Another layperson here. Yes, higher unemployment is certainly a possibility. But with higher interest rates, it’s not just businesses that are affected. It’s anyone who needs credit for any purpose (buying a home appliance, buying a home, buying a vehicle, wanting to study at a university that one cannot pay for immediately, etc.).
At a fundamental level, the target is consumption and the aim is to reduce it. Inflation is when there’s more money but lesser availability of goods and services that people want. So you either have to increase the production of (or import of) goods and services or reduce the amount of money in circulation. Central banks can only do the latter. The former is the responsibility of the executive and legislature to do with policy measures (short term, medium term, long term) on local and well as the international trade fronts.
Coming back to unemployment, it will likely rise. It will have a spiraling effect on other things (people going broke, loans being defaulted, etc.).
If you’ve read about all the developed countries targeting high inflation, and in particular what the U.S. Fed has been doing, there’s been a lot of talk about a “smooth landing”, which implies that the interest rate hikes will gradually bring down inflation without causing a big decline in GDP growth and related effects. This is mostly a fantasy because in reality nobody has figured out how to get other people, i.e., an entire population, to do something in unison.
While interest rates control ease of access to money, central banks can control the amount of money available through various mechanisms (liquidity control in banks, reserve requirements, etc.). Interest rate increases require time to show up in their effects (several months or quarters). Other measures can have a quicker impact. Businesses, especially larger ones, will have access to bind their effective interest rate to lower values for longer. So these changes won’t show up uniformly everywhere.
All said and done, central banks are typically (IMO) powerless in handling inflation or deflation. Without other policy decisions and policy actions (local and international) by the government, there’s not a lot that central banks can do without inflicting too much damage and getting into a whiplash reaction when things spike out of control.
At a fundamental level, the target is consumption and the aim is to reduce it. Inflation is when there’s more money but lesser availability of goods and services that people want. So you either have to increase the production of (or import of) goods and services or reduce the amount of money in circulation. Central banks can only do the latter. The former is the responsibility of the executive and legislature to do with policy measures (short term, medium term, long term) on local and well as the international trade fronts.
Coming back to unemployment, it will likely rise. It will have a spiraling effect on other things (people going broke, loans being defaulted, etc.).
If you’ve read about all the developed countries targeting high inflation, and in particular what the U.S. Fed has been doing, there’s been a lot of talk about a “smooth landing”, which implies that the interest rate hikes will gradually bring down inflation without causing a big decline in GDP growth and related effects. This is mostly a fantasy because in reality nobody has figured out how to get other people, i.e., an entire population, to do something in unison.
While interest rates control ease of access to money, central banks can control the amount of money available through various mechanisms (liquidity control in banks, reserve requirements, etc.). Interest rate increases require time to show up in their effects (several months or quarters). Other measures can have a quicker impact. Businesses, especially larger ones, will have access to bind their effective interest rate to lower values for longer. So these changes won’t show up uniformly everywhere.
All said and done, central banks are typically (IMO) powerless in handling inflation or deflation. Without other policy decisions and policy actions (local and international) by the government, there’s not a lot that central banks can do without inflicting too much damage and getting into a whiplash reaction when things spike out of control.