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< The Fed raises interest rates by only a quarter point after inflation drops

The Fed raises interest rates by only a quarter point after inflation drops

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ARI SHAPIRO, HOST:

That battle with inflation is not yet over, but we may be getting closer to a cease-fire. The Federal Reserve raised interest rates again today as it tries to clamp down on high prices. But this was the Fed's smallest rate hike in almost a year. The central bank is adopting a more cautious approach as it tries to weigh the effect that higher borrowing costs are having on the economy. NPR's Scott Horsley is here in the studio. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi, Ari.

SHAPIRO: So today's move was a major downshift for the Fed. What's going on?

HORSLEY: The central bank spent most of last year playing catch-up with inflation, which hit a 40-year high last summer. The Fed had to raise interest rates at the fastest pace in decades. Now those rate hikes are starting to have the desired effect. You know, people are spending a little bit less. Inflation has started to cool off. So the Fed thinks it's time for some fine-tuning. Today's rate hike was only a quarter of a percentage point, much smaller than most of last year's increases. Even though we're seeing lower inflation, though, or disinflation, Fed Chairman Jerome Powell says we're not out of the woods yet.

JEROME POWELL: We're going to be cautious about declaring victory and, you know, sending signals that we think that the game is won because it - you know, it's - we've got a long way to go. It's just - it's the early stages of disinflation. And it's most welcome to be able to say that, but we just see that it has to spread through the economy and that it's going to take some time.

HORSLEY: Powell thinks the central bank will push interest rates a little bit higher, maybe two more quarter-point rate hikes. And he says rates are likely to stay up for the rest of this year, although that could change if circumstances dictate.

SHAPIRO: What does that mean for ordinary Americans and for the economy more broadly?

HORSLEY: Well, higher rates are certainly weighing on the housing market. They also make it more expensive to get a car loan or carry a balance on your credit card. People are getting a little more cautious about their spending. What's encouraging is so far, we haven't seen much fallout in the job market. Despite some of those high-profile layoffs in the tech sector, unemployment's still really low, just 3 1/2%. Now, some critics do worry that if the Fed goes too far with these interest rate hikes, we could see a jump in unemployment. But Powell insists it's better to push rates too high than to stop short and then see inflation come roaring back.

POWELL: It's very difficult to manage the risk of doing too little and finding out in six or 12 months that we actually were close but didn't get the job done.

HORSLEY: Powell and other officials have been saying that for months. But, you know, financial markets are not convinced. In fact, a lot of investors think the central bank's going to end up cutting interest rates before the end of this year. After some hesitation today, the stock market rallied. The S&P 500 closed up 1%. The Nasdaq jumped 2%.

SHAPIRO: Powell usually tries to steer clear of political fights, but he was asked today about the fight over the debt ceiling. What did he say about that?

HORSLEY: Yeah, the federal government's bumping up against its debt limit. And unless Congress authorizes an increase sometime this summer, the government won't be able to pay all of its bills. House Republicans hope to use that as a bargaining chip to extract spending cuts. Powell says that's a risky proposition. And he warned if the government flirts with a default, no one should expect the central bank to come to the rescue.

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POWELL: There's only one way forward here, and that is for Congress to raise the debt ceiling so that the United States government can pay all of its obligations when due. And any deviations from that path would be highly risky - and that no one should assume that the Fed can protect the economy from the consequences of failing to act in a timely manner.

HORSLEY: This is kind of a recurring nightmare for Powell, who had to make a similar argument to House Republicans back in 2011, the last time there was a big showdown over the debt ceiling. Back then, Powell was a scholar at the Bipartisan Policy Center, and then-President Obama was so impressed by his performance, he put Powell on the Federal Reserve Board.

SHAPIRO: NPR's Scott Horsley, thank you.

HORSLEY: You're welcome.

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