The Fed raises interest rates by the most in over 20 years The Federal Reserve raised interest rates by half a percentage point Wednesday, in an effort to cool off demand and lower inflation. Consumer prices have been rising at the fastest pace in 40 years.

The Fed raises interest rates by the most in over 20 years to fight inflation

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ADRIAN FLORIDO, HOST:

The Federal Reserve is moving aggressively to address sky-high inflation. Today, the central bank raised interest rates by half a percentage point. The Fed also telegraphed that more hikes are likely in the months ahead.

NPR's Scott Horsley joins us now. Hi, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you.

FLORIDO: This is the biggest rate increase from the Fed in more than two decades. Why has it started to move so forcefully?

HORSLEY: Well, the Fed is really concerned about the soaring prices we've been seeing. You know, prices in March were up 6.6% from a year ago. That's the steepest increase since 1982. And while there are some indications that March may have been the high watermark for inflation, the Fed doesn't want to take any chances.

In fact, Fed Chairman Jerome Powell started his post-meeting news conference this afternoon not as he usually does - with a rather dry recitation of economic conditions. Instead, he turned to the TV cameras and said he wanted to speak directly to the American people.

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JEROME POWELL: Inflation is much too high, and we understand the hardship it is causing, and we're moving expeditiously to bring it back down. We have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses.

HORSLEY: Powell signaled that the Fed is likely to approve two similar-sized rate hikes at its next two meetings in June and July. And while he acknowledged there may be some pain associated with this strong economic medicine - you know, mortgage rates have already jumped. It's going to cost more to get a car loan or carry a balance on your credit card. Powell says that's better than the alternative, which would be to let inflation go unchecked so families and businesses had to keep worrying about what things are going to cost a month or a year from now. Without price stability, he says, the economy just doesn't work for anybody.

FLORIDO: Well, speaking of strong medicine, Scott, a lot of forecasters are saying that the Fed has waited so long to deal with inflation that now it's going to have to implement some really punishing rate hikes, and they fear that could lead to a recession. What is Powell saying about that?

HORSLEY: What the Fed is trying to achieve here is what economists call a soft landing - that is tapping the brakes enough to bring inflation down, but not so much as to bring the economy to a screeching halt. Now, Powell acknowledges that won't be easy. There are lots of challenges, like the war in Ukraine or the COVID lockdowns in China, which are adding to inflationary pressures. Many of those are beyond the Fed's control, but Powell does not believe a recession is inevitable.

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POWELL: I would say I think we have a good chance to have a soft or soft-ish landing or outcome, if you will. And I'll give you a couple of reasons for that. Businesses are in good financial shape. The labor market is very, very strong. And so it doesn't seem to be anywhere close to a downturn.

HORSLEY: Powell also notes that a lot of families and businesses managed to save money during the pandemic, and that extra cash, now sitting in bank accounts, could serve as an additional economic cushion.

FLORIDO: The stock market has been really volatile in the last week leading up to this meeting today, and so how did investors react to today's news?

HORSLEY: You know, the market was pretty calm when the announcement of the rate hike first came out. This was largely in line with what forecasters had expected, but the market soared during the chairman's news conference, especially when Powell said he and his colleagues are not seriously considering an even larger rate hike of three-quarters of a percent. Maybe that would have seemed like hitting the panic button.

For whatever reason, investors were really cheered by what they heard today. The Dow Jones Industrial Average jumped more than 900 points. All the major stock indexes were up around 3%.

FLORIDO: That's NPR's Scott Horsley. Thanks very much.

HORSLEY: You're welcome.

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