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Comment by JohnWhigham | Hacker News Reader

We need interest rates raised yesterday

Will raising interest rates solve supply chain issues? Will it decrease demand for goods and increase demand for services to pre-pandemic levels? It seems to me there are causes of inflation outside of the Fed's control.

Businesses that are highly leveraged with debt would either go bankrupt or raise prices to account for higher debt costs, which wouldn't address the problem.

That's their problem. If your business can't handle a 1% a year rate hike, you have no business in business. Sooner or later, they will turn into a zombie company and weigh on the economy anyway. So better purge them sooner than later so capital starts flowing to more healthy businesses and sectors.

Interest rates don't really affect gasoline prices.

And raising interest rates won't solve the chip shortage hurting the new / used car industry.

But it would probably hit demand for cars as people will be less quick to take out loans.

No one is buying a car for funsies in this market. Cars break down, people get into accidents, people have kids and need larger vehicles, demand for transportation is inflexible, and people will take out loans to get it regardless of the rate.

> ...people have kids and need larger vehicles, demand for transportation is inflexible, and people will take out loans to get it regardless of the rate.

I think this is true but only to a certain extent. People can make sacrifices to reduce transportation demand. Making a single trip, getting a smaller vehicle, or carpooling are options. The issue is that we've lived in a luxury transportation world for a long time, and people may be unwilling to make those sacrifices.

Reducing how much you use a car is one thing. Reducing to the point that you can eliminate the need for a car altogether is quite another. You can combine two trips into one, you can't combine two into zero. You don't need to drive a hummer everywhere, but you need something large enough to fit everything you have to regularly take. You can probably carpool to some places at some times, you can't carpool everywhere at any time.

Maybe there is some idiot out there who doesn't need a car but just likes having an autopayment burn a hole in his wallet every month, but is that person going to be dissuaded by a 1% increase on interest rates? There may be a few people right on the cusp of not needing to purchase a car who could be moved over the edge, but these are a tiny minority, and their shift in behavior won't have a serious impact on prices.

Regardless, the fact is trying to reduce demand is just a bad solution to shortages. Increased demand justifies the investment in new equipment and infrastructure to meet that demand, which in the long term leads to lower costs all around, and increased employment which in turn fuels more healthy growth. While in an emergency you might want to ration something just so nobody starves, cars aren't an emergency supply.

Interest rates are a base cost to everything. Base cost to business and base cost to consumers. Interest rate increases will raise prices (cause inflation), especially since many consumers are paying for things with savings and not debt.

'Interest rate increases will raise prices (cause inflation)'.

I hope you recognize this is so far outside current economic consensus that I can't even call it a heterodox theory. It's just wrong. This is the same logic used to justify repeated interest rate cuts in Turkey, which is causing disastrous inflation.

Interest rates also represent the opportunity cost of money. An increase in rates leads people to save rather than consume, decreasing the velocity of money and tending to lower inflation.

My feeling is that businesses might be way more sensitive to that given current unprecedented conditions. I’d like to know if they’ve modelled a scenario where interest rate rises actually make inflation worse by hitting supply.

They should've been raised back in 2018 when we had a booming economy

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