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breckenridgeback t1_ja8pgbl wrote

The federal reserve lends money to banks. Banks can, and do, borrow massive amounts of capital from the Fed, which they use to lend money to everyone else. Generally speaking, bank-to-everyone-else loans have a higher interest rate than fed-to-bank loans (since otherwise the bank is losing money acting as a middle-man).

By raising their interest rate, the fed makes borrowing from them more expensive. That reduces the amount banks borrow from them to re-loan to others, which in turn reduces the money supply - the availability of money as opposed to other goods - in the economy as a whole. Since high money supply is one cause of inflation, this can help reduce inflation through government policy. (The current episode of inflation is pretty weird though, and only loosely caused by money-supply issues.)

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Dampware t1_ja8rh0o wrote

Why is the current episode "weird"?

Didn't the government "print" lots of money for covid benefits? Isn't this round of inflation linked to that?

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breckenridgeback t1_ja8tq48 wrote

> Didn't the government "print" lots of money for covid benefits?

The current episode of inflation started well after those policies had mostly ended.

Remember, "inflation" is just a term for "a general rise in prices". And there are obvious reasons for such a rise:

  • Supply chains were badly disrupted during covid, and remained so into 2022 in part due to China's aggressive zero-covid policies. And since supply chains have many steps, it takes a long time for those effects to work their way through the system: a shortage of metal today might mean a shortage of lumber tomorrow if the lumber supply depends on, say, being able to buy more chainsaw blades.

  • Wages have risen [though not as fast as inflation] due to a hot labor market, which in turn is due to a combination of retiring Boomers, a non-trivial chunk of the population being killed or crippled by covid, and a culmination of existing trends in labor movements.

  • Rising wages did create some increase in the money supply.

  • Energy costs are pretty high. This was especially true in the immediate aftermath of the Russian invasion of Ukraine, which caused a big disruption to energy markets.

  • All of this created an environment where profiteering was easy and could be blamed on "inflation" without brand damage. Fortune 500 companies posted record profits in that environment by considerable margins, even in real (inflation-adjusted) terms. A quick look at their list shows us that 200 of the Fortune 500 had their profits double or more in 2022, and many more posted growth far far above inflation.

I am not enough of an economist to tell you which of these is most important (and given the general voodoo that is economics I'm not sure I'd trust actual economists to say with that much confidence either), but at the very least there's plenty of alternatives to covid-related money supply.

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Dampware t1_ja8xzkw wrote

Thank you so very much for using your time to give such a detailed answer. Much appreciated!

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DragonBank t1_ja8sjw9 wrote

Money supply and money demand(which is loosely what prices are.) are linked but not a perfect ratio, such that a 10% increase in supply won't perfectly follow with a 10% increase in demand.
Current inflation being "weird" is because there are many simultaneous causes here. Covid money isn't the only or primary one.

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