Every month the BofE raises the interest rate bit by bit, knowing inflation is so high and knowing they had to raise the rates quite high, why do it so slowly?
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Would you rather walk down the stairs or be pushed out of the upstairs window?
Doing it gradually gives everyone time to plan & adjust, they give a lot of signals and other guidance on where they think it’s going to go which gives everyone the time to sort things out.
Everyone is giving defenses of why they don’t do this, but you’ve asked a legitimate question. Noah Smith has a good rundown of the pros and cons here: [www.noahpinion.blog/p/why-doesnt-the-fed-just-hike-200bp?r=5zere&utm_campaign=post&utm_medium=web](https://www.noahpinion.blog/p/why-doesnt-the-fed-just-hike-200bp?r=5zere&utm_campaign=post&utm_medium=web)
Think of the economy as a glass cup, and inflation is heating it up. You want to cool things down before you get molten glass, and your primary way of doing so is adding water (raising interest rates). You can add water slowly over time to slow the increase in temperature, or you can dump all the water at once, shattering the glass, because you shocked the system too much.
The main reason is that it takes a long time for the effects of a change to propogate through the economy (you’ll hear a popular phrase in media coverage, “the lags are long and variable”). So if they make a bigt change, or smaller changes very rapidly, it would be easy to go too far too fast. By the time you realize that you raised them too high and started to reduce them again, the damage will already have been done. So they make small changes and give them some time to take effect before making another one, to rpevent “whiplash” response in the economy.
Imagine you’re trying to tow a trailer behind your truck. But instead of a nice rigid metal hitch, its attached to your bumper with big stretchy rubber bands. If you floor the accelerator, your truck will zoom off while the bands stretch out, and the trailer will only start moving slowly. You keep accelerating up to 60 mph and level off at that speed. But the trailer is 100 feet behind you and only starting to slowly gain speed. Eventially the trailer gets pulled back by the rubber bands and slams into the back of your truck. If instead, you verrrrrrry slowly accelerated, to give the trailer time to gain speed too, then as you slowly approached 60 mph you can slowly ease off the gas, and then you and the trailer are both doing 60 with no terrible accident. Thats what the fed is trying to do.
See: “Volcker Shock”. The Fed did this in 1980 to curb inflation causing two recessions. Mortgage rates skyrocketed and a lot of farmers in debt went bankrupt cause they couldn’t afford loan payments anymore. Depending on who you ask, it was either a genius move or an unnecessary punishment on the working class. When the Fed raises its rates, interest rates on ALL debt go up as well. So if you have credit card debt, a mortgage, business loan, etc., your payments become more expensive and it can get to the point where you can no longer afford them. High interest rates also tend to lead to high unemployment.
Whether you view the results of the Volcker Shock as good or bad, it was politically unpopular. The Fed has since decided that a softer approach where interest rates are increased gradually until inflation comes under control is the better approach.
For the same reason student drivers are taught to ease onto the brakes with steady, increasing pressure instead of just stomping on the brakes, causing injuries to the passengers.
Because JPow likes to expand the money supply as much as he can get away with. It took 9% inflation to get him to start raising rates to begin with.
If they raised rates very quickly, they run the risk of destabilizing the banks. The Federal Reserve’s job #1 is to keep banks in business. What’s inexplicable is why banks with large uninsured deposits and large long-term loan portfolios didn’t hedge against the very predictable interest rate rises that motivated depositors to move their funds and devalued their loan portfolio on paper. (I’m looking at you, SVB and FirstRepublic.) The banks that failed to do so had a strong paper position before the interest rate rises and could have sold them off or hedged their position at the beginning of the Fed moves on interest rates.
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