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

Whenever a loan is made, effectively neffectively new money is created by making that long. So if you raise the interest rate, you discourage new loans and as a result less new money is made.