The Fed delivers biggest rate hike in decades to fight inflation The Federal Reserve raised interest rates by three-quarters of a percentage point Wednesday in an effort to combat stubbornly high inflation. It's the biggest rate increase in 28 years.

The Fed delivers biggest interest rate hike in decades to combat surging inflation

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ARI SHAPIRO, HOST:

The Federal Reserve is cracking down hard as it tries to get control over sky-high inflation. The central bank announced the largest interest rate hike in almost three decades today. That's going to make it more expensive to carry a credit card balance, get a car loan or buy a house.

NPR's Scott Horsley joins us now here in the studio. Good to see you, Scott.

SCOTT HORSLEY, BYLINE: Good to be with you, Ari.

SHAPIRO: This is a more aggressive move than the Fed had been telegraphing. What's going on?

HORSLEY: That's right. You know, for weeks, the Fed had signaled that it planned to raise interest rates by half a percentage point at this June meeting, but instead, they decided to go bigger and raise rates by three-quarters of a point. That's the biggest jump since 1994. And it really shows just how determined the central bank is to get a handle on inflation, which has proven to be higher and more stubborn than they'd expected.

You know, the Fed had already raised interest rates twice this year, and policymakers were expecting to see some progress with prices starting to level off by now. Instead, we got that ugly report on Friday showing inflation actually getting worse. Not only gas and grocery prices are up, but rent is higher. Airfares are up. All kinds of services are costing more. Fed Chairman Jerome Powell says he and his colleagues decided to go big because they know what a hardship these higher prices are causing for people.

JEROME POWELL: Clearly, people don't like inflation a lot, and many people are experiencing it really for the first time because we haven't had anything like this kind of inflation in 40 years.

HORSLEY: Now, even though today's rate hike was bigger than the Fed had officially telegraphed, it didn't come as a complete surprise. There had been rumors floating around for the last couple of days something like this was in store. So financial markets pretty much took this in stride. The Dow Jones Industrial Average rose about 300 points today, or 1%.

SHAPIRO: Help us understand exactly how raising interest rates slows down inflation. Is the idea that by making things more expensive to buy, you discourage people from making big purchases? Is that it?

HORSLEY: Basically, yeah. Right now, demand for both goods and services has been really strong, and it's outstripping businesses' ability to keep up. That's why prices have been climbing. So exactly - by making it more expensive, the Fed's trying to tamp down demand. That will mean slower economic growth because consumer demand is such a big driver of the economy.

You know, this morning, the Commerce Department reported a modest drop in retail sales for May, but that was mostly driven by a decline in auto sales, not because people don't want cars, but just there aren't enough for them to buy. Powell says there is some shift in what people are spending on - spending money on, but so far, consumption has not been dented by these high prices.

POWELL: Overall, spending is very strong. The consumer is in really good shape financially. They're spending. There's no sign of a broader slowdown that I can see in the economy.

SHAPIRO: So if the goal is to kind of slow down this overhyped economy, is there a concern that that could trigger possibly even a recession?

POWELL: That's absolutely the danger. And the higher inflation gets and the more the Fed has to tap the brakes, the bigger that risk is. Powell said today he still thinks there's a chance for what he calls a softish landing for the economy - that is, avoiding a recession. But he acknowledged that's going to depend on a lot of things that are outside the Fed's control, like what happens with the war in Ukraine and how that affects global prices for energy and food, for example. You know, Fed policymakers are projecting that unemployment will tick up a little bit from 3.6% now to around 4% in the next year or two. Powell says he would view that as a soft landing if it brings inflation back down to around 2%. He would consider that a win.

SHAPIRO: That's NPR's Scott Horsley. Thanks a lot.

HORSLEY: You're welcome.

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