Raising rates will have one main effect. Raising prices.
Most of the drivers right now of inflation are in-elastic demand. Raising the cost of borrowing, will not deter that spend.
What it will do, is actually drive up the cost of all business, and worsen employment simultaneously. You can typically see a rise in prices (inflation) following a rate hike. Even when it's needed to combat regular elastic demand side inflation, it takes time to have a positive effect. If the main driver of the inflation is inelastic, or rate insensitive as much of the driving force right now is, hiking rates will actually increase inflation.
The AI boom doesn't care what rate it has to pay, it will pay it, and keep driving things up.
What's needed is a significant policy shift, to make room in the markets again for things society needs financing for (ex. building homes, productive revenue generating businesses)
>What it will do, is actually drive up the cost of all business, and worsen employment simultaneously.
That's the point of raising interest rates. It's demand destruction. If raising interest rates didn't raise the cost of doing business, it wouldn't work.
>You can typically see a rise in prices (inflation) following a rate hike. Even when it's needed to combat regular elastic demand side inflation, it takes time to have a positive effect.
Are you sure it's not just reverse causation? eg. inflation has gotten so out of hand that bankers are raising interest rates to counteract it? After all, inflation isn't a random walk. If it's bad one month, it's likely to get worse the next, especially when central banks haven't raised interest rates yet.
You're assuming raising rates will drop demand for lending that's driving the inflation.
That generally works, in sane markets, when the majority of the cause driving the increased borrowing and by extension inflation, is price sensitive.
What it seems we're seeing right now, is a very large drive that's rather inelastic, and almost ignorant of the price of lending.
It will drop consumer demand, but if consumer demand isn't what's driving inflation, inflation will continue to rise, while also adding additional costs on every loan.
People can't stop buying housing/food/groceries. AI companies won't stop buying compute. It's been shown heavily how many companies will continue to borrow vast amounts even as the cost of lending has increased in bond markets. Why would raising the base lending rate cause them to stop?
Perhaps a very large rate hike, that would break their existing loans, but at that point you're talking about everyone being out of a job, and the wider economy crashing.
To me this looks like a policy decision is needed, much as happened in the 70s, not a rate increase, to resolve the drivers in the debt markets.
Most of the drivers right now of inflation are in-elastic demand. Raising the cost of borrowing, will not deter that spend.
What it will do, is actually drive up the cost of all business, and worsen employment simultaneously. You can typically see a rise in prices (inflation) following a rate hike. Even when it's needed to combat regular elastic demand side inflation, it takes time to have a positive effect. If the main driver of the inflation is inelastic, or rate insensitive as much of the driving force right now is, hiking rates will actually increase inflation.
The AI boom doesn't care what rate it has to pay, it will pay it, and keep driving things up.
What's needed is a significant policy shift, to make room in the markets again for things society needs financing for (ex. building homes, productive revenue generating businesses)