Anonymous · Answer

Great question, extremely complicated answer.

Distilled into one sentence/phrase: In theory, the raising of interest rates (cost of capital) is designed to curb malinvestment (unjustified bidding up of asset prices) by contracting the supply of credit.

Message me if you want to know how to learn more.

Anonymous · Answer

Unless you have an advanced degree in economics, you should approach this question with a different atitude: "Can someone please explain to me how the Fed raising interest rates curbs inflation. I don't understand this." Assuming that people with more education and experience are wrong is a bit egotistical.

Pudsmucker · Answer

Up in the interest rates makes us slow are buying power down when interest rate goes up on the things that we buy. And those that have money in the banks get a little something on the side for letting bank borrow our money, so somebody can buy something at a higher rate of interest.

joeldalton · Answer

Inflation is caused by a supply of dollars outweighing demand, which devalues them. Raising interest rates makes the supply of money shrink because fewer people will take loans. This slows the devaluation of the dollar. The downside is then demand for homes will shrink. this will put negative pressure on prices, but will negatively affect companies that rely on the homebuilding industry

DryGermanGuy · Answer

As a warning example, check out the failing financial situation in Turkey: Erdogan has been terrorizing the central bank for years to constantly lower the interest rates. As a result, they are now at 85% (!!!) inflation.

Illustrator01 · Answer

More interest leads to people paying more money to govt/banks. Which leaves them with less money to spend (Disposable income). Less money to spend equals less spending. Thus demand for stuff will fall. When demand is low and supply is high, prices fall.

andreasderjuengere · Answer

The money system of this planet is not there to help people get along. Its only purpose is to continue domination over those who have nothing or little. And that's what they do. ''They'' can't lose

JPresidente · Answer

It's a plan you see. Anything that doesn't make sense and won't work they do it. Anything that needs to be done to fix a problem, they pretend the problem doesn't exist and there's nothing wrong so they do nothing.

MadClown · Answer

To come and think if it, you’re right. thank you.

Anonymous · Answer

Interest rates are designed to keep you at a lower vibration, and to force you into poverty. Everything else linked has the same purpose. To keep you from ascending.

Summeroflove · Answer

No. Neither does the Brandon administration

exitseven · Answer

The theory is that if you tighten up the money supply you will have less inflation.

Friendlybro79 · Answer

It helps banks make more money on every loan they give?

Ryfyle · Answer

there's too much cash and this eats at the cash.

Anonymous · Answer

Yes i was also thinking the same, hiking interest rates will only increase common man's problem and will push economy in recession

GreatVallue · Answer

Wouldn't less spending lower prices?

jshm2 · Answer

Because there is a lot more to it.

How does the constant upping the interest rates help with inflation?

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