Yesterday, we looked at inflation around the world. Today we can see how countries are using interest rates to fight it.
This NY Times map uses arrow length to show the size of recent interest rate hikes:
The NY Times also tells us that at least 45 countries have elevated rates this year.
Inflation and Interest Rates
Perhaps though the last two columns, below, say it all. We would expect the bar in the interest rate column to be accompanied by an inflation rate bar that corresponds. The U.S. stands out as having one of the highest inflation rates:
Meanwhile, we will soon have to draw a bar next to the eurozone. After not raising rates for 11 years, in a surprise announcement, they said rates would rise by a quarter point during July and then again in September. The reason is 8.1 percent inflation–much higher than the 5.3 percent projection in our NY Times graphic.
Our Bottom Line: Fighting Inflation
Everyone refers to “low interest rates” but never really says what they mean. If you are the Federal Reserve, then probably you are referring to the fed funds rate. The interest rate that banks charge each other, the fed funds rate is the rate that lets banks decide how much to charge you and me. Like any business, to be profitable, their prices need to exceed their costs. So, if the cost of borrowing is the fed funds rate, then the price to lend us money will be higher.
As a result, it will be more expensive if we borrow to buy a car or a house. Similarly, the interest rate on our credit card balances will go up. As economists, we can return to the law of demand. When price is up, the quantity we are willing and able to buy goes down. And that is precisely what the central bankers around the world are hoping for. With fewer dollars and euros and pounds chasing goods, prices should stop going up.
Of course. as we saw yesterday, central bankers cannot unravel the supply chain snarls that are raising prices from shortages or the Ukraine war that is nudging the price of oil upward. But still, higher interest rates could make a difference.
My sources and more: Most of today’s interest rates facts came from this NY Times article and, for the eurozone, from CBS. My go-to though is Steve Hanke. Here, he has some inflation history that is excellent.
What we are seeing here is another example of central banks overreacting because of their intrinsic impotence in dealing with sever shocks.
In 08, the lack of sufficient fiscal stimulus meant that the fed couldn’t ameliorate deflation without provoking asset inflation.
Today, the fed’s overreaction will provoke a recession. Although it’s true that supply shocks have diffused into more general inflation, inflation was initiated by, and is still sustained by, supply constraints, particularly in oil. Most supply constraints other than grain are visibly easing; but oil prices are still maintained by a combination of the Ukraine war, continued cartelization by authoritarian regimes, and investment reaction to the recent fracking bust. Unfortunately, the fed’s flirting with deflation exacerbates that last item.
The fed’s logic appears to be: Something must be done: This is something: Therefore we must do it.
Rick- I agree with all you say but could not imagine the Fed not responding.