Why Does Raising Rates Help Inflation

According to Investopedia “raising rates help inflation by moving the economy closer to full employment and keeping prices in check. The Federal Reserve raises interest rates to slow the economy when inflation is a concern and lowers rates to stimulate economic growth.”

When inflation is a concern the Fed typically employs what’s called contractionary monetary policy which is designed to slow economic growth. One of the main tools the Fed uses to influence inflation is the federal funds rate which is the rate at which banks lend money to each other overnight. The federal funds rate is the rate that the Fed directly controls—it’s the rate at which banks lend money to each other overnight. When the Fed wants to slow the economy it raises the federal funds rate. That makes it more expensive for banks to borrow money which in turn makes it more expensive for consumers to borrow money. That slows down economic growth and helps to keep inflation in check.

The Fed also uses something called quantitative easing to influence inflation. Quantitative easing is when the Fed buys assets from banks in order to increase the money supply. When the Fed wants to increase the money supply it buys assets from banks. That increases the amount of money in the economy which can lead to inflation.

The Fed uses both of these tools—the federal funds rate and quantitative easing—to influence inflation. By raising rates the Fed can slow the economy and keep inflation in check. And by increasing the money supply through quantitative easing the Fed can help to increase prices and fight deflation.

Why does raising rates help inflation?

Raising rates helps inflation by making it more expensive for borrowing which in turn slows economic growth and reduces inflationary pressures.

See also  How To Rate Someone On Fb Marketplace

Leave a Comment