Wednesday, March 16, 2016

Are Interest Rate Hikes Price Inflationary?

EPJ reader Brian Tague emails:
This article presents the idea that rate hikes are inflationary in the sense that they are a price hike. Can you comment please?

My response:
There is much confusion in the article. Price inflation is generally thought of as increases in the overall price of goods and services. The climb in inflation is roughly driven by increases in the money supply. Increases in Fed-controlled interests rates, because of the way Fed money creation is structured,a are related to money supply increases. The higher that interest rates are, relative to where interest rates would be without Fed manipulations, the less money supply is created---thus, roughly speaking less price inflation.

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