Interest rates are rising as the Fed fights stubborn inflation: NPR

Renovations continue to the Marriner S. Eccles Federal Reserve Building on September 19, 2022 in Washington, DC. The Federal Open Market Committee (FOMC) concluded its two-day meeting on interest rates this afternoon.

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Renovations continue to the Marriner S. Eccles Federal Reserve Building on September 19, 2022 in Washington, DC. The Federal Open Market Committee (FOMC) concluded its two-day meeting on interest rates this afternoon.

Kevin Deitch/Getty Images

The Fed ordered another big jump in interest rates today and signaled the possibility of additional rate hikes in the coming months, as it tries to rein in runaway rates.

The central bank raised its benchmark interest rate by 0.75 percentage points on Wednesday, matching increases in June and July. The Fed boosted borrowing costs at the fastest pace in decades. But so far, its actions have done little to curb the rapid rise in prices.

The The annual inflation rate in August was 8.3% A slight decrease from the previous month. while the Gasoline price fell sharply From their highest level in June, and used cars and airline tickets getting somewhat cheaper, other costs continued to rise, including essentials like rent, groceries and electricity.

Moreover, price hikes have spread to include goods and services not directly affected by the pandemic or war in Ukraine, indicating that inflation has gained momentum that may not be reversed quickly.

Sending a “severe love” message about interest rates

“Inflation is still accelerating rapidly and is not declining as quickly as expected,” said Greg McBride, chief financial analyst at Bankrate.com. “The Fed has been sending a ‘very loving’ message that interest rates are going to be higher and for a longer period of time than expected.”

The central bank has raised its benchmark interest rate five times this year – from nearly zero to 3.125%. On average, Fed policymakers believe rates will rise to about 4.4%. by the end of this year and 4.6% by the end of next year.

By making it more expensive to buy a car, get a mortgage or use a credit card, the Fed hopes to curb consumer demand, which has been outstripping supply and driving prices higher.

“If we don’t bring inflation down, we’re in trouble,” Federal Reserve Governor Christopher Waller said this month. “So this is the first job.”

The housing market is feeling the effects. Mortgage rates soar to the highest level since 2008, while Existing home sales are down In each of the last seven months. Falling home sales also reduce demand for things like furniture and appliances.

However, overall consumer spending remains solid, so Fed policy makers will continue to tighten the screws.

“The Fed will continue to raise rates until it actually restrains the economy and intends to keep rates at those constrained levels until inflation is unambiguously on course to 2%,” McBride said.

Do whatever it takes to control inflation

The prospect of interest rates remaining higher for longer has worried investors in recent weeks, leading to huge volatility on Wall Street.

Federal Reserve policy makers now expect a marked slowdown in economic growth this year, and a slight rise in the unemployment rate. But they confirmed their readiness to do whatever it takes to control inflation.

Waller said that with unemployment near a 50-year low of 3.7% and Companies adding hundreds of thousands of jobs Every month, “we don’t have any trade-offs, really.”

“If the unemployment rate remains low, say 5%, I think we can be really aggressive about inflation,” Waller said. “Once it goes above 5%, there will be obvious pressure to start making trade-offs.”

Federal Reserve Chairman Jerome Powell insists that the central bank will not be swayed by political pressure to take its foot off the brake prematurely. Powell says that this The mistakes policymakers made over and over again in the 1970sallowing inflation to become more stable.

“We will continue that until the job is done,” Powell told an audience at the Cato Institute this month. “The longer inflation stays much longer than the target, the higher the risk that the public will start to see higher inflation as the norm, and really have the potential to raise the cost of lowering inflation.”

Recent surveys have shown that despite the high rate of inflation today, Americans expect price stability in the next few years. People have grown more confident in it over the summer as the cost of gasoline – at its very obvious price – has fallen.