Member-only story
Free Market Hypocrisy
Raising interest rates doesn’t increase supply, it just makes people poorer.
Inflation sucks, but fighting inflation the wrong way or for the wrong reasons sucks even worse. While I am one the last people who would suggest letting the market serve as the solution to our problems, there’s one place where I do think market solutions can work: the market.
But in the bizarre market-first logic under which our economy is governed, the one condition under which free market advocates welcome intervention: when they think their money is losing value. That’s when the call the Federal Reserve Bank, and demand they take action.
Problem is, the Fed only knows how to do one thing: set interest rates. That’s their job. It effectively controls the spigot on the money supply. Raising interest rates makes it harder for banks to borrow money, tightening the spigot and eventually reducing the flow of funds into the economy. Lowering interest rates opens the spigot so that companies can invest in more factories or hire more workers, and home buyers can get less expensive mortgages.
That’s the only lens through which the Federal Reserve understands the economy, and especially inflation. When the Fed sees prices going up, they assume this is because there’s too much money in the system. In their…
