Rate Hikes increase cost of borrowing. Putting more money into the system, making the dollar worth less. Do I have that right? Rate Hikes work by assuming that Americans are smart with their money and will consume less but is this reasonable? It makes no sense to me yet every economists seems to agree.
EDIT: This was probably a bad ELI5. So I appreciate the responses, very helpful. Learning more now.
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It doesn’t quite require for the average American to have an in-depth understanding of economics
Increased cost of borrowing means:
* Consumers are less inclined to borrow due to it being more expensive to borrow money. Conversely, 0% interest with no payback time-limit is basically free money
* Interest on current debts – including variable mortgages – eats into people’s disposable income. So people have less money, and also need to be more conservative with what they spend.
So raising rates organically reduces buying pressure.
A person would financially self-destruct if they were to continue borrowing or spending money as they were. But for the majority of the economy, they would spend less money on goods.
The reduced buying pressure means that businesses need to attract buyers, and their method is usually reducing prices. Also, businesses incur storage costs and fixed costs. Keeping prices high when there’s less demand isn’t sustainable.
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