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Why can’t they just set the rate to 0 and be done with it? What does the interest rate have to do with inflation? The inflation is caused by the printing of mon

Why can’t they just set the rate to 0 and be done with it? What does the interest rate have to do with inflation? The inflation is caused by the printing of money during the pandemic, the supply/productivity issues, environmental related inefficiencies and deglobalization. The FED does not have any control over any of these issues and is creating more issues.

bigtex88 4y ago
Since when did comments on HN become this ignorant?
blurbleblurble 4y ago
Low rates are the mechanism by which money is printed.
- nerdponx 4y ago
  How does that follow? Money gets "printed" no matter what due to fractional-reserve banking.
  - blurbleblurble 4y ago
    Well, my understanding is: Money is loaned into existence and the Fed's funding rate affects how easy or difficult it is for banks to get that money when they need it. The banks are turning around and using that money to pay interest, to make their own loans and financial products, etc. Those products' rates will always be compared to the rate the Fed lends at. A higher Fed rate make new money more scarce, a lower rate makes it less scarce. The market behavior follows that. So it controls the rate at which money flows into the economy. It also indirectly affects the cost effectiveness of other loans that aren't directly connected to the Fed, and also how risky people and institutions are willing to be with their money. That's a crucial piece here, not only does the Fed's rate control how much "new" money flows into the economy, it also influences the ways people behave with existing money. In the beginning of COVID times, the Fed lowered rates to near 0%, which meant people/institutions were getting money much more easily than before. A whole host of zero interest loans meant it was easier for people to buy cars and houses and all kinds of stuff.
the_third_wave 4y ago
> What does the interest rate have to do with inflation From what I gather it is supposed to work like this: Low interest -> cheap loans and low interest on savings -> more money in the market to buy goods and services -> not enough goods and services to cover the demand -> prices go up -> inflation Higher interest rates -> expensive loans and higher interest on savings -> less money in the market to buy goods and services -> demand goes down until market finds a new equilibrium -> inflation goes down Any economists around here who want to correct my simplified picture?
- elwebmaster 4y ago
  I understand that logic but the interest rates were not the cause of the inflation. If the FED had made the interest rates negative and that caused inflation then I understand how raising the rates can fix inflation. In this case other “knobs” were turned which caused inflation and now by turning the “interest rate knob” to a new position while leaving the others as they are the economic system will get into a new state which is not the low-inflation state it was in before the pandemic. Why do we believe that this new state will be better than the state the system is currently in?
  - the_third_wave 4y ago
    They were not the cause - that was the heedless use of stimulus funds and the supply chain problems leading to (the former) an increase in demand and (the latter) a reduced supply - but now that inflation has reared its head it needs to be tamed. As it stands now it is better to purchase 'today' instead of 'tomorrow' since prices rise while there is no benefit in keeping funds in interest-bearing accounts given the low interest rates. As long as this remains true demand will stay high leading to higher prices. This can really spiral out of control as has been shown in e.g. Weimar Germany or more recently Argentina and Venezuela although the cause of the rise in inflation there is different from the subject discussed here.
    - elwebmaster 4y ago
      Comparing USA single digit inflation to Argentina and Venezuela is quite far fledged. Instead of destroying peoples’ livelihoods with interest rate hikes maybe the government can opt for trying to fix supply problems and improve efficiency, which will tame inflation in the long term. For example, they can reverse the deglobalization movement by signing new free trade agreements with developing nations, they can reduce or eliminate the validity of patent laws which will allow for cheaper products to be produced, they can negotiate an end to the war and remove all obstacles from the extraction and trade of natural resources. All of these policies will lower inflation while increasing employment, a win-win-win situation.

bigtex88 4y ago

Since when did comments on HN become this ignorant?

blurbleblurble 4y ago

Low rates are the mechanism by which money is printed.

nerdponx 4y ago
How does that follow? Money gets "printed" no matter what due to fractional-reserve banking.
- blurbleblurble 4y ago
  Well, my understanding is: Money is loaned into existence and the Fed's funding rate affects how easy or difficult it is for banks to get that money when they need it. The banks are turning around and using that money to pay interest, to make their own loans and financial products, etc. Those products' rates will always be compared to the rate the Fed lends at. A higher Fed rate make new money more scarce, a lower rate makes it less scarce. The market behavior follows that. So it controls the rate at which money flows into the economy. It also indirectly affects the cost effectiveness of other loans that aren't directly connected to the Fed, and also how risky people and institutions are willing to be with their money. That's a crucial piece here, not only does the Fed's rate control how much "new" money flows into the economy, it also influences the ways people behave with existing money. In the beginning of COVID times, the Fed lowered rates to near 0%, which meant people/institutions were getting money much more easily than before. A whole host of zero interest loans meant it was easier for people to buy cars and houses and all kinds of stuff.

the_third_wave 4y ago

> What does the interest rate have to do with inflation From what I gather it is supposed to work like this: Low interest -> cheap loans and low interest on savings -> more money in the market to buy goods and services -> not enough goods and services to cover the demand -> prices go up -> inflation Higher interest rates -> expensive loans and higher interest on savings -> less money in the market to buy goods and services -> demand goes down until market finds a new equilibrium -> inflation goes down Any economists around here who want to correct my simplified picture?

elwebmaster 4y ago
I understand that logic but the interest rates were not the cause of the inflation. If the FED had made the interest rates negative and that caused inflation then I understand how raising the rates can fix inflation. In this case other “knobs” were turned which caused inflation and now by turning the “interest rate knob” to a new position while leaving the others as they are the economic system will get into a new state which is not the low-inflation state it was in before the pandemic. Why do we believe that this new state will be better than the state the system is currently in?
- the_third_wave 4y ago
  They were not the cause - that was the heedless use of stimulus funds and the supply chain problems leading to (the former) an increase in demand and (the latter) a reduced supply - but now that inflation has reared its head it needs to be tamed. As it stands now it is better to purchase 'today' instead of 'tomorrow' since prices rise while there is no benefit in keeping funds in interest-bearing accounts given the low interest rates. As long as this remains true demand will stay high leading to higher prices. This can really spiral out of control as has been shown in e.g. Weimar Germany or more recently Argentina and Venezuela although the cause of the rise in inflation there is different from the subject discussed here.
  - elwebmaster 4y ago
    Comparing USA single digit inflation to Argentina and Venezuela is quite far fledged. Instead of destroying peoples’ livelihoods with interest rate hikes maybe the government can opt for trying to fix supply problems and improve efficiency, which will tame inflation in the long term. For example, they can reverse the deglobalization movement by signing new free trade agreements with developing nations, they can reduce or eliminate the validity of patent laws which will allow for cheaper products to be produced, they can negotiate an end to the war and remove all obstacles from the extraction and trade of natural resources. All of these policies will lower inflation while increasing employment, a win-win-win situation.