JUANA SUMMERS, HOST:
The Federal Reserve is making it more expensive to buy a car, get a mortgage or use a credit card. And the central bank ordered another big increase in interest rates this afternoon as it tries to control stubbornly high inflation. The Fed boosted its benchmark rate by three-quarters of a percentage point and signaled that additional rate hikes are likely in the months to come. NPR's Scott Horsley joins us now. Hi, Scott.
SCOTT HORSLEY, BYLINE: Hi, Juana.
SUMMERS: So this was the Fed's fifth rate hike in six months. Scott, what's going on here?
HORSLEY: What's going on is inflation's still really high, and the Fed has concluded that it's going to take some strong medicine to get prices under control. You know, the annual inflation rate in August was 8.3%, down only a little bit from the month before. And Fed Chairman Jerome Powell told reporters this afternoon he and his colleagues are acutely aware of what a hardship these rising prices are, especially for the people who can least afford it.
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JEROME POWELL: If your family is one where you spend most of your paycheck on gas, food, transportation, clothing, basics of life, and prices go up the way they've been going up, you're in trouble right away. You don't have a cushion. This is very painful for people at the lower end of the income and wealth spectrum.
HORSLEY: So the Fed is determined to get inflation down, and the way it does that is by making credit more expensive. The idea is that if it costs more to borrow money, people will buy less. That, in turn, will bring demand back into balance with supply, and prices will stop going up so fast.
SUMMERS: And Scott, it sounds like the Fed is not finished with rate hikes yet. What do we know about what could be to come?
HORSLEY: Interest rates have already risen by three percentage points this year, and the Fed looks poised to tack on another one to 1 1/4 points by the end of the year. That's a substantially bigger jump in borrowing costs than policymakers were predicting back in June. And that's because, so far, inflation has not really responded and cooled off as much as the central bank had hoped. This is the most aggressive string of rate hikes we've seen since the early 1980s, when then-Fed Chairman Paul Volcker took really draconian steps to control inflation after double-digit price hikes in the 1970s.
SUMMERS: The Fed say they're prepared to push the brakes as hard as they need to to get prices under control. But, Scott, what effect is that having on the broader economy?
HORSLEY: It's definitely slowing things down. One place you can see that is the housing market, which is especially sensitive to borrowing costs. You know, mortgage rates have now topped 6%, more than double what they were a year ago. That's put houses out of reach for some people. Sales of existing homes have fallen now for seven consecutive months, and the average price of those houses has dropped almost 6% over just the last two months. More broadly, Fed policymakers have sharply lowered their forecast for economic growth this year. They think GDP is moving just above stall speed. Powell acknowledged the slowdown could be painful, but he says letting inflation go unchecked would be even worse.
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POWELL: No one knows whether this process will lead to a recession or, if so, how significant that recession would be. Nonetheless, we're committed to getting inflation back down to 2%.
HORSLEY: Now, the stock market is not sure what to make of all this. Stocks fell when the rate hike was first announced this afternoon, then rallied as the Fed chairman was talking, and then fell again. And the Dow Jones Industrial Average ended the day down more than 500 points.
SUMMERS: So Scott, it looks like people are bracing for an economic slowdown. What does that mean, though, for workers?
HORSLEY: It could mean job cuts. That's typically what happens when the Fed takes action like this, but it's certainly not evident yet. So far, the job market has been remarkably resilient, even as some other economic indicators have been flashing warning signs. Unemployment's just 3.7%, close to a 50-year low. Businesses have been adding hundreds of thousands of jobs every month. But as interest rates go up and if demand goes down, it's possible we could see some layoffs.
Fed policymakers are forecasting somewhat higher unemployment both next year and the year after, but we could get lucky. You know, Fed Governor Chris Waller has suggested that, even if there is an economic downturn, employers have had so much trouble finding workers over these last two years, they may be reluctant to hand out pink slips, so long as they think that a recovery is not far away.
SUMMERS: NPR's Scott Horsley. Thanks as always.
HORSLEY: You're welcome.
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