How does raising the interest rates fight inflation? From what I’m seeing in real estate, the higher rates keep home prices low(er) than they could go. Is that why? But what about car loans? Help!
(No politics please)
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Banks earn money by lending deposits and collecting interest.
The safest borrower is the Federal Reserve because it always makes its payments. The Federal Reserve does not spend the money it borrows on goods or services.
Normal borrowers must pay higher interest rates than the federal reserve because they have a higher risk of missing a payment. Normal borrowers spend the money they borrow on goods and services, like construction, business expansion, real estate, etc.
When the Federal Reserve offers to pay a higher interest rate, normal borrowers must pay an even higher rate. This means normal borrowers can’t afford to borrow as much, so they end up with less money to spend on goods and services. This makes the prices of goods and services go down.
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