Re: question on ppi and interest rates
- From: Lysander <lysander@xxxxxxxxxxx>
- Date: Fri, 22 Feb 2008 08:27:57 -0800 (PST)
On Feb 18, 2:24 pm, joshrain <joshr...@xxxxxxxxx> wrote:
hi,
can someone explain me the effect of ppi and interest rates on the
economy?
for example, if ppi is rising, does the fed have to lower/increase its
rate?
Producer Price Indices are one measure of inflation. The Fed reaction
depends on the situation. The Fed is concerned with both unemployment
and inflation. Generally the Fed will influence interest rates to rise
during inflation. However, the situation we may be heading for now may
be a real dilemma. That is inflation and unemployment increasing.
Generally increased interest lowers inflation and raises unemployment.
Decreasing interest rates does the opposite. In most cases
unemployment drops with higher inflation so there is no dilemma. If
both are rising the Fed must try to fight one and make the other
worse.
also, on a side note how do mortgate rates react to changes in fed
short-term interest rate?
Mortgage rates will generally move in the direction of the Fed target.
Think of it like this. You are a bank. You have different
opportunities to lend money to make profit. As the interest rates rise
generally bonds are becoming less expensive and have higher returns.
So you can invest in bonds or loan the money. The only way you will
loan for a mortgage is if the mortgage will pay the same rate of
return as the bond, actually a higher return because mortgages have
risk and government bonds have little risk. So banks will only loan if
people will accept higher interest rates.
.
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