How raising interest rates helps fight inflation and high prices
NBCJun 17, 2022
The US Federal Reserve (Fed) raised interest rates by 0.25% on Wednesday and signaled that future increases in borrowing costs would continue to be implemented as part of its effort to combat inflation.
The central bank highlighted that progress has been made in lowering the pace of price increases from the 40-year highs of last year, with inflation easing to a 5% annual rate in December, according to the Fed's preferred measure.
By raising interest rates, the central bank hopes it can slow down the economy enough to dampen the soaring inflation. As the theory goes, the more expensive it gets to borrow money or carry a balance on a credit card, the less consumer will spend. And when spending declines, demand will fall, and within some time, the price of everyday goods. There are signs inflation is starting to cool, so it's working.
Eight Fed rate hikes in little more than a year haven't yet stopped prices from going down. While some of this is due to factors outside of the bank's control, such as supply chain issues and the war in Ukraine, most of it is driven by greedy, monopolistic corporations that continue to raise prices and profit margins. By continuing to raise rates rather than slowing corporate price increases, the Fed is letting workers and consumers take the hit. It's time to open its toolbox and look for other measures to reduce inflation.
There's a 50% chance that the Fed funds rate will be over 3% by Dec. 31, 2023, according to the Metaculus Prediction Community.