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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] 5 points 1 year ago (1 children)

Because it encourages people to save money instead of spending it. If you can earn 6 percent on your money, instead of spending it it is better to save it

[–] [email protected] 3 points 1 year ago (1 children)

I could see that working for investments (if expected return on some are < 6%), but not for personal gas consumption. I.e. people aren't going to put off a trip or bike to work to buy bonds. I suppose less investment in businesses (and costlier loans) could cause high energy projects like construction to be curtailed, lowering demand for oil (but also labor). Not sure if that's better than the Fed doing nothing though; since higher fuel costs also curtail these things.

[–] [email protected] 2 points 1 year ago

Think about it like this, 11% of Americans have ev's. Those people are the ones with large amounts of disposable income, and probably the ones you want to slow down spending from the most. So fuel prices straight up don't effect them.

You don't want to reduce people's ability to make ends meet directly. Instead, as most western governments, you need to play as the "invisible hand". no one wants the economy to slow down, so you have to do it in a way that looks like money laundering, but for an economic slowdown. "What's that? Banks are failing? Well they didn't hedge their risk properly." " a business lost money? While it looks like they should have prepared for customers buying patterns changing"

An unfortunate reality, is that this is the better option. Otherwise you end up with a massive crash, because the market, does. Not. Self. Regulate.