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In Reply to: Just wondering posted by jedrider on September 22, 2022 at 08:11:14:
High interest rates increase the cost-of-capital and hence reduce investment and ultimately supply of goods, albeit with some time lag.
The present extremely low unemployment rate and labor scarcity is evidence that the economy is working over-capacity. Accordingly reducing Demand is necessary. The Fed's main tool to moderate Demand is increase interest rates. Without control of interest rates and the money supply, inflation is inevitable. Note that expectation of continuing inflation is bad per se because is encourages further inflation.
That said, the Fed has said it wants inflation brought down to 2% p.a. -- that's a stretch goal especially in the shorter term. A recession is very probable under the circumstances we're observing.
Dmitri Shostakovich
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Follow Ups
- Well of course high rates reduces Supply as well as Demand - Feanor 10:00:08 09/22/22 (0)
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