How Interest Rate Hikes Actually Stop Inflation: The Chain Reaction

What Happened The question of how Federal Reserve interest rate hikes translate into lower consumer prices has puzzled many Americans, particularly as the Fed raised rates from near-zero in 2022 to over 5% by 2023. The confusion is understandable: if higher rates mean savers earn more money, shouldn’t that make people spend more, not less? The answer lies in understanding that multiple transmission mechanisms work simultaneously, and the spending-reduction effects typically outweigh the wealth effects from higher savings returns.