How does the fed interest rates affect inflation? I have been hearing a lot about this recently but I'm not sure what to make of it.? - Seedly

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Asked by Anonymous

Asked on 26 Feb 2019

How does the fed interest rates affect inflation? I have been hearing a lot about this recently but I'm not sure what to make of it.?

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It affects both loans and savings accounts interest rate just in case you dont know about it. When interest rates goes up, inflation will go down. This is because when interest rate is low, people can borrow more money to spend, it is also not good to save money since interest will be low for savings account and more money will go around allowing economy to grow which result in higher inflation. Vice versa if interest rate is high, people will less likely to borrow money and save money instead. So less money go around and economy slow down which result in lower inflation.

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Kishor Bhagwat
Kishor Bhagwat

23 Mar 2019

"When interest rates go up, inflation will go down"..maybe we can elaborate on that. It also depends on other factors. For eg, the growth in the economy. If there is growth, and jobs are plenty, inflation will still go up. the Fed 'tries' to reduce the credit supply in the economy by raising rates and hopes to influence the interest rates at the short end, but if there is enough money in the system chasing goods and services, inflation will still go up. Another example -Venezuela, 15% interest rates, 65% inflation. Different reasons, but beyond a point, interest rates would do nothing to control inflation.