Eli5 – Isn’t raising rates just a temporary inflation fix? Because the dollars that buy bonds will eventually need to be paid back as even more dollars

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Eli5 – Isn’t raising rates just a temporary inflation fix? Because the dollars that buy bonds will eventually need to be paid back as even more dollars

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The fed actually sells bonds to increase rates. (The fed also has other ways to increase rates). More importantly though, a major reason why raising rates counters inflation is because it lowers aggregate demand in an economy. If rates are higher, people will be less likely to buy things (especially big and expensive things that you usually have to borrow money for like cars and houses). Therefore, the demand for those things falls and the prices of those things fall too (or at least decrease at a slower rate).

Pretty much all of macro policy is to keep things within certain boundaries. There is no permanent “fix” to inflation – the idea (this time) might be to dampen demand and consumption enough so that supply catches up. Even if inflation stays at the mid to high single digits for a year or even two years, it will likely be painful but not catastrophic.

Many people appear to be, at least in the US and probably most of the large economies, sort of used to the super low interest rate and low single digit inflation of the last quarter century. Most developing economies do OK with 6-8% inflation for decades.

What needs to be managed are the underlying causes of inflation. This appears to be supply chain disruptions in China (due to Covid lockdowns), fuel/food/fertilizer shortages (Russia/Ukraine) and the pressure this puts on many products globally.

To answer your question directly:
Servicing bond debt is a part of the federal budget, which currently sits at about 10% of revenues. Ideally, taking on debt to invest in your country will cause your economy to grow. A growing economy means you get more tax revenue. More tax revenue means it’s easier to service your debt, so you can take on more!

Raising interest rates makes it harder for everyone in the economy, including the government, to borrow money to invest. This causes growth to slow and price growth should slow with it.