Hiking Interest Rates Protects Financial Assets of the 1% at Workers’ Expense – Truthout

High inflation has returned after more than two decades of very low and stable inflation rates. While in the past, central banks were struggling to bring inflation up to a target of 2 percent, they are now confronted with the opposite task. Raising the interest rate is one way to combat inflation, which is why the Federal Reserve announced in mid-June its largest interest rate since 1994.

Will a hike in interest rates fix the real reason behind today’s inflation, which is now a global problem? What does the Fed rate hike mean for average workers and the poor? What other ways are there to combat surging inflation? And why do capitalist governments worry more about inflation than they do about unemployment or inequality? Progressive economist Gerald Epstein sheds light on these and other questions about today’s inflationary economy. Epstein is professor of economics and founding co-director of the Political Economy Research Institute at the University of Massachusetts-Amherst and a leading authority in the areas of central banking and international finance. He is the author of many books, including, most recently, The Political Economy of Central Banking and What’s Wrong with Modern Money Theory? A Policy Critique.

C.J. Polychroniou: In an attempt to combat high inflation, which rose in the U.S. by 8.6 percent in May, the Fed hiked its interest rate by three-quarters of a point. This is the highest interest rate hike in decades, but it wouldn’t be surprising if the Fed took even more aggressive actions in the months ahead as part of its war against inflation. How much of an impact can higher interest rates expect to have on inflation?

Gerald Epstein: It partly depends on how high interest rates are jacked up and how long they are kept up. In general, moderate increases in interest rates — say, 1 or 2 or even 3 percentage point increases — cause only small reductions in the inflation rate, which is defined as the percentage rate of increase of the price of a market basket (collection) of goods and services over a period of time. There are many reasons for this. For one thing, in the first instance, as Wright Patman, the populist congressperson from Texas in the 1950s repeatedly pointed out, increases in interest rates actually increase prices! The reason is that interest costs are, among other things, …….

Source: https://truthout.org/articles/hiking-interest-rates-protects-financial-assets-of-the-1-at-workers-expense/

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