Eli5 – Isn’t raising rates just a temporary inflation fix? Because the dollars that buy bonds will eventually need to be paid back as even more dollars

Question

Eli5 – Isn’t raising rates just a temporary inflation fix? Because the dollars that buy bonds will eventually need to be paid back as even more dollars

In: 5

Answer 1

To answer your question directly:
Servicing bond debt is a part of the federal budget, which currently sits at about 10% of revenues. Ideally, taking on debt to invest in your country will cause your economy to grow. A growing economy means you get more tax revenue. More tax revenue means it’s easier to service your debt, so you can take on more!

Raising interest rates makes it harder for everyone in the economy, including the government, to borrow money to invest. This causes growth to slow and price growth should slow with it.