This will do nothing for actually impacting inflation. Instead it will crash the economy. Real inflation seems to be due to price gouging by companies[0], combined with energy increases due to OPEC price fixing [1], and rent increases due to collusion [2] and corporate domination housing market [3].

Jerome Powell had no answers to the Senate Oversight committee when asked how increasing rates would actually reduce that kind of inflation because his goal is to crash the economy for his buddies on Wall Street - they have lobbyists at the Fed too. [4]

[0] https://www.theguardian.com/commentisfree/2022/sep/25/inflat...

[1] https://newrepublic.com/article/166752/opec-cartel-gas-price...

[2] https://www.propublica.org/article/yieldstar-rent-increase-r...

[3] https://wjno.iheart.com/featured/brian-mudd/content/2022-02-....

[4] https://theintercept.com/2022/10/26/federal-reserve-bank-lob...

Not much to say here since this was foretold / expected.

All eyes on the 2:30pm press conference, where people will hope to divine the future from Powell's statements. I'm going to bet ~40 minutes of "Inflation isn't at 2% yet and we're committed to reducing inflation to that level".

I think what people really want to know is, where do these rate-increases end? In Sept. 22nd meeting, Powell thought 4.5% was roughly where things would end. Is the target rate higher now? Inflation is still strong, job numbers are also strong. Are we looking at additional hikes to 5% as we enter May 2023 or so??

Money for your parents but not for you.

Replace the Fed with an AI. They have a well defined objective function

I just started to have enough money for a decent downpayment on a house when all this rate hike started. Now I'm basically priced out.

Not a huge increase. Inflation is under control in the sense it's not rising, but they need to still pull a ton of money out of the economy; or let it ride.

Powell's speech doesn't matter at all until we see the results of midterms.

I dont get it. Prices are rising because fossil fuels are more expensive.

How do interest rate hikes fix that?

You should see the insane jumps in spdr futures right now.

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas.

(This should be the new Deleuze meme.)

This affects mortgage rates, but not housing prices. If anything, housing prices should decrease a bit as rates go up, since people tend to buy based on monthly payment which is house price + rate.

Therefore, your down payment should be just as effective as it was before, particularly if it's enough to pay for much of the house and keep your monthly payment lower.

Home prices will fall materially once people are forced to sell. That won't happen until broad layoffs occur.

If you have good credit, you'd be surprised how low PMI can get when you put less than 20% down. I wish I had learned it sooner. Saved 6 figures for a down payment only to find out that my PMI was only $103/mo on a $600k mortgage. Ended up doing 5% down instead and threw the rest of the cash into immediate home improvements and the market.

Disclaimer: I did get in when rates were in the low 3s. No clue what PMI is like nowadays or if it changes with the current rate environment.

that is the exact purpose of the action,

reduce demand

it does suck being on the receiving end - I do sympathise - and I am simply making an observation

(Not sure if this is good advice, but...) remember that you can always refinance at a lower rate when the rates come back down.

It's obviously still not advisable to buy a house if you can't afford the monthly payments, but remembering that you can always refinance in a couple years when the rates normalize might help if you have FOMO from the super low rates of the past few years.

Same here. When I started my search last year, while I could afford the mortgage payments, I kept getting outbid on everything I could find within my price range ($550,000). This year I'm priced out due to the doubling of interest rates. Home prices in the area I'm looking at (the Monterey Bay Area and some of the Central Valley exurbs of the Bay Area) have fallen a little bit since this summer, but they are still dramatically higher (roughly 30-50%) than they were in 2020 when the pandemic started. My performance-based salary increases haven't kept up with inflation. Thus I'm stuck renting my one-bedroom apartment longer.

I don't understand this fear. I was in same boat over 10 years ago, when the household bubble popped, so did prices (over a few years period). Then my downpayment was like 30-40% of the home costs.

There are always people who want or need to sell, even if people who bought high hold on to their homes.

A few months from now will be the best time to buy. You can renegotiate the terms of the loan, but you can never renegotiate the price you pay!!!!

Don't worry. You wouldn't want to be the bag holder in an economy where there are wholesale layoffs.

Here's my try: - Unlike popular perception, money is not created by "printing it". Money is created, or the supply of money is added to, when entities (corporations, institutions, people) borrow money from a bank.

- When interest rates go up, the cost of borrowing goes up because you have to pay back more over time.

- When the cost of borrowing goes up people borrow less.

- When their is less borrowing their is less money in the economy. Less of a currency trying to purchase the same amount of goods lowers prices.

More expensive credit to businesses leads to less investment and growth leading to less hiring leading to higher unemployment. Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas.

That's the theory anyway, they don't say it in plain terms like that though.

The Fed's tools are very blunt, and the only way it can reduce at-the-register prices for things like food and gas are indeed by hammering down aggregate demand, i.e. inducing a recession.

Of course, whatever the Fed does may be counterbalanced by supply-side issues, whether economic or political; a warmer-than-expected winter moderating gas prices, or executive actions impeding investment into O&G raising prices, and so on; and other demand-side issues, such as more helicopter money sprayed against fixed supply.

> "I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas.

It will not. The only way to reduce prices of oil/gas and fertilizers (for food) is to bring back the amount of oil/gas and ammonia that went offline due to Russia. There is no amount of digging anywhere in the world that will quickly replace this much lost natural resource.

What raising interest rates will do is cause less spending in all non-oil/gas goods and services. This means every other industry must expect a reduction in revenues because the average customer is going to be spending more on oil/gas and food.

In other words, the choices for companies are: be ok with reduced revenue or be ok with reducing prices.

The choices for individuals are: be ok with consuming less non-oil/gas/food things or sell assets to fund oil/gas/food things.

There are several mechanisms:

1. choice: The idea is that you can put your money in the bank and get some interest or you can spend it. So when interest rates go up, people will chose to spend less and save more. Obviously rates have to be higher than inflation which is now 10%, for this strategy to work, but at high enough rates, they will choose to save rather then spend. Less spending, demand falls, so prices should drop.

2. money supply: For the non-financial sector of the economy, money is created when households borrow from banks, and money is destroyed when loans are repaid. Increasing interest rates reduces loan growth and thus the money supply. A smaller money supply should lead to lower prices.

3. business investment: higher interest rates means that the cost of capital to firms goes up. They must earn a higher margin in order to service whatever debt they have at the higher rates, and investors can choose to invest in the business or buy a bond, and so the business has to earn a return at least as high as the bond. So higher interest rates means that ventures which would have been profitable at a lower rate are no longer profitable. So less business investment at higher rates.

Reduce demand, broadly, as credit tightens with increased interest rates. Can't borrow at basically free money rates across the board anylonger.

Translates into, Less money for stock buybacks, less Yolo with stimy checks, left over money to yolo is also reduced == the market returns to mean. People feel less wealthy == slow purchases. Reduced purchases == Business struggle. Businesses lay people off == less demand. All of this == Less driving, less food.

Really very simple.

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.

I think a lot of people aren't approaching the problem correctly.

Prices going down (Deflation) in a modern economy is very very very bad even if it's for Food and Gas. Since WW2 our economic system has been based on prices going up because that means people are producing goods to make money to spend it on goods. The real goal of these interest rate is to slow the rate of price increase because now there is less money available to borrow / print into the system. People / Businesses will now use debt less often to leverage their purchases which will slow down the economy. If prices increase too quickly the system burns itself alive. If prices lower it decays and dies.

So to answer your question prices will continue to rise because inflation will remain positive, however the rate of it will be lower.

They're not trying to reduce existing prices per se. They're trying to reduce the extent of price increases going forward.

The Fed can do that be damaging demand by damaging the labor market and reducing the value of assets (which also damages spending power ultimately in numerous ways).

There should be a lot more consideration given to increasing and improving on the production side right now, however the US is not nearly so skilled at that these days (whether industrially or policy wise). If you walk into your typical CVS or Walgreens and look at their empty baby formula section, it tells all. Supply chains are still a mess in the US.

Both groceries and gas are sold at low profit margins - I've heard as low as 1-2% for groceries. They are commodities, there's a lot of competition, and shoppers are very price conscious. If grocery stores can make a profit selling food cheaper they will. If grocery stores can pay less rent for their stores, pay less wages for their staff, pay less for all their expenses, those savings will get passed down to consumers as cheaper food.

It won't, because the current inflation is supplyside-driven, not expectations-driven. But if we transition to an expectations-driven inflation regime, that's really bad, because it would require much more severe action to bring under control. The Fed is doing this as a preventive measure to keep expectations-driven inflation from taking hold. It sucks, but it's being done to prevent more pain later.

It won't necessary reduce the price of food or gas much (some nominal decrease from "discretionary," or non-essential, spending on both).

It will bring down housing, which is 1/3 of the CPI by weight and helps get the Fed's inflation metrics down. (Just as an example, it won't make as much sense to leverage up and buy 5 Airbnb's at higher interest rates.)

By reducing demand. I guess.

The idea is that people will cut spending somewhat to have more money stored in saving accounts where they produce more low-risk return. Cutting spending will dampen prices.

Increasing interest rates increases the temptation to lend money instead of spending.

Interest rates make things requiring financing (cars, homes, stuff bought on credit) more expensive and out of reach. People either buy less, or buy the same but pay more interest, meaning they have less money for the next purchase.

By sucking the money out of the system.

It reduces demand - in the modern world the prices are disconnected from cost of production - instead reflect the demand for that product - how much can it be sold for

They are not targeting retail food and gas specifically. The hope is that removing money from the economy will cause spending to slow down everywhere and that eventually will hit food.

It won't reduce the prices. It will merely reduce the rate of increase of those prices.

TL;DR It puts people out of work so there's less demand and we move back down the demand/supply curve towards lower prices/slower increase in prices.

The simplistic version is one idea of the cause of inflation is there's too much demand for all goods as a whole in the economy because there's too much money floating around causing demand to push higher on the demand/supply curve because it's more expensive to produce more of something past a certain point. Making it harder to get loans decreases the money flowing in for some expenditures so there's less expansion in areas like hiring (which when we're near full employment like now usually means having to raise wages pushing costs up and injecting money into the more general market). Thus by increasing the cost of expansion you slow it down and cool the labor market and maybe even cause it to contract.

In the end it boils down to getting more people out of work so they can't buy as much and are willing to accept lower wages meaning it costs less to produce so you might meet the increased demand curve in the middle. It's an incredibly shaky way to try to run the economy but the government has limited knobs to turn and ideally it's easier to target relief at people put out of work because of this than it is to aid the entire population generally.

That's one theory I've heard explained at least. It's incredibly callous to me though because it depends on just putting people out of work and our safety nets in the US are extremely weak meaning you wind up with the fact that a 1 percentage point increase in the unemployment number is associated with a 1-1.6& increase in suicide rates. [0]

[0] https://www.healthaffairs.org/do/10.1377/hpb20220302.274862/....