Why Would the Fed Raising Rates Cause Prices to Decline (or Price Increases to Slow)?

Nov 28, 2010
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Inflation has most of us worried, and inflation is being used as the excuse for the Fed to raise rates 3 or 4 or maybe more times next year.

Someone explain to me how making money more expensive makes other things less expensive.

If these price increases we've seen are due to supply chain problems, chip shortages, other shortages, etc., how do higher rates change those factors?
 

seminole97

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Jun 14, 2005
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Someone explain to me how making money more expensive makes other things less expensive.
The Fed intends to reduce the rate at which the money supply is inflating.

It’s the corollary of this:

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.” - Ben Bernanke, 2002
 

Titanhawk2

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Jul 14, 2011
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Inflation has most of us worried, and inflation is being used as the excuse for the Fed to raise rates 3 or 4 or maybe more times next year.

Someone explain to me how making money more expensive makes other things less expensive.

If these price increases we've seen are due to supply chain problems, chip shortages, other shortages, etc., how do higher rates change those factors?
Less access to money is suppose to make less money available, thereby decreasing inflation
 
Nov 28, 2010
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Higher rates causes less borrowing, which means a lower money supply, so there are fewer dollars chasing goods and services.
I get the conventional theory. But is it people who are borrowing that are driving up food prices, or gas prices?

Higher rates might slow corporate growth and R&D, but that doesn't sound like a healthy way to tackle inflation. When supply can't keep up with demand, we want businesses to build out and produce more, not pull back because borrowing is expensive.
 

dandh

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Nov 11, 2002
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I get the conventional theory. But is it people who are borrowing that are driving up food prices, or gas prices?

Higher rates might slow corporate growth and R&D, but that doesn't sound like a healthy way to tackle inflation. When supply can't keep up with demand, we want businesses to build out and produce more, not pull back because borrowing is expensive.
People borrowing drives up prices on housing, vehicles, and more. Companies borrowing drives up prices on everything. Just having a larger money supply without a corresponding increase in productivity pretty much guarantees an increase in prices overall.
 
Nov 28, 2010
78,206
31,363
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People borrowing drives up prices on housing, vehicles, and more. Companies borrowing drives up prices on everything. Just having a larger money supply without a corresponding increase in productivity pretty much guarantees an increase in prices overall.
Again with the conventional wisdom. These are not conventional circumstances.

I'm not saying that raising rates is a bad idea. And I imagine it will have the conventional effect sometime down the road. But instead of giving me generic econ 101, I wish someone would go beyond that to talk about how raising rates under these specific circumstance is going to help.
 
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dandh

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Again with the conventional wisdom. These are not conventional circumstances.

I'm not saying that raising rates is a bad idea. And I imagine it will have the conventional effect sometime down the road. But instead of giving me generic econ 101, I wish someone would go beyond that to talk about how raising rates under these specific circumstance is going to help.
I think we have a different viewpoint on inflation in general. I'm not wed to any one theory, I think there are important truths in all. You seem stuck on Keynes, which helps explain some things but totally ignores others. FTR, I am not just looking at raising rates. The discount rate is just one factor right now. But the Fed purchases of govt and mortgage debt are also interfering with normal market adjustments to rates.

I'm really not worried about discount rates as much as I am the Fed wantonly monetizing all government debt and further exacerbating the problem by interfering in the mortgage markets; the policy moves by the government that have disincentivized work and production also loom large. It is a very complicated situation right now, but increases to the money supply (both monetary and fiscal policy) have created a situation that amplifies other factors, like supply chain issues and lowered workforce participation. I don't see anything changing with inflation until we address some of those problems.
 
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Huey Grey

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Jan 15, 2013
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I think we have a different viewpoint on inflation in general. I'm not wed to any one theory, I think there are important truths in all. You seem stuck on Keynes, which helps explain some things but totally ignores others. FTR, I am not just looking at raising rates. The discount rate is just one factor right now. But the Fed purchases of govt and mortgage debt are also interfering with normal market adjustments to rates. I'm really not worried about discount rates as much as I am the Fed wantonly monetizing all government debt and further exacerbating the problem by interfering in the mortgage markets; the policy moves by the government that have disincentivized work and production also loom large. It is a very complicated situation right now, but increases to the money supply (both monetary and fiscal policy) have created a situation that amplifies other factors, like supply chain issues and lowered workforce participation. I don't see anything changing with inflation until we address some of those problems.
He is clearly talking about covid causing all conventional wisdom to be thrown out the door. Bringing up Keynes makes no sense in this discussion.
 

Rifler

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Raising interest rates decreases the amount of money chasing goods and services,.. Less money chasing goods and services restricts the cost of goods and services,.. Economics 101.