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Comment by dragontamer | Hacker News Reader

> That only works if the interest rates are higher than inflation.

Not necessarily. Raising interest rates lowers inflation.

So increasing interest rates is a double-whammy on housing. The increased mortgage prices lowers home values, fighting inflation _AND_ causes future profits to be discounted (relative to the risk-free bond rate).

The housing market was overheating earlier this year because low 2.5% interest rates meant that people's monthly payments were much lower than people expected. But now that we have 6% mortgage prices, the monthly mortgage price is increasing (which will eventually force housing prices down).

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This is why rising interest rates is the main tool of the Fed right now. Its not the perfect solution, but its sufficient until Congress enacts lasting change (ie: policy changes that lead to an increased supply of our luxury goods). The bank can only change interest rates so much before it becomes unreasonable.

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We haven’t had runaway inflation like this in the US since the late 70s/early 80s. At that time it did indeed require interest rates higher than inflation to stop it. It took a fed funds rate of 20% to reverse 14% inflation.

It's not so much the absolute value of interest rates that matters, as much as the increase or decrease relative to earlier prices that matters.

Going from 1% rates to 2% is in many ways a bigger change than say a 15% to 16% increase.

Why Fed is not fighting with inflation? With 1.5% interest rate and 9.3% inflation it is clear Fed wants to keep high inflation, but why?

The Fed want inflation to diminish (in real terms) the mountains of debt the US government and consumers incurred in the past 20 years. At the expense of the poorest people and savers (because wage inflation is much lower than the goods/services inflation, not to mention bank savings interest rates, which are laughable).

Make no mistake, the Fed are not idiots, they have been trying to introduce inflation for a long time, but initially they succeeded in asset inflation only. With the help of Covid and the war, they got their wish.

But wage inflation needs to match the goods/services inflation, because without it, borrowers will be even less able to pay their debts.

In order to really stamp out inflation, the Fed would need to raise the interest rate to 10%, essentially forcing the US to declare bankruptcy.

The Fed is hoping to introduce a mild recession, which, they hope, would reduce all kinds of inflation, without them having to raise the rates above 3.5% or so.

How do interest payments to the poor help them? They spend way more in interest expenses, heck they even pay taxes which pay the interest on government debt. Oh and finally if you buy a product from a company that borrowed money, the marginal profit of a product is necessary to cover the interest expenses of the company meaning you as a consumer pay interest in the form of higher prices on products.

The idea that the rich pay interest to themselves is laughable.

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