Getting inflation below the Fed's 2% goal is taking longer than expected The Federal Reserve held interest rates steady, and investors now think borrowing costs could stay higher for months to come. Inflation remains stubbornly above the Fed's 2% target.

Getting inflation below the Fed's 2% goal is taking longer than expected

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JUANA SUMMERS, HOST:

The cost of getting a car loan or carrying a balance on your credit card is likely to remain high for a while longer. The Federal Reserve held interest rates steady today, and investors think those rates are likely to stay high for months to come. Inflation remains stubbornly above the Fed's 2% target, and getting it down is taking longer than expected. NPR's Scott Horsley is here in studio with us. Hi, Scott.

SCOTT HORSLEY, BYLINE: Hi, Juana.

SUMMERS: So Scott, not so long ago, people said they thought that this would be the summer when interest rates started coming down. What happened?

HORSLEY: Sticky inflation happened. We saw a lot of progress last year as inflation cooled off significantly, and there were hopes it would just settle down to 2%, allowing the Fed to take its foot off the brake and lower interest rates. Instead, that progress on prices has stalled so far this year. Since January, inflation's been hovering around 3% or more. As a result, Fed Chairman Jerome Powell says interest rates are going to have to stay higher for longer, as painful and inconvenient as that might be.

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JEROME POWELL: Of course, we're not satisfied with 3% inflation. Three percent can't be in a sentence with satisfied. So we will return inflation to 2% over time.

HORSLEY: Investors are now betting it will be September at the earliest before rates start coming down. Powell did give investors a little bit of relief, though, today when he said it's unlikely the Fed will have to raise interest rates to get inflation under control.

SUMMERS: Right, but higher interest rates are the Fed's main tool for fighting inflation. Has that tool gotten a little rusty?

HORSLEY: The tool has worked on some parts of the economy - things that you typically borrow money for, like a house or a car or a big piece of furniture. You know, higher borrowing costs have tamped down demand for those big-ticket items. And we've seen the price of a lot of goods level off or even come down a little bit. But a report from the Commerce Department last week shows that Americans' spending is increasingly tilted towards services - things like restaurant meals and concert tickets - which tend to be less sensitive to interest rates. Demand for those services is still going up, and so are their prices.

You know, in a way, Juana, this lingering inflation is the byproduct of a really strong economy. We've got a good job market. Lots of people are working. They're earning and spending money. Some Republicans have tried to paint this with a term from the Jimmy Carter era - stagflation. But Powell, who's old enough to remember the 1970s, says that's definitely not what we're seeing now.

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POWELL: I was around for stagflation, and it was, you know, 10% unemployment. It was high-single-digits inflation and very slow growth. I don't see the stag or the flation (ph).

HORSLEY: One reason the economy has been so resilient is that we've got tens of millions of people who are pretty insulated from the Fed's high interest rates. You know, they locked in low-rate mortgages when the rates were down. They're finally earning some money on their savings account. These higher interest rates aren't doing much to tamp down their spending.

SUMMERS: Right. So if rate cuts don't come until this fall, that would put us right in the heat of the presidential election. Do you think the Fed would be reluctant to put its thumb on the scale like that?

HORSLEY: Powell insists that political calculations will not weigh on his and his colleagues' decisions at all. He says this is the fourth presidential election he's gone through on the Federal Reserve Board, and politics just doesn't factor into their decision-making. He says it's hard enough to get the economics right without trying to worry about politics as well.

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POWELL: We just don't go down that road. If you go down that road, where do you stop? And so we're not on that road. We're on the road where we're serving all the American people and making our decisions based on the data and how those data affect the outlook and the balance of risks.

HORSLEY: History shows that steering clear of politics is important for the Fed to do its job. If people think the Fed's going to get inflation under control, whatever the political fallout, then the central bank's more likely to be successful. If people think the Fed's going to bend to the political winds, inflation may be harder to contain. That is one of the lessons that came out of that period in the 1970s.

SUMMERS: NPR's Scott Horsley - thank you.

HORSLEY: You're welcome.

(SOUNDBITE OF BUN B AND STATIK SELEKTAH SONG, "STILL TRILL")

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