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Couldn't raising interest rates actually create inflation?

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October 23, 2013 – Comments (2)

The fed creates money out of nowhere in order to pay interest on federal debt. So I understand that higher rates makes people less likely to borrow and therefore less likely for new money to be created. But higher rates means the fed has to print even more money than before just to pay interest. More money being printed would lead to more inflation. 

 

Since its generally viewed as the opposite, where am I wrong? 

2 Comments – Post Your Own

#1) On October 23, 2013 at 5:43 PM, ryanalexanderson (< 20) wrote:

I would say that it's because the prime rate affects the total credit market, which dwarfs the government credit market. The adverse effect on the general velocity of currency and creation of credit is much larger than the increase in debt servicing costs. 

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#2) On October 23, 2013 at 6:39 PM, Valyooo (99.34) wrote:

That's what I figured

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