I do not understand in the current post covid scenario, where inflation is being caused primarily because of businesses and utilities increasing prices across the board, how federal or national reserve banks increasing wholesale interest rates does anything at all except drive people to the wall?
It would seem that Inflationary pressures today are nothing to do with discretionary spending so how does increasing Interest rates help and not hurt more?
TIA
In: Economics
TLDR – The government has no direct control of the interest rate. What they have control of is how much money they print. Every week, government prints a certain amount of money. Then, there is an auction where supply and demand figures out what the interest rate will be. If too much was printed, the interest rate is lower. If they print less, the interest rate is higher. That printed money is then used by the government for stuff like government workers, contracts, payments like social security, etc.
Because government has no direct control of the interest rate, multiple things happening at the same time can result in the temporary appearance that printing money is not the cause of inflation. Politicians are eager to convince you of that so they can print more. If you had a money printer, you would benefit by convincing everyone else that printing money for yourself will not cause inflation.
With all else being equal, inflation is not possible if no new money is printed. But not all else is equal. For example, if US govt stopped printing all money tomorrow, inflation can still increase if other countries decide to dump US bonds. But things like this is temporary because other countries have a limited number of US bonds and the contribution towards inflation for this method has a maximum impact.
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