Re:The Federal Reserve is expected to increase interest rate...
by mholyland on Wednesday March 22, 2023 @05:49AM
(#35258805)
> 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.
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.
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.