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The Fed is expected to raise interest rates to get a grip on rising inflation

A MARTINEZ, HOST:

Concerns about inflation are increasing, right along with the price of gas, food - you know, the things most of us need each and every single day. Federal Reserve Board is trying to do what it can to fight off a recession, and its No. 1 weapon is higher interest rates. The Fed is expected to announce another sharp jump in borrowing costs later today. NPR's chief economics correspondent Scott Horsley is watching that meeting closely.

The Fed's attitude toward interest rates hikes, to me, felt like that proverb - slow and steady wins the race. But now it could be less tortoise, more hare.

SCOTT HORSLEY, BYLINE: A week ago, it seemed like a foregone conclusion that the Fed was going to raise interest rates by another half percentage point today, just as it did last month and just as it telegraphed it would likely do next month. But now a lot of forecasters are betting the Fed will go bigger than that and raise interest rates by three-quarters of a percent this afternoon. If so, that would be the largest increase since 1994. And of course, it would mean higher borrowing costs for anyone with a credit card balance or looking for a car loan or a new home mortgage.

MARTINEZ: Yeah. What's changed, though? I mean, why are we likely to see bigger rate increases?

HORSLEY: A big part of it is that ugly inflation report we got last week. It showed consumer prices up 8.6% in May compared to a year ago. Soaring gasoline prices were a big part of that, but the increase was really broad-based. You know, rents are up. Airfares are climbing. Used car prices are on the rise again.

Chief economist Jay Bryson at Wells Fargo says the report dispelled any notion that inflation is going to go quietly without a fight.

JAY BRYSON: The bottom line is it seems like inflation is becoming more entrenched. And for many people, I think that was the game changer.

HORSLEY: There's also some survey data suggesting people's expectations of future inflation are creeping up, and that's worrisome because it can become a self-fulfilling prophecy. And finally, The Wall Street Journal and other news outlets published stories on Monday afternoon saying the Fed is likely to consider a larger rate hike. While those stories did not quote any Fed officials, a lot of people saw that as a kind of smoke signal designed to prepare the ground for a larger rate increase.

MARTINEZ: All right, assuming the Fed is doubling down on higher interest rates, how does that help with inflation?

HORSLEY: Well, right now there's just a lot of demand in the U.S. and around the world. People want to buy more than businesses are producing right now, and that's driving up prices as a result. By making it more expensive to borrow money, the Fed hopes to tamp down demand and get prices back under control. Ordinarily, that takes time. But you are beginning to see the effects in the housing market, where mortgage rates have jumped sharply in anticipation of the Fed's moves.

Mark Hamrick is a senior economic analyst at Bankrate. He says the average rate on a 30-year fixed loan is now close to 6%. That's double what it was a year ago.

MARK HAMRICK: We're going to see some of the highest mortgage rates that we have seen in many, many years. And along with the high home prices that have been seen all across the country, this housing affordability question is only going to sort of move from the yellow to the red zone.

HORSLEY: That's already starting to weigh on demand for houses, which should translate to lower demand for furniture and appliances and everything else. What's more, we expect the Fed to keep raising interest rates in the months to come.

MARTINEZ: Wow. All right. That sounds painful. Is this why a lot of people seem to be worried about a recession?

HORSLEY: Yeah, it's no fun. Businesses are going to find it's more expensive to borrow money and expand. The stock market's taking a hit, which makes people feel less wealthy and less likely to spend. Bryson doesn't think we're necessarily headed for a recession, but he does think the path to avoiding a downturn is pretty narrow.

BRYSON: I think best-case scenario is you're looking at a landing that may be quite bumpy. You're looking at a period of relatively slow growth next year.

HORSLEY: And we'll also get new forecasts from the Fed today about inflation, unemployment and economic growth.

MARTINEZ: NPR's Scott Horsley, thanks a lot.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.