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Why does raising the interest rate lower inflation? | Why Guy

By raising the interest rates now with the promise of six more hikes before the end of the year, the Fed is "pumping" the brakes on spending.

CALIFORNIA, USA — Whether it's at the grocery store or the gas station, wallets are getting stressed.

In an effort to bring inflation under control, the Federal Reserve is raising interest rates. Bank accounts are hurting, and people pay more interest on a home or car loan. Why does a higher rate help?

First, think about when interest rates are low. It's easier to pay off a credit card bill or to pay off your house, so it encourages spending. Demand for products is high so prices go up, so the goal when the Fed raises interest rates is to lessen the desire to spend which then lowers prices.

The biggest impact is on the housing market and investments. Home prices should come down because people won’t be able to afford a higher rate.

If home prices do come down, that might offset the higher rate for a loan.

By raising the interest rates now with the promise of six more hikes before the end of the year, the Fed is "pumping" the brakes on spending. "Jamming" the brakes could cause a recession.

Once the economy had time to recover from the 2008 recession, the Federal Reserve raised the interest rate five different times between 2017 and 2018, with the latest time just recently this year and a big jump Wednesday.

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