Another big Fed rate hike to battle inflation. Economy hangs in balance U.S. Federal Reserve raises rates for fourth time in 2022, this time by another three-quarters of a percentage point to battle inflation. It's at a size and pace we haven't seen since the 1980s.

Another big Fed rate hike is here to battle inflation. Economy hangs in balance

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JUANA SUMMERS, HOST:

With inflation at a 40-year high, the Federal Reserve continues to hike interest rates aggressively. The Fed just announced its fourth increase this year. And NPR's David Gura joins us now to explain what this means. Hi, David.

DAVID GURA, BYLINE: Hey, Juana.

SUMMERS: So what did the Federal Reserve decide to do today?

GURA: So the Federal Reserve did what Wall Street expected in the face of high inflation that has not abated. The Fed raised interest rates again by an additional three-quarters of a percentage point, which, I will point out, is a sizable increase. In fact, Fed Chair Jerome Powell called it unusually large. You know, the Fed did this because prices have continued to rise at the fastest rate in four decades. In June, inflation was up a whopping 9.1% from a year earlier. And Powell acknowledged the effect this is having on Americans.

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JEROME POWELL: My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation.

GURA: Now, Powell reiterated the Fed's goal is to get inflation down from 9.1% to around 2% without triggering a recession. And Powell acknowledged once again, Juana, this is going to be a difficult process.

SUMMERS: And David, remind us, if you can, how these interest rates ripple through the economy.

GURA: Well, the Fed wants to get inflation under control. And to do that, it needs to slow down the economy. That means companies will slow down hiring. And we've already seen some hiring freezes and layoffs. The Fed is targeting demand, and what it's doing is pushing up the cost of borrowing. That's going to take away the incentive to spend money on big things like cars and houses. Businesses will spend less on new equipment and new workers.

You know, something else we heard the Fed chair reiterate today is the central bank can't control everything. Supply chain issues are driving high inflation. So are high prices for gas and for wheat because of the war in Ukraine. And in the Fed's toolbox, they're just really aren't tools to deal with that.

SUMMERS: And what did we hear today from the Fed chair about how well he thinks these rate hikes are working to accomplish the Fed's goals?

GURA: So this is going to take time, but we are seeing companies act more conservatively. They're spending less. They're hiring fewer workers. We heard a mix of confidence and humility from Jerome Powell - confidence that he and his colleagues are doing what they need to do under difficult circumstances, but humility about how tough this is and an acknowledgment of the challenges the Fed faces.

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POWELL: The current picture is plain to see. The labor market is extremely tight, and inflation is much too high.

GURA: And what Powell said essentially is it's a tough path ahead and very uncertain. Plus, there's a lot of time between now and the next Fed meeting, which is not until September. Not only is there a lot of time, there will also be a lot of new data between now and then on how the economy is doing - two new jobs reports, several reports on inflation. We've also seen more economists sounding the alarm about a recession on the horizon. And something reporters also asked Powell about today was if he thinks we're in one.

SUMMERS: All right. What did he say?

GURA: Yeah, he bit. Here's what Powell said about that.

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POWELL: I do not think the U.S. is currently in a recession. And the reason is there are just too many areas of the economy that are performing too well. And, of course, I would point to the labor market in particular.

GURA: The U.S. economy added 372,000 new jobs in June. The unemployment rate is near its pre-pandemic low. It's at 3.6%. And Powell counts himself among policymakers who say you can't have a recession when the jobs market is so strong. I should say the backdrop to this is tomorrow we're going to get a report card on the economy from the Commerce Department, GDP. We'll see if the economy grew or contracted between April and June. This is the rule of thumb among many economists - a rule of thumb, not an official definition - that two quarters of negative growth signals a recession. And, Juana, we did have negative growth in the first quarter of this year.

SUMMERS: We'll watch and wait. NPR's David Gura, thank you.

GURA: Thank you.

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