[lghh]

> Yes, the only way raising these rates could reduce demand is by increasing unemployment.

It could also reduce demand by making it more expensive to buy things. Sure, that will probably have a side-effect of increasing unemployment, but that unemployment isn't the goal. The goal is to make it cost more to do things so less people want to do them.

[civilized]

I wonder why we'd want to pull levers to make things cost more, when the goal is to fight inflation, the bad phenomenon in which things cost more.

[hellojesus]

Increased costs lead to decreased demand, which ultimately will dampen further price increases. They're shifting the intersection of supply and demand.

[Ericson2314]

So then inflation will defeat itself by its own, per your reasoning.

The actual truth is to the extent raising interest rates does anything at all to prices, it is via reducing employment.

[hellojesus]

Yes, inflation would burn itself out with permanent price increases in a world where the Fed wasn't holding down the print button.

The goal of increased interest rates is to make borrowing more expensive, which means business and consumers would cut down on investment or loans, since those are good mechanisms for money creation. It slows the velocity of money and therefore demand.

Of course, we also have supply shocks right now which are causing price increases due to scarcity as well.

[Ericson2314]

> The goal of increased interest rates is to make borrowing more expensive, which means business and consumers would cut down on investment or loans, since those are good mechanisms for money creation. It slows the velocity of money and therefore demand.

And the business that don't get as easy credit will not hire as many people. Let's not hide behind the abstractions that exact causal mechanism here.

It's usually the same barely employed marginalized folks that are "last to higher, first to fire" too. This is empirically established.

Some service workers loose my job, but stupid investment still pours into blockchain bullshit? What a crude lever this monetary policy is!

It would be much better to adopt some new more precise levers. For example, the rules on the collateral for loans could be changed to pop a bubble. Or Gasoline prices should go up way more (with a new UBI to compensate) to encourage rationing of that key thing while not effecting demand overall.

Basically, the policy should match the underlying cause in the supply shocks. Treating all inflations as all the same is crude and punishes poor people extra for no justifiable reason.