[misja111]

> When the government says "You give me $100 and I'll give you back more later"

No it's the other way around. The FED rate is the rate for which the FED will lend you money. The government borrows money by writing out government bonds, which' yield (rate) is determined by the market. Every time the FED lends someone money, it basically prints it. Higher interest rates will cause fewer people to borrow money -> less money is printed -> inflation goes down. At least that's how it works in theory.

[TheOtherHobbes]

The theory completes ignores the fact that inflation is driven by two things: external supply shocks and corporate profiteering. There's some catch-up from wage inflation later, but it's a reaction to higher prices not a driver of them.

Tinkering with the money supply is like repainting your house when it's on fire. If your house is unstable it's not because it's the wrong colour. It's because the foundations need underpinning and perhaps a redesign.

[dsfyu404ed]

>The theory completes ignores the fact that inflation is driven by two things: external supply shocks and corporate profiteering.

Citation please for this supposed "fact".

The accepted wisdom is that inflation is driven by the size of the money supply and the velocity of the money.

[throw0101b]

> Every time the FED lends someone money, it basically prints it.

It is the commercial/retail banks that create money through credit:

> Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans.

* https://www.bankofengland.co.uk/explainers/how-is-money-crea...

* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

While central bank reserve rates do have impact, there are countries have have no reserve requirements (UK/England being one of them).

The transmission mechanism of monetary policy is… complicated:

* https://www.ecb.europa.eu/mopo/intro/transmission/html/index...

* https://www.chicagofed.org/publications/working-papers/2012/...

[bogomipz]

No, this is not correct. The term "Fed Rate" is not correct or meaningful either. There are two different things - the Fed Funds Rate and the Discount Rate(also known as the Discount Window.) The Fed Funds Rate is "the rate" being discussed when the Fed raises interest rates[1][2]. The Fed Funds Rate is the interest rates banks charge each other to borrow money overnight to meet their Federal Reserve requirements. When it becomes more expensive for banks to borrow money from each other to meet their overnight Federal Reserve requirements it makes credit more expensive for both the banks and the consumers of a bank's loan products.

Banks can also borrow directly from the Federal Reserve via a facility called the discount window or Fed Discount rate[1]. Banks for a long time have avoided borrowing directly from the Fed as it has had something of stigma attached to it.[3] That has changed recently however(2007-2008.) The Discount Rate is always more than the Fed Funds Rate.

>"Every time the FED lends someone money, it basically prints it."

This is not correct either. The Fed maintains a balance sheet with assets and liabilities similar to a corporation [4]. One of those assets is money they have lent to other financial institutions. They do this by crediting or debiting the bank's account at the Fed. You seem to be confusing the Discount Rate with Quantitative Easing.

[1] https://www.investopedia.com/terms/f/federalfundsrate.asp

[2] https://www.investopedia.com/terms/f/federal_discount_rate.a...

[3] https://www.federalreserve.gov/econres/notes/feds-notes/stig...

[4] https://www.investopedia.com/terms/f/fed-balance-sheet.asp

[flandish]

Does this rate not also cause personal mortgages to rise, due to the increase? This effects monthly payments, on already agreed contracts, which makes homeowners struggle, no?

[jandrewrogers]

In the US almost all mortgages are fixed rate, so the monthly payments don't change. The interest rate does not change for the life of the mortgage, often 30 years. Because a mortgage can be refinanced, this causes a downward ratchet on interest rates for mortgages over time. This is one of the ways in which a mortgage is a hedge against inflation and rising costs. There are tens of millions of Americans with a mortgage rate in the 2.5-3.5% range because the mortgages pre-date the current rise in interest rates.

What this does impact is the ability of people to move houses, since a new mortgage would be priced to current market conditions.

[FreeHugs]

The FED lends someone money? Whom do they lend money?

[the_mitsuhiko]

Commercial banks.

[FreeHugs]

Really? I have never heard about the process of banks lending money from the FED.

Do you have a link where this process is described?

[the_mitsuhiko]

https://en.wikipedia.org/wiki/Discount_window