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Paper Roses

(7,468 posts)
Fri Sep 9, 2022, 09:00 AM Sep 2022

Help me understand: Why does the raise in interest rates help us?

If you are wealthy, the raise(and another proposed raise)punish those who are most affected by the rise in rates. If you have substantial funds, it probably does not bother you but for those of us with limited means, this is a punishment. Bank loans, car loans, Reverse Mortgages...anything that involves 'interest' will put those of us with limited means in a worse situation.

I can't understand why the raise is a help to the economy, especially to the millions who live month to month on limited funds. Pay your bills and have little left for the rest of the month.
Live on Social Security, it is not possible.

It seems to me that a lower rate that would encourage spending would be a bonus. More sales for stores, less money out of our pockets to use on the next expense.

5 replies = new reply since forum marked as read
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Help me understand: Why does the raise in interest rates help us? (Original Post) Paper Roses Sep 2022 OP
My understanding: it's a balancing act... ret5hd Sep 2022 #1
It is used to slow down the economy so prices eventually fall jimfields33 Sep 2022 #2
It effects demand Johnny2X2X Sep 2022 #3
Higher rates cause lower demand, which in turn causes lower prices Fiendish Thingy Sep 2022 #4
It's a case of "if all you have is a hammer..." HariSeldon Sep 2022 #5

ret5hd

(20,435 posts)
1. My understanding: it's a balancing act...
Fri Sep 9, 2022, 09:13 AM
Sep 2022

inflation vs interest rates

both hurt the same people you describe in the short term, but interest rates can be lowered in the future. Prices...not so much.

Raise interest rates: lower inflation rates

My admittedly amateur understanding.

jimfields33

(15,475 posts)
2. It is used to slow down the economy so prices eventually fall
Fri Sep 9, 2022, 09:13 AM
Sep 2022

Right now those dollars don’t go far especially for fixed incomes. This will help.

Johnny2X2X

(18,745 posts)
3. It effects demand
Fri Sep 9, 2022, 09:36 AM
Sep 2022

It reduces demand on big ticket items, thus lowering prices.

But it's a long term strategy, we should have started the process in 2021. What we are doing now will have the most effect in 2023.

Fiendish Thingy

(15,369 posts)
4. Higher rates cause lower demand, which in turn causes lower prices
Fri Sep 9, 2022, 09:57 AM
Sep 2022

Or at least cools inflation.

This is significant especially for two big ticket items, homes and cars, although the effects may take months to be seen, as demand cools.

Lower rates indeed stimulate spending/increase demand, which causes prices to rise/inflation. Between emergency low interest rates and COVID stimulus money, the economy heated up quickly, unemployment dropped to record lows, and inflation not seen since the early 80’s returned.

Of course, during inflationary cycles, some industries/corporations take advantage and Jack up prices beyond the rate of inflation, gouging consumers.

It’s a cycle, with trade offs.

Wages are slowly increasing, and Social Security should see one of its bigger COLA increase next year (announced in September, takes effect in January). Recent reports suggest the next COLA increase could be as high as 9%.

HariSeldon

(452 posts)
5. It's a case of "if all you have is a hammer..."
Fri Sep 9, 2022, 10:23 AM
Sep 2022

The solution for inflation that causes the least collateral damage is raising taxes (including effectively collecting taxes otherwise omitted) on the wealthy. But the Federal Reserve does not have power over taxation, so they try to use the power they do have to increase misery (by increasing unemployment) and fear via increased interest rates. This will, supposedly, cool of the economy and moderate inflation.

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