Why does the Fed raise the prime rate to combat inflation?

Question

I might also need a quick on inflation as well. All I can think is that they’re trying to de-incentivize interest-based purchasing but I don’t understand how that’s a fix for inflation.

In: 1

Answer 1

A higher prime rate trickles down to higher loan interest rates, which mean that people can’t borrow as much money, which means they have less access to cash. Less cash means you can’t pay as much for stuff, which means the prices of those things go up more slowly.