Analysis: What Will Fed Do to Check Inflation?

The Federal Reserve's Open Market Committee concludes its two-day meeting Wednesday and is expected keep interest rates steady. Co-host Renee Montagne talks with David Wessel, economics editor of the Wall Street Journal, about what the Fed will do to keep inflation in check and how to boost the economy.

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RENEE MONTAGNE, host:

In recent months, whenever the Federal Reserve has met, the question has been how much it will cut rates, but as it ends its meeting today, many expect rates to stay put. There's even speculation about possible rate hikes down the road.

To talk about this, we turn to David Wessel. He's economics editor of the Wall Street Journal and a regular guest on our program. Good morning.

Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning.

MONTAGNE: What is your best guess as to what the Fed might announce today in terms of interest rates?

Mr. WESSEL: The Fed's been pretty clear this time. It looks like they're going to hold their target for the most important interest rate they set at two percent, and that's the rate that banks lend to each other, and it's a basis for rates throughout the system. The big question is: What words will they use to signal their concern about inflation? The stronger the language, the more people will think they're trying to prepare us for a rate increase later this summer, in the fall or in the winter.

MONTAGNE: Fed chairman, Ben Bernanke, has raised concerns about inflation. How serious a problem might inflation be at this point in time?

Mr. WESSEL: The inflation rate is now up. Consumer prices have risen 4.2 percent over the past year, and they're rising even more rapidly some other countries, and this of course is primarily because oil prices and food prices have gone up so much, and if your job is to keep inflation low, this is quite worrisome.

I don't think the Fed is worried about today's inflation rate, but they're worried that this could be a kind of virus that works for a worse inflation rate later, and they want to make sure that that doesn't happen.

MONTAGNE: Looking down the road, if there is a rate hike, or even now with talk of a rate hike, what does that mean for the housing market?

Mr. WESSEL: When interest rates go up, that's bad for the housing market, and it's bad because it costs people more to get a mortgage, and so either the interest rates could go up because the Fed raises rates, and that tends to cascade through the system, or if the markets conclude that we're going to have a lot of inflation down the road, they could begin to push up the rates in markets that mortgages are based on, and they could do it on their own.

So one reason the Fed is stepping so cautiously now is they don't want to do anything that prematurely chokes off housing recovery, if one ever shows up.

MONTAGNE: Now, is there much disagreement among Fed board members, as you understand it, in terms of what to do about rates?

Mr. WESSEL: Yes. There appears to be substantial disagreement within the Federal Reserve system. Some people are more worried about protecting the economy from economic and financial disaster, and some people, particularly some of the presidents of the regional Fed banks, are worried that they're not vigilant enough on inflation, and so a couple of them, the presidents of the Dallas Fed and the Philadelphia Fed, have actually been voting in favor of holding rates steady or raising rates.

MONTAGNE: High oil prices are adding to inflation worries - not just inflation worries but would seem to be pushing prices up, adding to inflation. Is there anything the Fed can do about oil prices?

Mr. WESSEL: No, there's nothing the Fed can do about oil prices, and that's one of their frustrations. Here you have these headline numbers on inflation going up. It all has to do with supply and demand of oil and OPEC and financial speculation. So what they're doing is trying to prevent the increase in oil prices from spilling over to the rest of the economy, and actually, although they never put it this way, they'd like to have a little more unemployment and just a little more slack on the economy so other prices can't go up at a time when oil and food prices are going up so much.

MONTAGNE: David, thanks very much.

Mr. WESSEL: You're welcome.

MONTAGNE: David Wessel is economics editor of the Wall Street Journal.

(Soundbite of Music)

MONTAGNE: This is NPR News.

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