this post was submitted on 10 Sep 2023
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Economics

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Why does Fed raise rates in response to supply-side caused inflation? (sh.itjust.works)
submitted 1 year ago by [email protected] to c/[email protected]
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I recently read an article about OPEC, and how oil prices will likely rise for the next year or two. The article said this will cause a significant uptick in inflation indicators, so the Fed will likely raise rates.

I can understand raising rates in response to monetary inflation, but it doesn't make much sense to me to raise rates in response to supply-side shocks. It also seems cruel since the goal seems to be to raise rates so more people become unemployed or underemployed so that can't afford to buy gas.

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[–] [email protected] 11 points 1 year ago (2 children)

The Fed only has a couple of tools to combat inflation, and none of them work very well for supply-side inflation. Personally I think they shouldn't be raising rates to deal with supply-side shortages (ideally you'd want to make it cheaper for companies to produce more and decrease shortages), but politically speaking they need to show they're taking some form of action to rein in inflation.

[–] [email protected] 5 points 1 year ago

Just want to upvote this because I think it's very important. The feds toolbelt is vastly limited nowadays. They basically are using interest rates as the only lever they can pull.

Rates have basically been zero for the last 15 years. When the market normalizes zero percent rates, anything to the contrary will have a compounding negative impact.

[–] [email protected] 2 points 1 year ago (1 children)

Or, the legislators can do their jobs. Oh wait, the Republicans have a majority in the house. Never mind.

I am old enough to remember when fiscal policy was a tool in managing economic shocks.

[–] [email protected] 1 points 1 year ago

Yup. Ideally this would be handled through public policy changes, instead of relying on a quasi-private institution that's severely limited in its powers.

But apparently that's too much to ask.