The Federal Reserve is expected to raise key interest rate again on Wednesday
STEVE INSKEEP, HOST:
We have an update on interest rates, which people will know about if they have credit card bills or they're considering buying a new house or a car. People know interest rates are far higher than they have been in years. Last month, the Fed did take a break from interest rate hikes, which made consumers and Wall Street very happy. But then today, the Fed is going to announce what it plans to do next. NPR's Stacey Vanek Smith will be at the Fed meeting today. Hey there, Stacey.
STACEY VANEK SMITH, BYLINE: Happy Fed Day, Steve.
INSKEEP: Oh, thank you. Delighted...
INSKEEP: ...That you've joined us on this near-holiday. What happens now?
SMITH: Well, today, everyone's expecting the Fed will unpause. We're expecting to see it raise interest rates by a quarter percentage point.
INSKEEP: Why end the pause?
SMITH: So the Fed is always trying to strike this balance - you know, raise interest rates just enough to slow the economy down to where inflation falls, but not so much that we end up in a recession. So when interest rates rise, it makes it more expensive for us to borrow money. We tend to borrow less money, spend less, and that means companies sell less stuff, there's less demand, and that usually brings prices down. But of course, when companies make less money, they also don't expand, and they often lay people off. All this can cause a recession.
So the Fed's always trying to strike this balance. Economists call it a soft landing - slowing the economy down just enough, but not too much. And for the last year, the Fed has taken really aggressive action. Interest rates are higher than they've been in more than 20 years. So a lot of people said the pause was to try to see how things are settling and hopefully help us strike this balance, this soft landing.
INSKEEP: Well, I would have thought we would have just about landed at this point or maybe at least be at that moment where, you know, you're about to touch down, and you can see the runway out your window.
INSKEEP: Inflation is down to 3%. Why raise interest rates again now?
SMITH: Yes, inflation is down to 3%. That is not far off from the Fed's goal inflation rate of 2%. So why just not quit it with the rate hikes already, give the economy a break? I put that question to economist Raghuram Rajan. He ran the central bank in India for years. He's a professor at the University of Chicago. And he told me he thought the Fed was wise to be cautious.
RAGHURAM RAJAN: I think the message they wanted to send is things are moving in the right direction, but we need time to see how much more we need to do, rather than, you know, we're done. We were waiting to see how the economy reacts and deciding how much more medicine it needs.
SMITH: Rajan says declaring victory over inflation too soon could destroy the progress we've made. If inflation gets momentum, what's often called an inflationary spiral, prices start to rise out of control, our savings starts being worth less and less. This happened in the U.S. in the '70s, and the Fed had to take really aggressive action. It was years of recession, years of high unemployment. And right now in the U.S. everything is moving in the right direction. And Rajan says the Fed probably does not want to risk taking its foot off the brakes too soon. So our hot pause summer is expected to come to an end.
INSKEEP: Hot pause summer - that sounds like a hit song going up the charts.
SMITH: It's true. Well, with the Fed, you've got to try to, like, bring a little excitement where you can.
INSKEEP: (Laughter) NPR's Stacey Vanek Smith, you always bring the excitement. Thank you so much.
SMITH: Thank you, Steve. Transcript provided by NPR, Copyright NPR.
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