[lamontcg]

They're increasing the cost of borrowing, which directly affects the cost of loan financing for something like a car or a house.

But probably more importantly the increased cost of borrowing hits businesses which are living on the edge and have been rolling over short term loans at low interest rates. When that debt service triples then those unprofitable businesses will start facing negative cash flow losses and can be pushed into insolvency.

For just one example, look at all the commercial real estate vacancies in downtown SF and Portland. Behind a lot of that will be very cheap financing which will go under when interest rates rise (and it is all reasonably short-term financing because it had to be in order to get the lowest interest rates and keep the businesses barely treading water -- so think of this as ARM mortgages for business).

So you have reduced demand for anything funded by loans, along with businesses at the margins going under because their cost of borrowing increases. You get layoffs from the businesses going under which will remove demand for goods. The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession.

All the Fed does is raise the cost of borrowing money which causes enough businesses on the edge of failure to fail that it pushes the economy into a recession--amplified by all the positive feedback loops in the economy.

Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards. The only tricky part might be understanding why failures of businesses on the margins could lead to an economic collapse, but you'd think that with the audience of engineering-oriented people here that we'd collectively understand positive feedback loops amplifying small changes into big ones.

Oh there's also purely subjective psychological positive feedback loops as well. Layoffs at FAANGs right now (or whatever they're called these days) is more due to forward expectations and those businesses getting a bit more runway for the recession. But by doing that they're helping to create the very recession that they're getting prepared for. Similarly in the middle of a recession businesses cut jobs and curb spending because they're in a recession, making the recession worse.

[apropos_g]

> The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession.

Yes, but prices are not demand, they are supply and demand. What if you shut down the parts of the economy that make food and gas?

For example, how do fed interest rates shut down the parts of Saudi's economy that makes oil?

Anyway, in your explanation, you do not use the words "food" or "gas" which is how the "CPI" is calculated.

> Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards.

Using the words in the question to answer the question is "straightforwards."

[lamontcg]

When people are fired from their jobs they no longer have money to spend, they don't take that trip to Disneyland this year (or whatever) and that shows up as reduced airline trips and miles driven, which impacts gas prices. Similarly because they're not buying as much consumer stuff that impacts deliveries. Businesses tighten spending which means less B2B stuff being bought which reduces manufacturing demand (and deliveries). That all drops demand for all kinds of energy and petroleum products.

I didn't mention the words "food" or "gas"[*] because I thought it was obvious, this stuff is really, really basic economics. The economy is all connected, so someone's contraction in spending is another market participant's contraction in demand--and as businesses see a contraction in their demand they adjust to contract their own spending.

When it comes to food, people contract their spending by starting to make coffee at home or just buy starbucks less often as a splurge rather than a daily thing, so that contracts revenue for starbucks, that leads to layoffs, which leads to less consumer spending, etc. The prices of staples don't usually drop as much because people still need to eat, but with reduced energy and transportation costs the supermarkets can reduce the cost of milk to try to attract customers.

[*] Actually on re-reading I did mention food and gas: "The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession." And "every sector" really means literally every sector of the economy--including "food and gas".

[monkeydreams]

Lamontcg offered you the simple explanation of why interest rate management is used to manage inflation. They didn't muddy the waters by talking about market distortions and why it is best to minimalise these. They didn't go into an explanation of why interest rate hikes are themselves a marketplace intervention preventing the proper movement of debt pricing. They didn't even get lost in the labyrinth of exchange rates, and the impact all of this has upon a global trade currency.

Their explanation was about as simple as you can get.

> Yes, but prices are not demand, they are supply and demand. What if you shut down the parts of the economy that make food and gas?

Think this through and remember that food and fuel are must haves. There will always be demand, even at high prices. Just less of it. Which is what the point is.