They are deeply political. The interest rates would have to be significantly higher, particularly in the UK, but actually going there would do other damage. So they are trying to go as high as possible, without losing support of the businesses.
The governement already spends 80bn on the interest bill each year (against a budget of ~1,000bn); despite 20 years of being able to issue debt at effectively 0%.
https://en.wikipedia.org/wiki/Neutral_rate_of_interest (also known as r*)
Naturally I have taken a few liberties with the theory - inflation +/- r* would be the correct rate for the economy. As a quick calculation, it wouldnt be unfair to say interest rate == inflation is a balanced monetary policy.
The Fed is now stuck in a really hard place - raise too much too fast and you get many more SVBs going belly up, posing a larger systemic risk, assuming we even "make it out of the woods". Pause / raise slowly, and you risk inflation running red hot, and people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody.
The Fed is also fighting other dynamics like supply consequences of the Ukraine war, or energy crises, some of which are transitory, some are not. Still lots of uncertainty.
All this on top of a tug of (policy) war between an administration that favors handing out more packages, and the Fed's duty in achieving pricing stability. Can't see this ending well.
The federal funds rate is such a blunt instrument. It's not clear to me that raising the rate is particularly effective in stopping inflation, which tends to be a complex phenomenon with multiple causes. As you say, there are "other dynamics".
> people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody.
On the other hand, there are also people who lose their paychecks entirely due to rising interest rates. The Fed has been very public about the fact that they want to stop wage inflation in particular (which tends to lag behind inflation of other goods).
It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently. It seems almost inevitable that the economy will go on a roller coaster with the fed turning the volume knob up and down. Chicken and egg problem, to mix my metaphors.
That target rate depends on many things in the economy that the FED has no control over, so they adjust the knob as best they can predict, to stear the economy to their dual mandate.
They need to keep inflation low (around 2%) and employment high, but they don't control what the government does in terms of raising/cutting taxes, what world events do to supply, and production.
But you're right, it's a blunt knob to adjust when there are so many variables at play.
To be clear, I was implicitly questioning this. Expecting the Fed to control inflation or employment seems unrealistic, even silly.
The US healthcare system, as an example, was a direct unintended consequence of US government price controls. That was 80 years ago and the affects are still with us.
Price controls lead to shortages and subsidies lead to price increases. It's usually best just to leave stuff alone and let the market take care of it.
If you leave it all to the Fed, everything is a nail, with the hammer being the benchmark rate. Creating too much money is not great, but poorly targeted or no government fiscal policy is equally disastrous.
Ultimately none of the measures you mention are really relevant to inflation, as far as the Reserve would be concerned. CPI is.
The US probably has it the worst because they subsidise fixed 30y mortgages, which you pretty much can't get anywhere else on the planet because the terms of such are so insanely generous to the holder. These insulate a massive portion of the US population from immediate effects of rate rises, so the US likely has to hit harder than most other countries for the same effect on inflation.
https://www.rabobank.nl/particulieren/hypotheek/hypotheekren...
5.44% right now, still well below the US rates (~7%).
And the mistake earlier was basically propping up the world economy during covid. I don't know exactly what else they could've done?
The US markets are still well down, banks are failing, mortgages are extremely high.
Stop dishing out the pain guys, at least until all of the previous rate rises have played through The system.