LogFAQs > #966895029

AlCalavicci posted...

how exactly does raising the interest rates help lower inflation? Can someone explain in laymans terms?

also, anyone know what this will make mortgage rates climb to??

A prime factor for rampant inflation is when the populous has too much spending power. They are buying everything. If the fed raises interest rates, it makes banks raise there interest rates which makes borrowing money stop which makes the surplus of money in people's hands and spending go down which makes inflation go down. If the fed is too aggressive with inflation hikes, people don't just spend less, they stop spending all together and it can trigger a recession.

As far as interest rates go, it is typical to see bank and federal credit interest rates rise to a minimum of 3% higher than the federal interest rate. I think currently, the average housing market interest rate is 6% +/- 0.5%.