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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsShocker...raising interest rates causes inflation
I am dumbfounded this fact is just ignored. Everywhere it is spewed as accepted fact the the Fed must raise interest rates to stop inflation. Well what happens when the rates get raised...EVERYTHING automatically cost more, that is inflation. Energy, mortgages, credit cards, loans, food, transportation, homes, cars...the cost goes up...not down. The notion of lowering inflation is that raising rates slows down spending by causing things to be so expensive people will not make the purchase. This then results in supply excess which will lower prices( merchants must reduce price to sell things to people who now have no jobs and less money to spend)...but of course that takes years to happen and in the meantime
jobs are cut, wages cut and production slowed...which is exactly what conditions occurred when pandemic started. The main factors that have driven CURRENT inflation problems is the rise in price of oil and supply chain disruptions caused by the pandemic...not low interest rates. Raising rates forces oil producers to pay more for the money they borrow to finance production, wages, equipment purchases and so the cost of a barrel of oil goes up. Raising the cost of everything (inflation) by raising interest rates is not a solution to slowing inflation it is actually exacerbating it. It's like hitting someone with a headache on the head with a hammer so their headache will go away. The Ukrainian war along with OPEC's greed and the pandemic's lingering effect on supply are the main factors driving inflation and raising the price of EVERYTHING by raising interest rates is not a solution its a destructive counter productive move. Powell is wrong and is set to repeat Volkers disasterous policies...he instituted huge interest rate rises and destroyed our economy in his pursuit of tackling inflation...inflation he was causing. When they say the Fed is raising rates to curb inflation....what they are really saying is "The Fed is causing more inflation in the belief it will slow inflation" of course they leave out this basic fact and how it will take years of job losses and cause a recession to achieve that end.
Aussie105
(5,437 posts)prices are stable.
Sellers need to keep their margins reasonably low in order to be competitive.
When supply can't keep up with demand, prices go up. People will keep buying and pay whatever sticker price is on an item, whatever that increased price is. The higher price may be justified by costs that have risen, or just plain profiteering because supply lags behind demand.
That's what causes inflation, everything up.
People will keep spending, up to the limit on their credit cards if need be.
When people realize they are living beyond their means, they will go and concentrate on essentials - demand for non-essentials drops off even if supply ramps up and prices stabilize or go back down.
Inflation reduces, but if demand doesn't pick up, businesses start laying off people.
If that escalates, you have a recession.
The Australian RBA (Reserve Bank of Australia) is following the American fed's approach to curbing inflation with monthly rate rises.
We have yet to see if that approach works. Will it curb inflation, and what effect does it have on the economy overall, and unemployment figures?
Here, in America, and in other countries using the same approach, the jury is still out.
uponit7771
(90,364 posts)... hurting working wage Americans.
Alexander Of Assyria
(7,839 posts)Sort of like if ur not an expert in medicine cant much respect ones home made cure for Covid.
gab13by13
(21,413 posts)She said now we have high inflation and low unemployment, we are going to have high inflation and high unemployment.
I notice that the fed kept interest rates at zero for Trump.
Not to mention people's 401k's are also tanking.
onenote
(42,773 posts)Please don't use DU to spread misinformation. During Trump's presidency, the Fed actually raised rates, only reducing them to near zero for around nine months in 2020 because of the COVID crisis. In contrast, the Fed Rate was below below 1 percent for the entirety of Obama's presidency (and below .50 for most it) and for the first year of Joe's presidency.
More specifically, the Fed lowered interest rates to near zero in late 2008 in response to the economic crisis and kept them low throughout Obama's eight years in office. The rate began drifting up at the end of 2016, but were still only at .55% at the end of 2016. After Trump took office, the Fed continued raising the rate, hitting 2.40% in July 2020. The rate began dropping slowly over the next several month before dropping dramatically (from 1.58% in February 2020 to 0.10% in March 2020) in response to the COVID crisis. It stayed low throughout the entire first year of Biden's presidency (only .08% in January 2022). At that point, in response to inflationary concerns, the Fed started raising the rate. Bottom line, since 2009, the Fed rate has been below 1% for most of the time a Democrat has occupied the White House and only for around nine months of the Trump presidency.
https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
Fiendish Thingy
(15,662 posts)The Fed, under Yellen (Bidens current treasury Secretary) raised rates from 2016-19. Rates were dropped once COVID hit.
Unemployment numbers released this morning show a record low of 3.5%
Yes, continuing to hike rates could trigger a recession, and increase unemployment to around 5-6% (5% is considered normal or full employment). Again, despite being corrected with her actual words, you misquote Warren. Warrens concern isnt with rate hikes, but with the speed and size of the hikes. Powell waited too long to begin raising rates, so now he is playing catch up with more frequent, larger hikes to try and ward off double digit inflation as was experienced in the early 80s.
The Fed typically hikes a quarter to a half % at a time, but Powell has been hiking .75-1%.
Yes, its a down year for the markets, but if youre invested in a balanced and diversified portfolio, your 401k should be fine a year from now. My portfolio survived the 87 crash, the dot com bust, the GFC of 2008, and the COVID crash of 2020, all of which were more severe than the current bear market correction.
elias7
(4,027 posts)My observational knowledge is that inflation worldwide has nothing to do with the fed raising interest rates in the United States.
My withering macroeconomic knowledge is that once at full employment, the Fed must start increasing interest rates so that inflation does not occur.
Alexander Of Assyria
(7,839 posts)ever fought inflation
raise rates to cool economy.
Economics 101, first term.
4Q2u2
(1,406 posts)Maybe Econ 101 First Term should be, cool the economy by windfall taxes on price gouging. Not screw over working and poor people!!!
Alexander Of Assyria
(7,839 posts)whos crying most, its not workers getting jobs much easier lately and at higher wages.
4Q2u2
(1,406 posts)Tons of regular people now have 410k and the like. Every day inflation is hurting workers much more, even at the higher wages. For they are not seeing gains with that raise. It is being eaten up by price gouging. Rich investors can absorb and rebound much easier than the general public, secondly this is when the sharks go hunting and buy low. They are trying to panic the market and scoop up bargains from people who cannot absorb dramatic hits. " Who will think of the Millionaires and Billionaires, they suffer so much" Is that what you are advocating? Because Econ 101 says so? Well we need new text books and theories if that is the case.
Alexander Of Assyria
(7,839 posts)4Q2u2
(1,406 posts)The cheerleader for the 1%.
Amishman
(5,559 posts)The velocity of money is how often money changes hands.
By discouraging lending, money changes hands less often. That makes our money supply behave as if its smaller, without anything actually being removed from circulation.
The problem is the current inflation is being driven by the increase in our actual money supply, not the velocity of money acting as a multiplier. The velocity of money is at historic lows, which has actually insulated us from the amount of money created since 2020. We've increased the M2 money supply by about 40%, and inflation has been less than that because the velocity of money so low.
The problem is the Fed has very few tools available to it right now. They are trying to reduce their asset holdings (which reduces the money supply), but that is already causing turmoil in the bond market. Shrinking the money supply rapidly would be even more destructive than the inflation we're trying to cure.
So why are they hiking rates? I think a big part of it is to regain ground to give later. Cutting rates is an important stimulus tool, and by raising them now, they are giving themselves cards to play next time there is an economic crisis.
jerseyjim
(129 posts)for a cut on your finger.
IronLionZion
(45,543 posts)Nobody expects the rates to go up to 20%. There are plenty of jobs now. They keep reporting "labor shortage" and there are "short staffed" signs everywhere. The unemployment rate in the US is currently 3.7%. Seasonal holiday hiring has started.
David__77
(23,534 posts)
unblock
(52,332 posts)We have inflation because supply can't keep up with demand.
Raising interest rates diverts consumer spending from goods and services to banks. Raise rates enough for long enough, eventually the reduced demand for actual goods and services forces bring demand in line with supply, and inflation gies form to "acceptable" levels.
But of course, this essentially boils down to a plan to cause enough of a recession to fix the inflation problem. Then you have a recession to deal with.
Who suffers when there's inflation? It's a mish-mash if winners and lowers but for the most part, the richer you are, the more you are hurt by inflation (people with fixed debt such as fixed rate mortgages are the winners, though they may have cash flow issues)
Who suffers when there's a recession? Again there are winners and losers, but the biggest losers are those who lose their jobs, usually the working poor. And it usually adversely affects nearly everyone. That said, the super-rich are in a position to profit off of everyone else's fire sales and emerge with an even greater share of wealth.
It's not that it doesn't work. It does. The problem is that it's a major policy decision that no one even debates or votes on.
Fiendish Thingy
(15,662 posts)Yellen raised interest rates from 2016-19 without causing inflation.
Inflation is caused by:
Record low interest rates, combined with
Record low unemployment, creating increased demand, combined with
Corporate price gouging and greed,
P.s. paragraph breaks would make your screed a bit more intelligible.
Bonx
(2,075 posts)global1
(25,272 posts)It makes a lot of good points and is good sense.