STEVE INSKEEP, HOST:
The Federal Reserve raised short-term interest rates by three quarters of a percentage point yesterday.
A MARTINEZ, HOST:
The latest hike is aimed to bring down inflation. But by raising the cost of borrowing, the Fed also slows down the economy. Home prices are falling. Stocks and bonds are both down a lot this year.
INSKEEP: NPR's Chris Arnold joins us next. Good morning.
CHRIS ARNOLD, BYLINE: Hey, Steve.
INSKEEP: How did Powell explain his, I guess, fifth rate hike in about six months?
ARNOLD: Yeah. He talked about how higher prices, inflation, is hurting a lot of Americans. He spent some time talking about that. The annual inflation rate in August was about 8%. That's just a bit lower than the month before, so not a lot of improvement. And Powell's job here is to really convince the world, basically, that the Fed is serious about doing what it takes to fight that inflation. Here's what he said.
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JEROME POWELL: We have got to get inflation behind us. I wish there were a painless way to do that - there isn't. We have to get supply and demand back into alignment. And the way we do that is by slowing the economy.
INSKEEP: Which they do with interest rates, with other tools, I guess, and also just signaling that it's what they intend to do.
ARNOLD: Right. And it might sound bad to be slowing the economy, but the hope is that will cool off higher prices. And Powell's messaging here is really important, too, because people's expectations matter a lot. So if workers think that, oh, inflation is going to go up - I need higher wages - they're going to push for higher wages. And businesses will feel more pressure for that. And they'll think, well, look; I can just raise prices to pay the higher wages. And we get into a cycle. The Fed doesn't want that wage price spiral to get embedded. So Powell is saying, we are going to slow the economy even if it means job losses, even if it means a recession. That's the pain that he's talking about.
INSKEEP: What does all of this mean specifically for the housing market?
ARNOLD: Well, rising rates, that's pushed mortgage rates up a lot this year, too. And that's making it much harder to buy a house. So we got some new numbers yesterday. Home prices fell 6% since June. That's the biggest two-month drop in nearly a decade. And Powell talked about housing, too.
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POWELL: We've had a time of a red-hot housing market all over the country, where, you know, famously, houses were selling at 10% above the ask before even seeing the house, that kind of thing. Housing prices were going up at an unsustainably fast level. So we probably, in the housing market, have to go through a correction.
ARNOLD: Now, correction might sound scary. They could just flatten off prices. They could come down a bit more. We'll find out.
INSKEEP: I would imagine that this is one of those periods where if you're lucky enough to have money socked away for retirement in some fund, you shouldn't be looking at that because you'll be horrified by how much it's gone down.
ARNOLD: Yeah. Yeah, particularly now because it's not just stocks going down, bonds are going down, too. And, you know, it's sort of a 101 investing thing, right? Like, I want to own some stocks. You want to own some bonds. And one of the reasons for that is that it diversifies your risk. And they don't usually fall at the same time. But a side effect, really, of what the Fed's fight against inflation is doing is that it's pushing both down at the same time, stocks and bonds. And that's hurting people, you know, with retirement accounts and 529 plans. I talked to retiree Deborah McDaniel. She lives in Bremerton, Wash. And her 401(k) has fallen down from around $500,000 to 400,000.
DEBORAH MCDANIEL: It is concerning to me that this not go on for too much longer because it could turn what I was hoping was an adequate retirement into, oh, maybe I need to find a job again at 69 - not something I relish doing.
ARNOLD: So that is some more of the pain that the Fed's talking about with fighting inflation.
INSKEEP: NPR's Chris Arnold. Thanks.
ARNOLD: Thanks, Steve.
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