Would raising interest rates "choke off rising prices for crucial goods like gasoline and food?

Question

This is an assertion in an article in the New York Times article

http://www.nytimes.com/2008/06/07/business/07econ.html

"Job Losses and Surge in Oil Spread Gloom on Economy"

by Peter S. Goodman June 7, 2008

This question, of course, refers to the economy of the United States, but has global implications. My thought is that rising interest rates would slow down an economy, but that a great deal of slowing down would be necessary to affect inelastic commodities such as oil and food. However, if human activities are outrunning our capacity to produce basic commodities, we will have to slow down a bit, if only because there may not be enough energy available to drive human activities at the volume and speed projected on our current course.

Answer 1

It could but this is a world economy. One of the main reasons for high energy prices is the enormous demand from Asia. China and India alone make up half the world's population. Lowering interest rates helps the economy in the short term but devalues the dollar thus allowing foreign investors to buy oil. High fuel costs drive up the cost of every good you buy from food to big ticket purchase items like appliances. they all must be shipped right? That and rising unemployment, off shoring are contributing mightily to one of the weakest economies in 20+ years. I think this will peak around the end of the year (election time) and the recession we're in will start coming to a slow end.

Answer 2

Rising interest rates would do one thing very well -- prop up the dollar.  A good fraction of the current price of oil is related to the dollar's fall and speculation that it will fall farther in the future, and if you own a future on a commodity whose price is denominated in dollars you get richer when that happens.  A believably stable (or rising) USD takes that money out of the picture.  Before thursday and friday's spike, the oil market was easing because it was believed that the pain for the USD was more or less over.

The problem is, as you say, rising interest rates slow down the economy and normally you wouldn't do with a looming recession.  The Fed is faced with a dilemma as to whether inflation or recession is the biggest threat to the economy, and to decide to raise rates to combat inflation or lower rates to combat recession.

In the early 80s, the Fed under Paul Volcker was faced with a similar decision, and he decided that tackling inflation was the bigger concern, so he let the nasty recession of the early 80s happen to combat it.

The Fed clearly cant to anything about the supply and demand aspects of the price of oil, but if raising rates can cut the speculative pricing, that might be some economic stimulus unto itself.