if the economy is doing well why does that make interest rates higher?
In: Economics
It doesn’t… directly. Don’t confuse interest rates (the price of borrowing money) with inflation (the change in the price of goods).
The problem is that when an economy is doing really, really well you tend to have lots of inflation (the implication is that people both REALLY want things AND have the money to buy the things they want, hence other people can charge more for them and everything gets more expensive = inflation). This is obviously bad for the people who can’t afford thing in the first place but also bad because it can all crash and burn very quickly if suddenly lots of people can’t afford things.
So inflation is something Governments and ‘people in charge’ have decided to keep a close eye upon and the *theory* is that something like a 2% annual inflation is considered ‘chef’s kiss perfect’ for a country. It implies people have money, people want things, and that people are able to get better jobs and earn more money to buy more things they want, etc. That’s the theory at least.
The problem is what happens when inflation gets WAY too high, like 10%? You go into the ‘bad’ place of people not being able to buy things anymore so the Government and ‘people in charge’ need to do whatever they can to slow things down. Pretty much the only tool they have though, are interest rates that *they* get to set. If it gets too expensive to borrow money people will slow down their purchasing and loan-getting and this will slow the economy down from the, say 10%, back to 1 or 2%.
What’s happening right now is we ARE seeing inflation coming back to the 2% range (in the US at least) but people are still generally buying stuff and borrowing money and buying things at a ‘healthy’ just slower pace. Healthy in this case means we aren’t seeing a whirlwind of companies going out of business and laying off their workers and people losing their jobs and no one being able to buy anything and everything going to shit.
It’s worth pointing out, opinions and headlines aside, this *is* what we’re seeing. Overall people are vastly keeping their jobs, companies are surviving fairly well, and people keep on buying and borrowing money. Just slower. This was their goal in *choosing* to increase the interest rate. Not everything is going to super well for everyone, some companies will have layoffs (and that’s newsworthy) but some companies will keep on hiring (that doesn’t make the news as much). So it might *seem* like we’re seeing massive layoffs but that’s more of a selective echo-chamber effect. *In General* people and companies are doing fairly well right now. Let’s be fair and say that increasing interest rates is like putting the economy on a diet, no one is going to be *happy* about it, but there is big difference being between happy, and having another Great Depression.
Keeping the interest rates high is like pinching the hose on the economy, they don’t want to squeeze the water off entirely (that would be bad) but they don’t want to release it too soon or else all the built up pressure will just come splurtting back out and ruin their work so far. They need to keep it pinched long enough so that they can be sure when they let go, they’ll keep the trickle they want, not no water and not a fire hose.
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