Fed raises rates by another three-quarters of a percentage point, pledges more hikes

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4. The economy is overcooked right now.

Basically the economy is on overdrive and that is what leads to inflation. Interest rates slow the economy down. See the article below.

https://www.washingtonpost.com/business/2022/09/20/fed-interest-rate-hike-inflation/

How does raising interest rates affect inflation?

Inflation happens when there’s a mismatch of supply and demand in the economy. During the pandemic, for example, so many people wanted to buy cars that factories couldn’t keep up. Families relocated and scoured for new houses, but there weren’t enough available. So cars and houses got more expensive.

The Fed can’t do anything to boost chip manufacturing or build more houses, which would fix the supply side of the equation. So it has to focus on slowing down demand instead. It wants fewer people to buy new cars or put in bids for houses, which would bring prices down.


When the Fed raises its benchmark interest rate, it makes all kinds of lending more expensive. Mortgage rates go up. So do auto loans. And over time, that helps supply and demand get back in sync.