The Federal Reserve is trying to fight inflation. It has more or less made itself seem like the only one that can do anything to lower it. But i don’t understand how? For example if someone is growing apples and selling them for profit among other things, and if the interest rate goes up, why would this person lower the price on his apples?
if the interest rate goes up, why would this person lower the price on his apples?
because his customers now have worse loan terms and have to spend some of their money on the higher interest that they previously spent on apples… is the theory…
more interestingly did you know the interest the us government pays on the national debt goes to the federal reserve and their shareholders? almost half a trillion this year
beyond that i recommend South Park 13x3 Margaritaville for a comprehensive overview of central banks
The interest rates make it harder to borrow money, which in turn should reduce the money supply, whose high rate is one of the causes of inflation. If people have less money then they can’t afford to buy all those expensive fancy things…which in turn ‘ought’ to cause suppliers to reduce their prices. That’s the theory. But, in practice…if people have less money they demand more wages…which is itself an inflationary pressure. Some suggest price controls…however communist countries have resoundingly shown that does not work either.
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Chinese had paper money first and they had inflation also, guess what they did, they went back to silver as money. But history likes to repeat itself.
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Here we go, a decent thread. lets just try to keep this one cool so that there is no excuse for it to be locked.
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Generally when interest rates go up it makes debt more expensive, it also creates an income for those who save money in a special bank account that generates optimal interest.
The trader who lowers the price of their apples is doing it to entice more customers into their shop, while these new customers are there hopefully they will also buy bannana, orange, pineapple and kiwi. so generally the goal is to entice customers with the promise of money being saved, this will help the retailer maintain their business and hopefully survive the interest hike.
Whoever sells the cheapest most optimal quality goods will get most of the sales, the apple seller may have been able to get a good price on the supply of apples/trees/land and is passing it on to the consumer as most retailers goals are to become the market leader.
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Yes…lower prices don’t necessarily mean less profits. There is no linear relationship. If the lower price encourages more customers then in fact a lower price can actually generate more profit. That is precisely how competition in the market should work to keep prices low. It’s when you get cabals, price controls, profit capping, etc, that the customer can actually end up worse off. The free market has to genuinely be free to work properly.
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If they wouldnt be able to afford bread, the market would have no profits, as people would not buy bread. So its a pretty sensationalist, playing on emotions text.
They are able to afford bread, they are not able to afford more luxurious things that they were able to afford. Thats what inflation causes.
WIth time people will get used to it and forget how it was before.
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Or they’ll take the bread and burn the store down.
Only in a fallen countries that is happening. Anywhere else, where is some decent culture, they would be savagely punished for theft, maybe even cutting their hands off.
The marketing ads on TV are similar to how you describe.
Ok crazy person.
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It really is a Catch-22 thing where I live. Cannot buy a house because inflation has skyrocketed the prices and the homes you might get a mortgage for are vastly below the worth of their price. Cant get a mortgage because central bank rate hikes have skyrocketed their rates without really doing anything to curb inflation.
I am not convinced that central bank rate hikes are an effective means of combatting inflation. They might have been in the markets of the 80’s when this concept really gained popularity but its been 50 years of rapid development since then.
I do believe that even a 0.2% increase across a nation of millions is a significant profit on top of the extra they got from last month’s rate hike.
I’m not sure a higher interest rate would = more profit, the higher interest rate will be too high for many to borrow so there would be less loans being paid out. Since a banks income is based on loaning money less loans should mean less profit.
Another perspective is that due to the cost of living being higher and the economic slowdown people lose their jobs and will have to borrow more at a higher rate, so you might be right about increased profits.
Lowering inflation doesn’t mean things will get cheaper. It means it will just get slower more expensive than when inflation was higher.
The FED’s target and that of most central banks around the globe is 2% inflation per year. So things will always get more expensive even if all goes according to their central monetary planing.
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I read a few years ago that 2% is about what the financial industry extracts from the economy each year. Interesting coincidence.
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In the United States, only a very tiny proportion of the currency is used to buy things like apples. The vast, vast majority of money is used for transactions like real estate, equities, and bonds. A lot of the money that has been in circulation recently has been in the form of debt: corporate bonds to do corporate stock buybacks and home mortgages are two examples. If interest rates are increased then it becomes less profitable to do this type of trade. In theory, this will cause asset prices to drop (because people stop buying them), which will reduce inflation.
There are a lot of problems with this theory and I am not sure it actually works at all. The biggest problem is that they would need to raise the interest rates above the real rate of inflation, which they have not done. This has caused a massive flight of capital out of the bond market and that money is flowing into other assets, causing their prices to inflate.
The real problem seems to be that the government has spent decades cooking their books and manipulating the labor and inflation statistics - so their numbers are completely unreliable. Now the Federal Reserve is using those numbers to try to fine-tune the performance of the system.
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The idea this people have with their central monetary planing unit that can crank a single lever left or right and somehow influence an extremely complex system like the global economy in just the right way is completely insane in my opinion.
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Inflation is nothing more then wealthy people being scared of everyone else having enough money to live happily but always struggling to make ends meet so that people will work.
Inflation is also abothers neans by which the wealthy keep the peasants from being able to raise and sustain enough money to overthrow the government.