[staticman2]

A simple example: If your mortgage or credit cards debt or car loans cost more due to higher interest rates, you are going to have less money left over to purchase other products.

This will make you less likely to want the new expensive Iphone, especially if you were going to finance the purchase, so as Iphone sales plumit, there will be less of a chip shortage since supply now meets demand.

[RspecMAuthortah]

OK so what happens if the chip shortage lasts longer (due to war and commodity prices)and with plummeting sales and corporate earning (which will reduce tax receipts as well) the economy will enter recession? So then what is the game? Do Fed keep the economy in recession? Or do they start QE again?

[dragontamer]

> Or do they start QE again?

Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.

Given the data however, its unlikely to happen. We're currently at record employment levels. The expectation is for the rate to keep going up to maybe 4.5% next year, and finally that's when inflation is quelled, and we taper off rates sometime next year.

Of course, we need to keep up with economic data and see if these rate hikes have the desired effects.

[RspecMAuthortah]

> Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.

Right but that will also increase demand and induce more inflation, no? So Fed will be perpetually stuck, in theory at least, to find a balance in their dual mandates.

[dragontamer]

Its like monetary policy is only a tiny piece of overall policy.

The big guns is Congress, not the Fed. Possibly the President if you consider things like averting the big Railroad Union strike last week (which would have certainly caused more inflation as shipping costs could have gone up).

Lots of little fires happening around the country. The fed has one lever: interest rates. Congress / President has the other levers.

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Still though: we watch the Fed because the prime rate has a large effect on the value of investments, especially in the question of stocks vs bonds. Its important for the individual investor to follow.

[karatinversion]

The fed has to keep adjusting rates as economic conditions change, yes.

[randomdata]

The goal is equalize the demand with the supply. Keeping with the example, the hope is to see just as many iPhones sold, already limited by how many chips are available, but not with people fighting over them outbidding each other with higher and higher offers to obtain one.

A recession will occur if they overshoot, however.

[treis]

Rate cuts don't just hit demand. They hit supply too and probably harder than they hit demand.

[merpnderp]

There is too much demand. If we could make all the stuff we can afford to buy, then we wouldn't have inflation. But it is how we get $12 for a medium #1 at Burger King, which is flipping insane.

[ARandomerDude]

Alternative: I now don't think a new house and car are worth it, so I have more money for things like iPhones, making the chip shortage worse.

[pixl97]

Eh, not really. Because you're buying the house on a loan but not buying iphones on the loan.

When you choose to get a loan you're pumping a few hundred thousand that was leveraged into existence into multiple industries that gets distributed into the economy, that gets distributed to hundreds of people working.

When you choose just to just buy an iphone, that's $1000ish your spending of your own money.

[staticman2]

Most people spend more money on cars and houses than Iphones. If interest rates cause you to you buy an Iphone instead of a new house or car you've probably contributed to lowering inflation more than increasing inflation because there's one less person bidding up the cost of houses and cars, plus cars have chips in them.

[7speter]

You're incentivized to put your money in savings because of the interest you can accrue in a savings account since interest rates are up for those accounts.