On a side note I think I figured out part of Fed's plan.
Basically the key is to stimulate inflation so that they get the chance to hike rates. By doing so many people choose to stop investing in stocks, funds and more on longer term saving accounts.
Essentially this heals the asset-liability structure of financial institutions. They now have liabilities of longer term so they can issue longer term loans. This eventually will stimulate real economy.
The fed respond to inflation *AND* unemployment rate, and they respond to their own forecasts of those things.
The fed didn't stimulate inflation by choice. The rates were at 0 for most of the decade and inflation was very low.
Increasing interest rates was a response to inflation -- partially created by QE and stimulus spending, supply chain disruptions, and other supply/demand shifts.
As for how interest rates work: they make borrowing more expensive. There's a bunch of second-order effects from that but borrowing cost and time value of money are the main thing to keep in mind.
The Fed wants to push unemployment. To save the economy previously they injected tons of money and need Billionaires and big businesses (because the injection process is not directed to your average mom and pop) to use that money. Now that they need to reduce money, they take away jobs for the working class. Nice system. Free government money to some and government pushing for you to lose your job for others, the two levers the Fed loves.
The FED is not trying to push unemployment, they just accept it as a cost to curb inflation which is always enemy number one. Interests rates and unemployment are correlated; you make borrowing more expensive, people invest less and become more conservative, often by trimming.
Pricing is the primary economic signal that guides investment in a capitalist system. When inflation runs too high the pricing signals break down as the result of speculation and hoarding. That can lead to malinvestment.
Historically the Fed’s job was to “take away the punch bowl” and wring the bad debt and malinvestment out of the system before it became a systemic risk. Since 2008 the system has primarily focused on how to move the bad debt around to avoid default.
Basically the key is to stimulate inflation so that they get the chance to hike rates. By doing so many people choose to stop investing in stocks, funds and more on longer term saving accounts.
Essentially this heals the asset-liability structure of financial institutions. They now have liabilities of longer term so they can issue longer term loans. This eventually will stimulate real economy.