Will Higher Interest Rates Bring Down Inflation?
by John Lawrence
As has been pointed out by others, they will not bring down the cost of things in limited supply like gas and items in short supply due to supply chain problems. What they will bring down is asset inflation in the real estate and the stock markets. Indirectly this will stabilize the rental market. Rent is one of the biggest costs to the family budget so stabilizing, if not decreasing, rents is a good thing. Similarly, the price of houses should actually decrease as the price of mortgages goes up. For those who can pay cash this is a good thing. Sellers will have to drop their asking prices or their real estate will sit on the market unsold as people will not be able to afford the current inflated house prices as well as a much more expensive mortgage. Increased interest rates will also make business loans more expensive and some businesses will go under. This will decrease stock prices as people lose confidence in the stock market. We are not in a real estate crisis as we were in 2008, the Great Recession, since rules about who can obtain a mortgage have been sufficiently tightened. The real estate industry leading up to the Great Recession was famous for "liar loans" in which anyone could just state their income without any verification.
Renters can take heart in the fact that their rents will probably not be going up at such a rapid rate since they are at least partly determined by the price of the underlying real estate. Credit card debtors should pay off their credit cards since credit card debt is definitely going to get more expensive. People living paycheck to paycheck should not be borrowing money. The price of basic goods should come down as supply chain problems are worked out although food prices might remain high as global warming takes its toll on crop production. The cost of gas definitely should come down as production is increased in the US and elsewhere if the supply of Russian gas stays off the market.
The remnants of Biden's Build Back Better bill now repackaged as the Inflation Reduction Act of 2022 will help not only fight inflation but have a major impact on fighting climate change. Incentives to buy electric vehicles and heat pumps are very forward thinking and progressive pieces of legislation long overdue. However, as Yogi Berra said, "It's not over till it's over." Is Krysten Sinema aboard? Some very important aspects of this bill constitute taxing the rich, also provisions which are long overdue especially the "carried interest" loophole. Bringing the costs of health care down also helps those near the bottom rung of the economic ladder, and reins in one of the biggest causes of inflation - health care and pharmaceutical costs. Taxing the rich and the Fed's selling of Treasury bonds extracts money from the economy which has a salutary effect on inflation. The chip bill, which has already passed Congress, will increase domestic production of this valuable commodity and make the US more self sufficient while creating more jobs. Jobs are in great supply already so this part is not really needed at the present time. There is a shortage of workers.
Although some writers see raising interest rates as unproductive and even harmful, if they bring down the cost of real estate and reduce asset prices in the stock market, that might actually be a good thing. Businesses which have to pay higher interest rates for loans may not be buying back as much of their own stock, and this in and of itself might bring down asset inflation in the stock market.
