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"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the ne

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

guyzero 4y ago
By reducing demand. I guess.
- bwb 4y ago
  This is it. You trigger a pull back in the economy, if you get lucky you don't trigger a recession. But, if you need to trigger a recession you do it rather than out of control inflation.
- apropos_g 4y ago
  How exactly do rising interest rates reduce demand for food? How does it reduce demand for gas? This is what I mean.
  - guyzero 4y ago
    Per other commenters less money in the economy reduces aggregate demand. Per previous inflationary periods where interest rates were raised basically by putting people out of work.
foobarian 4y ago
It won't reduce the prices. It will merely reduce the rate of increase of those prices.
- avmich 4y ago
  If done enough, it may reduce prices; we may not want that though.
- apropos_g 4y ago
  Well, I don't see a common sense explanation as to why the rate of increase should decrease either. We could also say, "Eventually, the rate of increase will go down anyway, in the absence of any action from the fed."
  - foobarian 4y ago
    I don't understand the entire system either, but one obvious effect is that there will be much less cash-out refinancing or flipping, which means at least that source of cash and the associated demand will get smaller. And judging how many people I know around town who have been treating their houses like ATMs, it's not a small effect.
    - apropos_g 4y ago
      > And judging how many people I know around town who have been treating their houses like ATMs, it's not a small effect. This is true, this is at least appealing to common sense. But I don't see how that excess cash was going into spending more on food and gas. If I run a supermarket and raise prices, and people like lettuce, if they keep buying the lettuce, because $3.75 lettuce is still worth it compared to $2.00 lettuce, well, CPI can increase a lot, and demand appears to be inelastic, and interest rate increases did nothing to reverse CPI.
avmich 4y ago
The idea is that people will cut spending somewhat to have more money stored in saving accounts where they produce more low-risk return. Cutting spending will dampen prices. Increasing interest rates increases the temptation to lend money instead of spending.
- apropos_g 4y ago
  > is that people will cut spending somewhat Why would people cut spending on food and gas? They need both to survive. That's what the CPI is made of.
  - avmich 4y ago
    Because people will cut spending on going to theaters somewhat, and that takes some gas to get there. No, short term people don't need theaters to survive. There is some non-critical spending to cut, Feds rely on that.
Analemma_ 4y ago
It won't, because the current inflation is supplyside-driven, not expectations-driven. But if we transition to an expectations-driven inflation regime, that's really bad, because it would require much more severe action to bring under control. The Fed is doing this as a preventive measure to keep expectations-driven inflation from taking hold. It sucks, but it's being done to prevent more pain later.
- monkmartinez 4y ago
  I disagree. Supply constraints were a figment of unsustainable demand. There was simply too much money sloshing around to satisfy the hedonistic human treadmill of MORE!
- whimsicalism 4y ago
  But most measures of demand for durable goods show that it is up.
- apropos_g 4y ago
  > It won't, because the current inflation is supplyside-driven, not expectations-driven. But if we transition to an expectations-driven inflation regime, that's really bad, because it would require much more severe action to bring under control. The Fed is doing this as a preventive measure to keep expectations-driven inflation from taking hold. It sucks, but it's being done to prevent more pain later. We have differing definition of common sense.
willcipriano 4y ago
More expensive credit to businesses leads to less investment and growth leading to less hiring leading to higher unemployment. Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. That's the theory anyway, they don't say it in plain terms like that though.
- apropos_g 4y ago
  > Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. People need food and gas to survive. They're not going to stop buying food and gas, unless they are dead.
  - deleted 4y ago
    [deleted]
  - afiori 4y ago
    I people are not on a fixed immutable diet and routine. I would not put instant ramen and a steak in the same "food to survive" category.
  - NegativeLatency 4y ago
    Well the US isn't setup for it in most places but in larger cities it is possible although sometimes less convenient to take transit or bike, so I don't think people "need" gas to survive.
  - rtkwe 4y ago
    Even if you're not put fully out of work if you have less money you'll only take essential trips reducing gas demand even if you're somewhere without public transit at all. Same with food, less money means you'll buy cheaper alternatives that are generally easier to produce. Just because something is 'essential' doesn't mean you'll always spend the same amount on it regardless of your economic situation.
- glofish 4y ago
  or it could mean people waste a lot less - we all know in the western world waste is gigantic
glofish 4y ago
By sucking the money out of the system. It reduces demand - in the modern world the prices are disconnected from cost of production - instead reflect the demand for that product - how much can it be sold for
- apropos_g 4y ago
  > By sucking the money out of the system. Does it suck money out of the system? Here's a common sense example: Raising interest rates caused assets like stocks and bonds to decline in price. People sell these equities and now have cash they are willing to spend on more shit, specifically what is in the CPI. So the opposite can also happen.
  - dingaling 4y ago
    No it doesn't suck money out, but it reduces the rate at which new money is created through borrowing. Every time a loan is agreed, the value of the ${NATIONAL_CURRENCY} is diluted by a tiny amount. And that tiny dilution is amplified through the economy and has a proportionally larger effect on the price of end-user items which inflate to compensate. Increasing interest rates is not a lever that directly affects things measured by the CPI, but the idea is that the effects will ripple through the economy and reduce the delta-v of their prices at the end of a very complicated series of gears and pulleys. It's a bit like trying to refloat a grounded ship by subtly nudging the Moon's orbit to modify the tides.
    - apropos_g 4y ago
      > No it doesn't suck money out, but it reduces the rate at which new money is created through borrowing. This is true. It does not tell me how the money created through borrowing between 0.75% rates and 4.00% rates was used to buy food and gas though. That borrowed money was overwhelming actually used to buy equities, which the fed is obviously impacting very effectively, and not food and gas, even indirectly.
deleted 4y ago
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monkmartinez 4y ago
Reduce demand, broadly, as credit tightens with increased interest rates. Can't borrow at basically free money rates across the board anylonger. Translates into, Less money for stock buybacks, less Yolo with stimy checks, left over money to yolo is also reduced == the market returns to mean. People feel less wealthy == slow purchases. Reduced purchases == Business struggle. Businesses lay people off == less demand. All of this == Less driving, less food. Really very simple.
- georgeecollins 4y ago
  That's not quite right, because if you only reduce demand you could also reduce supply and prices would be unchanged. Higher interest rates reduces money supply (which can induce a recession) but does not necessarily reduce the supply of goods. Less money chasing the same amount of goods (ideally) causes lower prices. I don't think you are wrong intuitively. I am just trying to be a little more specific because get very vague about monetary policy and it leads to some bad assumptions.
  - apropos_g 4y ago
    > but does not necessarily reduce the supply of goods Every mainstream economist agrees that rising interest rates increases unemployment. Well you need human beings to go and make stuff like food and gas. That stuff is also already made as efficiently as possible. So supply is definitely, also, going to be reduced.
    - georgeecollins 4y ago
      I think you are right, but keep in mind we are currently in the middle of raising interest rates and unemployment has not gone up. So what I am trying to say is, rather than say A (rising interest rates) -> D (recession), acknowledge what happens is A (rising interest rates) -> B (less money supply) -> C (less employment) -> D (recession) Because if you don't acknowledge the steps, you can't explain what is happening today. Rates are going up and unemployment isn't. The economy is complicated.
nine_zeros 4y ago
> "I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. It will not. The only way to reduce prices of oil/gas and fertilizers (for food) is to bring back the amount of oil/gas and ammonia that went offline due to Russia. There is no amount of digging anywhere in the world that will quickly replace this much lost natural resource. What raising interest rates will do is cause less spending in all non-oil/gas goods and services. This means every other industry must expect a reduction in revenues because the average customer is going to be spending more on oil/gas and food. In other words, the choices for companies are: be ok with reduced revenue or be ok with reducing prices. The choices for individuals are: be ok with consuming less non-oil/gas/food things or sell assets to fund oil/gas/food things.
- adventured 4y ago
  Oil isn't a serious problem, neither is gasoline. The West can safely maintain the situation with Russia indefinitely. Brent has been in the $90s for a while now. That's equivalent to $65-$70 from ten years ago, which also wasn't a problem then. It's very modestly elevated at present. Natural gas may be a different matter, although the Europeans look like they can have that permanently solved over the next few years through diversification and greater energy conservation.
  - nine_zeros 4y ago
    > Oil isn't a serious problem, neither is gasoline. Isn't a serious problem, yet. That's because China is offline and EU is still purchasing oil from Russia.
  - Sin2x 4y ago
    If it wasn't a problem, Biden wouldn't tour Iran, Venezuela and Saudi Arabia to get their oil and wouldn't open the national reserve. Nations literally live and die by the oil.
  - medvezhenok 4y ago
    You can't mention oil prices without mentioning the U.S. SPR (Strategic Petroleum Reserve) releases (around ~250M barrels released this year, around 1/3 of the total reserve): https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCSSTUS1&f=M https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=M... Without those, the price of crude oil would likely be higher than it is at the moment (although hard to say how much higher). The fact that China is still pursuing a COVID-0 policy has also helped keep global demand depressed - but we can't rely on that indefinitely.
prottog 4y ago
The Fed's tools are very blunt, and the only way it can reduce at-the-register prices for things like food and gas are indeed by hammering down aggregate demand, i.e. inducing a recession. Of course, whatever the Fed does may be counterbalanced by supply-side issues, whether economic or political; a warmer-than-expected winter moderating gas prices, or executive actions impeding investment into O&G raising prices, and so on; and other demand-side issues, such as more helicopter money sprayed against fixed supply.
- apropos_g 4y ago
  > The Fed's tools are very blunt, and the only way it can reduce at-the-register prices for things like food and gas are indeed by hammering down aggregate demand, i.e. inducing a recession. By some measures, it's not even succeeding in inducing a recession. Demand isn't even necessarily declining - you would need a common sense explanation why the rate of increase in demand doesn't sometimes fluctuate or go down anyway, in the absence of fed action. The Fed's tools are extremely effective at taking a huge shit on bond prices. They have huge financial impacts. But you are not giving me a common sense explanation for how raising interest rates will reduce the prices of food and gas.
  - alienicecream 4y ago
    They're trying to reduce the rate of inflation, not "the price of food and gas". Depending on the measure of inflation you're using, food and gas might not even be in that measure.
- za3faran 4y ago
  What's the guarantee that inducing a recession would be recoverable at some point in the future?
adventured 4y ago
They're not trying to reduce existing prices per se. They're trying to reduce the extent of price increases going forward. The Fed can do that be damaging demand by damaging the labor market and reducing the value of assets (which also damages spending power ultimately in numerous ways). There should be a lot more consideration given to increasing and improving on the production side right now, however the US is not nearly so skilled at that these days (whether industrially or policy wise). If you walk into your typical CVS or Walgreens and look at their empty baby formula section, it tells all. Supply chains are still a mess in the US.
- WillPostForFood 4y ago
  >There should be a lot more consideration given to increasing and improving on the production side right now The US knows how to drill for oil and frack. It would help curb inflation and help Europe deal with Russia.
- apropos_g 4y ago
  > They're trying to reduce the extent of price increases going forward. What is the common sense explanation for how increasing interest rates reduce the extend of price increases of food and gas?
georgeecollins 4y ago
Here's my try: - Unlike popular perception, money is not created by "printing it". Money is created, or the supply of money is added to, when entities (corporations, institutions, people) borrow money from a bank. - When interest rates go up, the cost of borrowing goes up because you have to pay back more over time. - When the cost of borrowing goes up people borrow less. - When their is less borrowing their is less money in the economy. Less of a currency trying to purchase the same amount of goods lowers prices.
- mywittyname 4y ago
  Lots of companies make money from the cash flow spread between interest rates and whatever their investment is. And when interest rates rise, entire segments of their business become fundamentally unprofitable. It's not just banks either. Say a company buys a $100k asset, and they can use it to generate $10k in revenue. That's a profitable investment at 5% interest ($5k), but not at 10% ($10k). So at high enough interest rates, it's not economically viable for that company to expand. That lack of expansion has upstream implications, and can have a cooling effect on asset prices at broad levels.
  - apropos_g 4y ago
    > and can have a cooling effect on asset prices at broad levels. Well asset prices aren't the prices of food and gas.
- apropos_g 4y ago
  > ... borrowing... borrowed... Borrowed money is rarely spent on food and gas. You can be stupid and talk about buying food and gas on credit cards. Very few people in this country will stop buying food and gas to prevent default. People need food and gas to survive. So it's not really the borrowed money that is spent on food and gas.
  - stu2b50 4y ago
    You’re talking on a micro level, the OP is talking about macro monetary theory. It’s not about individuals borrowing money, it’s about companies and banks borrowing money and how difficult that is. Monetary supply past m1 is produced by banks borrowing and lending money, and limiting that directly limits monetary supply.
gitfan86 4y ago
They are not targeting retail food and gas specifically. The hope is that removing money from the economy will cause spending to slow down everywhere and that eventually will hit food.
- apropos_g 4y ago
  > They are not targeting retail food and gas specifically. Then it should be obvious why the Fed is doing a terrible job.
thehappypm 4y ago
Interest rates make things requiring financing (cars, homes, stuff bought on credit) more expensive and out of reach. People either buy less, or buy the same but pay more interest, meaning they have less money for the next purchase.
- apropos_g 4y ago
  > Interest rates make things requiring financing (cars, homes, stuff bought on credit) more expensive and out of reach. This is complex. Lower interest rates overall increase home prices, because people buy the biggest home they can afford on a monthly payment. There are many kinds of cars. Some are cheap and some are expensive. Anyway, how do interest rates make things like food and gas more expensive and out of reach? Those don't require financing. They're hugely impactful on inflation. You can be the Fed, and pretend there's a "core" CPI, but the people who make your clothes and cars need food and gas, your clothes are made with a lot of gasoline directly, via shipping and manufacturing, etc., so it is sort of a fiction that there is this non-food-and-gas CPI.
lamontcg 4y ago
They're increasing the cost of borrowing, which directly affects the cost of loan financing for something like a car or a house. But probably more importantly the increased cost of borrowing hits businesses which are living on the edge and have been rolling over short term loans at low interest rates. When that debt service triples then those unprofitable businesses will start facing negative cash flow losses and can be pushed into insolvency. For just one example, look at all the commercial real estate vacancies in downtown SF and Portland. Behind a lot of that will be very cheap financing which will go under when interest rates rise (and it is all reasonably short-term financing because it had to be in order to get the lowest interest rates and keep the businesses barely treading water -- so think of this as ARM mortgages for business). So you have reduced demand for anything funded by loans, along with businesses at the margins going under because their cost of borrowing increases. You get layoffs from the businesses going under which will remove demand for goods. The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession. All the Fed does is raise the cost of borrowing money which causes enough businesses on the edge of failure to fail that it pushes the economy into a recession--amplified by all the positive feedback loops in the economy. Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards. The only tricky part might be understanding why failures of businesses on the margins could lead to an economic collapse, but you'd think that with the audience of engineering-oriented people here that we'd collectively understand positive feedback loops amplifying small changes into big ones. Oh there's also purely subjective psychological positive feedback loops as well. Layoffs at FAANGs right now (or whatever they're called these days) is more due to forward expectations and those businesses getting a bit more runway for the recession. But by doing that they're helping to create the very recession that they're getting prepared for. Similarly in the middle of a recession businesses cut jobs and curb spending because they're in a recession, making the recession worse.
- apropos_g 4y ago
  > The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession. Yes, but prices are not demand, they are supply and demand. What if you shut down the parts of the economy that make food and gas? For example, how do fed interest rates shut down the parts of Saudi's economy that makes oil? Anyway, in your explanation, you do not use the words "food" or "gas" which is how the "CPI" is calculated. > Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards. Using the words in the question to answer the question is "straightforwards."
miamibre 4y ago
I think a lot of people aren't approaching the problem correctly. Prices going down (Deflation) in a modern economy is very very very bad even if it's for Food and Gas. Since WW2 our economic system has been based on prices going up because that means people are producing goods to make money to spend it on goods. The real goal of these interest rate is to slow the rate of price increase because now there is less money available to borrow / print into the system. People / Businesses will now use debt less often to leverage their purchases which will slow down the economy. If prices increase too quickly the system burns itself alive. If prices lower it decays and dies. So to answer your question prices will continue to rise because inflation will remain positive, however the rate of it will be lower.
- lamontcg 4y ago
  Economists have predicted "soft landings" before every recession I can remember where I've followed what the Fed has been saying (I don't quite remember the Volker Fed, I was a little too preoccupied with Star Wars toys and Legos).
  - bryanlarsen 4y ago
    And economists have predicted 9 of the last 5 recessions. And in an economy with 3.5% unemployment, the odds of a recession seem pretty low in my opinion.
    - lamontcg 4y ago
      Once the effects of the Fed rates hikes are felt broadly throughout the economy and unemployment is running closer to 8% let me know if that feels more like a recession or not.
    - klipklop 4y ago
      We are pretty early into the cycle to declare such a thing. The rate increases are likely not close to ending. It takes time for this stuff to unwind. Also note that we are in a similar situation as when Nixon propped up the economy before an election in 1972. It took a while for his policies to backfire. Unemployment rate was 3.5% when Nixon was elected and doubled by 1974. The current dominating party in the US is not taking as many extreme measures as Nixon of course, but for me I want to see where the economy stands after the election dust has settled.
harambae 4y ago
It won't necessary reduce the price of food or gas much (some nominal decrease from "discretionary," or non-essential, spending on both). It will bring down housing, which is 1/3 of the CPI by weight and helps get the Fed's inflation metrics down. (Just as an example, it won't make as much sense to leverage up and buy 5 Airbnb's at higher interest rates.)
corny 4y ago
Both groceries and gas are sold at low profit margins - I've heard as low as 1-2% for groceries. They are commodities, there's a lot of competition, and shoppers are very price conscious. If grocery stores can make a profit selling food cheaper they will. If grocery stores can pay less rent for their stores, pay less wages for their staff, pay less for all their expenses, those savings will get passed down to consumers as cheaper food.
- trs8080 4y ago
  I mean, when was the last time a company the size of a grocery store chain passed down savings to consumers? If anything, the pandemic has shown that companies will gladly continue to fleece customers despite lowering expenses. At the end of the day, they exist to extract as much profit as possible - if every one of their peers maintains high prices, consumers don't have any choice but to pay those prices.
rtkwe 4y ago
TL;DR It puts people out of work so there's less demand and we move back down the demand/supply curve towards lower prices/slower increase in prices. The simplistic version is one idea of the cause of inflation is there's too much demand for all goods as a whole in the economy because there's too much money floating around causing demand to push higher on the demand/supply curve because it's more expensive to produce more of something past a certain point. Making it harder to get loans decreases the money flowing in for some expenditures so there's less expansion in areas like hiring (which when we're near full employment like now usually means having to raise wages pushing costs up and injecting money into the more general market). Thus by increasing the cost of expansion you slow it down and cool the labor market and maybe even cause it to contract. In the end it boils down to getting more people out of work so they can't buy as much and are willing to accept lower wages meaning it costs less to produce so you might meet the increased demand curve in the middle. It's an incredibly shaky way to try to run the economy but the government has limited knobs to turn and ideally it's easier to target relief at people put out of work because of this than it is to aid the entire population generally. That's one theory I've heard explained at least. It's incredibly callous to me though because it depends on just putting people out of work and our safety nets in the US are extremely weak meaning you wind up with the fact that a 1 percentage point increase in the unemployment number is associated with a 1-1.6& increase in suicide rates. [0] [0] https://www.healthaffairs.org/do/10.1377/hpb20220302.274862/#:~:text=Unemployment%20And%20Suicide,-The%20research%20relating&text=This%20research%20finds%20that%20a,average%20increase%20in%20suicide%20rates https://www.healthaffairs.org/do/10.1377/hpb20220302.274862/....
rsj_hn 4y ago
There are several mechanisms: 1. choice: The idea is that you can put your money in the bank and get some interest or you can spend it. So when interest rates go up, people will chose to spend less and save more. Obviously rates have to be higher than inflation which is now 10%, for this strategy to work, but at high enough rates, they will choose to save rather then spend. Less spending, demand falls, so prices should drop. 2. money supply: For the non-financial sector of the economy, money is created when households borrow from banks, and money is destroyed when loans are repaid. Increasing interest rates reduces loan growth and thus the money supply. A smaller money supply should lead to lower prices. 3. business investment: higher interest rates means that the cost of capital to firms goes up. They must earn a higher margin in order to service whatever debt they have at the higher rates, and investors can choose to invest in the business or buy a bond, and so the business has to earn a return at least as high as the bond. So higher interest rates means that ventures which would have been profitable at a lower rate are no longer profitable. So less business investment at higher rates.

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

guyzero 4y ago

By reducing demand. I guess.

bwb 4y ago
This is it. You trigger a pull back in the economy, if you get lucky you don't trigger a recession. But, if you need to trigger a recession you do it rather than out of control inflation.
apropos_g 4y ago
How exactly do rising interest rates reduce demand for food? How does it reduce demand for gas? This is what I mean.
- guyzero 4y ago
  Per other commenters less money in the economy reduces aggregate demand. Per previous inflationary periods where interest rates were raised basically by putting people out of work.

foobarian 4y ago

It won't reduce the prices. It will merely reduce the rate of increase of those prices.

avmich 4y ago
If done enough, it may reduce prices; we may not want that though.
apropos_g 4y ago
Well, I don't see a common sense explanation as to why the rate of increase should decrease either. We could also say, "Eventually, the rate of increase will go down anyway, in the absence of any action from the fed."
- foobarian 4y ago
  I don't understand the entire system either, but one obvious effect is that there will be much less cash-out refinancing or flipping, which means at least that source of cash and the associated demand will get smaller. And judging how many people I know around town who have been treating their houses like ATMs, it's not a small effect.
  - apropos_g 4y ago
    > And judging how many people I know around town who have been treating their houses like ATMs, it's not a small effect. This is true, this is at least appealing to common sense. But I don't see how that excess cash was going into spending more on food and gas. If I run a supermarket and raise prices, and people like lettuce, if they keep buying the lettuce, because $3.75 lettuce is still worth it compared to $2.00 lettuce, well, CPI can increase a lot, and demand appears to be inelastic, and interest rate increases did nothing to reverse CPI.

avmich 4y ago

The idea is that people will cut spending somewhat to have more money stored in saving accounts where they produce more low-risk return. Cutting spending will dampen prices. Increasing interest rates increases the temptation to lend money instead of spending.

apropos_g 4y ago
> is that people will cut spending somewhat Why would people cut spending on food and gas? They need both to survive. That's what the CPI is made of.
- avmich 4y ago
  Because people will cut spending on going to theaters somewhat, and that takes some gas to get there. No, short term people don't need theaters to survive. There is some non-critical spending to cut, Feds rely on that.

Analemma_ 4y ago

It won't, because the current inflation is supplyside-driven, not expectations-driven. But if we transition to an expectations-driven inflation regime, that's really bad, because it would require much more severe action to bring under control. The Fed is doing this as a preventive measure to keep expectations-driven inflation from taking hold. It sucks, but it's being done to prevent more pain later.

monkmartinez 4y ago
I disagree. Supply constraints were a figment of unsustainable demand. There was simply too much money sloshing around to satisfy the hedonistic human treadmill of MORE!
whimsicalism 4y ago
But most measures of demand for durable goods show that it is up.
apropos_g 4y ago
> It won't, because the current inflation is supplyside-driven, not expectations-driven. But if we transition to an expectations-driven inflation regime, that's really bad, because it would require much more severe action to bring under control. The Fed is doing this as a preventive measure to keep expectations-driven inflation from taking hold. It sucks, but it's being done to prevent more pain later. We have differing definition of common sense.

willcipriano 4y ago

More expensive credit to businesses leads to less investment and growth leading to less hiring leading to higher unemployment. Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. That's the theory anyway, they don't say it in plain terms like that though.

apropos_g 4y ago
> Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. People need food and gas to survive. They're not going to stop buying food and gas, unless they are dead.
- deleted 4y ago
  [deleted]
- afiori 4y ago
  I people are not on a fixed immutable diet and routine. I would not put instant ramen and a steak in the same "food to survive" category.
- NegativeLatency 4y ago
  Well the US isn't setup for it in most places but in larger cities it is possible although sometimes less convenient to take transit or bike, so I don't think people "need" gas to survive.
- rtkwe 4y ago
  Even if you're not put fully out of work if you have less money you'll only take essential trips reducing gas demand even if you're somewhere without public transit at all. Same with food, less money means you'll buy cheaper alternatives that are generally easier to produce. Just because something is 'essential' doesn't mean you'll always spend the same amount on it regardless of your economic situation.
glofish 4y ago
or it could mean people waste a lot less - we all know in the western world waste is gigantic

glofish 4y ago

By sucking the money out of the system. It reduces demand - in the modern world the prices are disconnected from cost of production - instead reflect the demand for that product - how much can it be sold for

apropos_g 4y ago
> By sucking the money out of the system. Does it suck money out of the system? Here's a common sense example: Raising interest rates caused assets like stocks and bonds to decline in price. People sell these equities and now have cash they are willing to spend on more shit, specifically what is in the CPI. So the opposite can also happen.
- dingaling 4y ago
  No it doesn't suck money out, but it reduces the rate at which new money is created through borrowing. Every time a loan is agreed, the value of the ${NATIONAL_CURRENCY} is diluted by a tiny amount. And that tiny dilution is amplified through the economy and has a proportionally larger effect on the price of end-user items which inflate to compensate. Increasing interest rates is not a lever that directly affects things measured by the CPI, but the idea is that the effects will ripple through the economy and reduce the delta-v of their prices at the end of a very complicated series of gears and pulleys. It's a bit like trying to refloat a grounded ship by subtly nudging the Moon's orbit to modify the tides.
  - apropos_g 4y ago
    > No it doesn't suck money out, but it reduces the rate at which new money is created through borrowing. This is true. It does not tell me how the money created through borrowing between 0.75% rates and 4.00% rates was used to buy food and gas though. That borrowed money was overwhelming actually used to buy equities, which the fed is obviously impacting very effectively, and not food and gas, even indirectly.

deleted 4y ago

[deleted]

monkmartinez 4y ago

Reduce demand, broadly, as credit tightens with increased interest rates. Can't borrow at basically free money rates across the board anylonger. Translates into, Less money for stock buybacks, less Yolo with stimy checks, left over money to yolo is also reduced == the market returns to mean. People feel less wealthy == slow purchases. Reduced purchases == Business struggle. Businesses lay people off == less demand. All of this == Less driving, less food. Really very simple.

georgeecollins 4y ago
That's not quite right, because if you only reduce demand you could also reduce supply and prices would be unchanged. Higher interest rates reduces money supply (which can induce a recession) but does not necessarily reduce the supply of goods. Less money chasing the same amount of goods (ideally) causes lower prices. I don't think you are wrong intuitively. I am just trying to be a little more specific because get very vague about monetary policy and it leads to some bad assumptions.
- apropos_g 4y ago
  > but does not necessarily reduce the supply of goods Every mainstream economist agrees that rising interest rates increases unemployment. Well you need human beings to go and make stuff like food and gas. That stuff is also already made as efficiently as possible. So supply is definitely, also, going to be reduced.
  - georgeecollins 4y ago
    I think you are right, but keep in mind we are currently in the middle of raising interest rates and unemployment has not gone up. So what I am trying to say is, rather than say A (rising interest rates) -> D (recession), acknowledge what happens is A (rising interest rates) -> B (less money supply) -> C (less employment) -> D (recession) Because if you don't acknowledge the steps, you can't explain what is happening today. Rates are going up and unemployment isn't. The economy is complicated.

nine_zeros 4y ago

> "I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. It will not. The only way to reduce prices of oil/gas and fertilizers (for food) is to bring back the amount of oil/gas and ammonia that went offline due to Russia. There is no amount of digging anywhere in the world that will quickly replace this much lost natural resource. What raising interest rates will do is cause less spending in all non-oil/gas goods and services. This means every other industry must expect a reduction in revenues because the average customer is going to be spending more on oil/gas and food. In other words, the choices for companies are: be ok with reduced revenue or be ok with reducing prices. The choices for individuals are: be ok with consuming less non-oil/gas/food things or sell assets to fund oil/gas/food things.

adventured 4y ago
Oil isn't a serious problem, neither is gasoline. The West can safely maintain the situation with Russia indefinitely. Brent has been in the $90s for a while now. That's equivalent to $65-$70 from ten years ago, which also wasn't a problem then. It's very modestly elevated at present. Natural gas may be a different matter, although the Europeans look like they can have that permanently solved over the next few years through diversification and greater energy conservation.
- nine_zeros 4y ago
  > Oil isn't a serious problem, neither is gasoline. Isn't a serious problem, yet. That's because China is offline and EU is still purchasing oil from Russia.
- Sin2x 4y ago
  If it wasn't a problem, Biden wouldn't tour Iran, Venezuela and Saudi Arabia to get their oil and wouldn't open the national reserve. Nations literally live and die by the oil.
- medvezhenok 4y ago
  You can't mention oil prices without mentioning the U.S. SPR (Strategic Petroleum Reserve) releases (around ~250M barrels released this year, around 1/3 of the total reserve): https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCSSTUS1&f=M https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=M... Without those, the price of crude oil would likely be higher than it is at the moment (although hard to say how much higher). The fact that China is still pursuing a COVID-0 policy has also helped keep global demand depressed - but we can't rely on that indefinitely.

prottog 4y ago

The Fed's tools are very blunt, and the only way it can reduce at-the-register prices for things like food and gas are indeed by hammering down aggregate demand, i.e. inducing a recession. Of course, whatever the Fed does may be counterbalanced by supply-side issues, whether economic or political; a warmer-than-expected winter moderating gas prices, or executive actions impeding investment into O&G raising prices, and so on; and other demand-side issues, such as more helicopter money sprayed against fixed supply.

apropos_g 4y ago
> The Fed's tools are very blunt, and the only way it can reduce at-the-register prices for things like food and gas are indeed by hammering down aggregate demand, i.e. inducing a recession. By some measures, it's not even succeeding in inducing a recession. Demand isn't even necessarily declining - you would need a common sense explanation why the rate of increase in demand doesn't sometimes fluctuate or go down anyway, in the absence of fed action. The Fed's tools are extremely effective at taking a huge shit on bond prices. They have huge financial impacts. But you are not giving me a common sense explanation for how raising interest rates will reduce the prices of food and gas.
- alienicecream 4y ago
  They're trying to reduce the rate of inflation, not "the price of food and gas". Depending on the measure of inflation you're using, food and gas might not even be in that measure.
za3faran 4y ago
What's the guarantee that inducing a recession would be recoverable at some point in the future?

adventured 4y ago

They're not trying to reduce existing prices per se. They're trying to reduce the extent of price increases going forward. The Fed can do that be damaging demand by damaging the labor market and reducing the value of assets (which also damages spending power ultimately in numerous ways). There should be a lot more consideration given to increasing and improving on the production side right now, however the US is not nearly so skilled at that these days (whether industrially or policy wise). If you walk into your typical CVS or Walgreens and look at their empty baby formula section, it tells all. Supply chains are still a mess in the US.

WillPostForFood 4y ago
>There should be a lot more consideration given to increasing and improving on the production side right now The US knows how to drill for oil and frack. It would help curb inflation and help Europe deal with Russia.
apropos_g 4y ago
> They're trying to reduce the extent of price increases going forward. What is the common sense explanation for how increasing interest rates reduce the extend of price increases of food and gas?

georgeecollins 4y ago

Here's my try: - Unlike popular perception, money is not created by "printing it". Money is created, or the supply of money is added to, when entities (corporations, institutions, people) borrow money from a bank. - When interest rates go up, the cost of borrowing goes up because you have to pay back more over time. - When the cost of borrowing goes up people borrow less. - When their is less borrowing their is less money in the economy. Less of a currency trying to purchase the same amount of goods lowers prices.

mywittyname 4y ago
Lots of companies make money from the cash flow spread between interest rates and whatever their investment is. And when interest rates rise, entire segments of their business become fundamentally unprofitable. It's not just banks either. Say a company buys a $100k asset, and they can use it to generate $10k in revenue. That's a profitable investment at 5% interest ($5k), but not at 10% ($10k). So at high enough interest rates, it's not economically viable for that company to expand. That lack of expansion has upstream implications, and can have a cooling effect on asset prices at broad levels.
- apropos_g 4y ago
  > and can have a cooling effect on asset prices at broad levels. Well asset prices aren't the prices of food and gas.
apropos_g 4y ago
> ... borrowing... borrowed... Borrowed money is rarely spent on food and gas. You can be stupid and talk about buying food and gas on credit cards. Very few people in this country will stop buying food and gas to prevent default. People need food and gas to survive. So it's not really the borrowed money that is spent on food and gas.
- stu2b50 4y ago
  You’re talking on a micro level, the OP is talking about macro monetary theory. It’s not about individuals borrowing money, it’s about companies and banks borrowing money and how difficult that is. Monetary supply past m1 is produced by banks borrowing and lending money, and limiting that directly limits monetary supply.

gitfan86 4y ago

They are not targeting retail food and gas specifically. The hope is that removing money from the economy will cause spending to slow down everywhere and that eventually will hit food.

apropos_g 4y ago
> They are not targeting retail food and gas specifically. Then it should be obvious why the Fed is doing a terrible job.

thehappypm 4y ago

Interest rates make things requiring financing (cars, homes, stuff bought on credit) more expensive and out of reach. People either buy less, or buy the same but pay more interest, meaning they have less money for the next purchase.

apropos_g 4y ago
> Interest rates make things requiring financing (cars, homes, stuff bought on credit) more expensive and out of reach. This is complex. Lower interest rates overall increase home prices, because people buy the biggest home they can afford on a monthly payment. There are many kinds of cars. Some are cheap and some are expensive. Anyway, how do interest rates make things like food and gas more expensive and out of reach? Those don't require financing. They're hugely impactful on inflation. You can be the Fed, and pretend there's a "core" CPI, but the people who make your clothes and cars need food and gas, your clothes are made with a lot of gasoline directly, via shipping and manufacturing, etc., so it is sort of a fiction that there is this non-food-and-gas CPI.

lamontcg 4y ago

They're increasing the cost of borrowing, which directly affects the cost of loan financing for something like a car or a house. But probably more importantly the increased cost of borrowing hits businesses which are living on the edge and have been rolling over short term loans at low interest rates. When that debt service triples then those unprofitable businesses will start facing negative cash flow losses and can be pushed into insolvency. For just one example, look at all the commercial real estate vacancies in downtown SF and Portland. Behind a lot of that will be very cheap financing which will go under when interest rates rise (and it is all reasonably short-term financing because it had to be in order to get the lowest interest rates and keep the businesses barely treading water -- so think of this as ARM mortgages for business). So you have reduced demand for anything funded by loans, along with businesses at the margins going under because their cost of borrowing increases. You get layoffs from the businesses going under which will remove demand for goods. The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession. All the Fed does is raise the cost of borrowing money which causes enough businesses on the edge of failure to fail that it pushes the economy into a recession--amplified by all the positive feedback loops in the economy. Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards. The only tricky part might be understanding why failures of businesses on the margins could lead to an economic collapse, but you'd think that with the audience of engineering-oriented people here that we'd collectively understand positive feedback loops amplifying small changes into big ones. Oh there's also purely subjective psychological positive feedback loops as well. Layoffs at FAANGs right now (or whatever they're called these days) is more due to forward expectations and those businesses getting a bit more runway for the recession. But by doing that they're helping to create the very recession that they're getting prepared for. Similarly in the middle of a recession businesses cut jobs and curb spending because they're in a recession, making the recession worse.

apropos_g 4y ago
> The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession. Yes, but prices are not demand, they are supply and demand. What if you shut down the parts of the economy that make food and gas? For example, how do fed interest rates shut down the parts of Saudi's economy that makes oil? Anyway, in your explanation, you do not use the words "food" or "gas" which is how the "CPI" is calculated. > Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards. Using the words in the question to answer the question is "straightforwards."

miamibre 4y ago

I think a lot of people aren't approaching the problem correctly. Prices going down (Deflation) in a modern economy is very very very bad even if it's for Food and Gas. Since WW2 our economic system has been based on prices going up because that means people are producing goods to make money to spend it on goods. The real goal of these interest rate is to slow the rate of price increase because now there is less money available to borrow / print into the system. People / Businesses will now use debt less often to leverage their purchases which will slow down the economy. If prices increase too quickly the system burns itself alive. If prices lower it decays and dies. So to answer your question prices will continue to rise because inflation will remain positive, however the rate of it will be lower.

lamontcg 4y ago
Economists have predicted "soft landings" before every recession I can remember where I've followed what the Fed has been saying (I don't quite remember the Volker Fed, I was a little too preoccupied with Star Wars toys and Legos).
- bryanlarsen 4y ago
  And economists have predicted 9 of the last 5 recessions. And in an economy with 3.5% unemployment, the odds of a recession seem pretty low in my opinion.
  - lamontcg 4y ago
    Once the effects of the Fed rates hikes are felt broadly throughout the economy and unemployment is running closer to 8% let me know if that feels more like a recession or not.
  - klipklop 4y ago
    We are pretty early into the cycle to declare such a thing. The rate increases are likely not close to ending. It takes time for this stuff to unwind. Also note that we are in a similar situation as when Nixon propped up the economy before an election in 1972. It took a while for his policies to backfire. Unemployment rate was 3.5% when Nixon was elected and doubled by 1974. The current dominating party in the US is not taking as many extreme measures as Nixon of course, but for me I want to see where the economy stands after the election dust has settled.

harambae 4y ago

It won't necessary reduce the price of food or gas much (some nominal decrease from "discretionary," or non-essential, spending on both). It will bring down housing, which is 1/3 of the CPI by weight and helps get the Fed's inflation metrics down. (Just as an example, it won't make as much sense to leverage up and buy 5 Airbnb's at higher interest rates.)

corny 4y ago

Both groceries and gas are sold at low profit margins - I've heard as low as 1-2% for groceries. They are commodities, there's a lot of competition, and shoppers are very price conscious. If grocery stores can make a profit selling food cheaper they will. If grocery stores can pay less rent for their stores, pay less wages for their staff, pay less for all their expenses, those savings will get passed down to consumers as cheaper food.

trs8080 4y ago
I mean, when was the last time a company the size of a grocery store chain passed down savings to consumers? If anything, the pandemic has shown that companies will gladly continue to fleece customers despite lowering expenses. At the end of the day, they exist to extract as much profit as possible - if every one of their peers maintains high prices, consumers don't have any choice but to pay those prices.

rtkwe 4y ago

TL;DR It puts people out of work so there's less demand and we move back down the demand/supply curve towards lower prices/slower increase in prices. The simplistic version is one idea of the cause of inflation is there's too much demand for all goods as a whole in the economy because there's too much money floating around causing demand to push higher on the demand/supply curve because it's more expensive to produce more of something past a certain point. Making it harder to get loans decreases the money flowing in for some expenditures so there's less expansion in areas like hiring (which when we're near full employment like now usually means having to raise wages pushing costs up and injecting money into the more general market). Thus by increasing the cost of expansion you slow it down and cool the labor market and maybe even cause it to contract. In the end it boils down to getting more people out of work so they can't buy as much and are willing to accept lower wages meaning it costs less to produce so you might meet the increased demand curve in the middle. It's an incredibly shaky way to try to run the economy but the government has limited knobs to turn and ideally it's easier to target relief at people put out of work because of this than it is to aid the entire population generally. That's one theory I've heard explained at least. It's incredibly callous to me though because it depends on just putting people out of work and our safety nets in the US are extremely weak meaning you wind up with the fact that a 1 percentage point increase in the unemployment number is associated with a 1-1.6& increase in suicide rates. [0] [0] https://www.healthaffairs.org/do/10.1377/hpb20220302.274862/#:~:text=Unemployment%20And%20Suicide,-The%20research%20relating&text=This%20research%20finds%20that%20a,average%20increase%20in%20suicide%20rates https://www.healthaffairs.org/do/10.1377/hpb20220302.274862/....

rsj_hn 4y ago

There are several mechanisms: 1. choice: The idea is that you can put your money in the bank and get some interest or you can spend it. So when interest rates go up, people will chose to spend less and save more. Obviously rates have to be higher than inflation which is now 10%, for this strategy to work, but at high enough rates, they will choose to save rather then spend. Less spending, demand falls, so prices should drop. 2. money supply: For the non-financial sector of the economy, money is created when households borrow from banks, and money is destroyed when loans are repaid. Increasing interest rates reduces loan growth and thus the money supply. A smaller money supply should lead to lower prices. 3. business investment: higher interest rates means that the cost of capital to firms goes up. They must earn a higher margin in order to service whatever debt they have at the higher rates, and investors can choose to invest in the business or buy a bond, and so the business has to earn a return at least as high as the bond. So higher interest rates means that ventures which would have been profitable at a lower rate are no longer profitable. So less business investment at higher rates.