Interest Rate Tightening Will Cause Even More Economic Destruction
Federal Reserve policies attempting to promote economic and price stability are a major cause for the recent acceleration in the consumer prices’ rise. According to popular thinking, the central bank is supposed to promote both steady economic growth and price stability, the economy perceived as a spaceship that occasionally slips from stability to instability.
Supposedly, when economic activity slows down and falls below the path of stability, the central bank should give the economy a push through loose monetary policy (lower interest rates and increasing the money supply), which will redirect it toward stable growth.
Conversely, when economic activity is “too strong,” the central bank should “cool off” the economy by imposing a tighter monetary stance, to prevent “overheating.” This involves raising interest rates and reducing monetary injections to put the economy back on a trajectory of stable growth and prices.
Government officials and people at the Fed claim supply shocks due to the covid-19 disruptions and the Ukraine-Russia war are behind Consumer Price Index (CPI) increases. The Fed has thus tried to curb demand for goods and services by raising interest rates to place it in line with the curtailed supply.
Most people believe price increases are inflation and that prices will fall if the demand for goods and services is reduced with a tighter interest rate stance.
But the key factor behind price increases is the money supply increase. Note that a good’s price is the amount of money paid for it. Conseq
Article from Mises Wire
