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
Inflation is, generally, caused by too much money chasing too few goods. Interest rates are, generally, used as a tool to control the ups and downs of the economy. Raising interest rates makes it more expensive to borrow money, and thus more expensive to invest/spend money. On the large scale, this slows down economic activity, reduces demand for everything, and brings inflation down.
Inflation is rarely caused by discretionary spending (although the post-covid income boom + still-slow supply lines was part of it), but interest rates aren’t moved to change discretionary spending. They affect bank loans, mortgages, and most of all, the loans businesses take out to invest elsewhere.
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