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The changes the Fed is making in the face of historically high inflation

JUANA SUMMERS, HOST:

A whole lot of people are scouring their budgets these days, looking for anywhere they can squeeze out a few bucks.

AURELI TRUJILLO: We've canceled subscriptions such as Amazon. I think we also canceled Hulu. We're kind of on the fence on Netflix right now.

VIOLET OLSICK: We stopped buying alcohol, which isn't necessarily a bad thing. But we started buying, like, the generic brand sodas - you know, small things like that.

ROBERT HART: We don't do a lot of driving, and when we do drive, we try to combine things. For example, if we have doctor's appointments, we try to make sure that they get combined.

SUMMERS: Aureli Trujillo (ph), Violet Olsick (ph) and Robert Hart (ph) - like the rest of us, they're dealing with 9.1% year-over-year inflation. And it is not just regular Americans making changes in the face of that historically high inflation. So is the Federal Reserve. This week, it will again decide whether and how much to raise interest rates to try to bring inflation under control.

For a look at the stakes of that decision and everything roiling the economy in this moment, we're joined by NPR's chief economics correspondent Scott Horsley and NPR business correspondent David Gura. Hi there.

SCOTT HORSLEY, BYLINE: Good to be with you.

DAVID GURA, BYLINE: Hey, Juana.

SUMMERS: Inflation is raging right now, and I have to imagine that most Americans have never experienced anything like this in their lifetime before. Scott, is it changing consumer behavior?

HORSLEY: We are starting to see people change their behavior a little bit, and that's a change from what we were seeing earlier in the pandemic. You know, when the price of gas hit $5 a gallon last month, people actually bought less gasoline. And that's unusual. Ordinarily, people will complain when the price of gas goes up, but they typically pay whatever it cost to fill up their tank. It's evident now there is a breaking point, and it seems to be somewhere around $5 a gallon.

We're also seeing changes in what people spend at the supermarket. You know, early in the pandemic, when people were having to eat all their meals at home, some folks actually splurged and traded up to more expensive brands to replicate the restaurant experience they weren't having. And now they're going in the opposite direction. Spending at the supermarket is still climbing, but people are walking out with less food in their shopping carts. In some cases, they are trading down to generic store brands or shopping at cheaper outlets.

This isn't true throughout the economy, though. Airline ticket prices are still climbing, and yet people are buying more airline tickets. Spending at restaurants also continues to outpace restaurant prices. But as the cost of things like food and energy and rent keeps climbing, people are having to adjust their behavior.

SUMMERS: Another thing that a lot of people are feeling right now, David, is that their investment portfolios are just getting hammered. Is there a connection between inflation and all of those stock market crashes that we've seen this year?

GURA: We have had so much volatility, so you're picking on something I think a lot of people have noticed, which is that markets have been really tumbling. There have been days when we've seen these kind of thousand-point swings. That's really radical, and that's tough to stomach, even if you're somebody who's invested for the long haul. If you're a retiree, Juana, this is a difficult time because portfolios are getting crushed, and you know that you need that fixed income to live, and it comes from those portfolios. It's also a really tough time for people who are new to investing, who might have downloaded an app like Robinhood at the beginning of the pandemic and invested for the first time. This has been a really rude awakening.

And there is a connection here to what Scott knows so well covering economics, and that's just the role that the Fed is playing and how markets are reacting to it. I mean, there's this connection between inflation and these market crashes because the Fed is hiking interest rates aggressively to bring down inflation. What it's doing basically is it's raising borrowing costs for people, for businesses as well. And what the Fed hopes will happen is that's going to slow down spending and bring down prices. So to use a kind of tired metaphor here, the Fed is pumping the brakes on the economy in a way that we really haven't seen for decades. And what that means is this era of cheap money that we'd all gotten used to is over, and that's made it a particularly volatile and difficult year for Wall Street so far.

SUMMERS: David, what do you mean when you say cheap money? What is that?

GURA: So for a really long time, the Fed had pushed interest rates down. They were near zero. And you look at sort of what - where you would - had an opportunity to make money. You couldn't make money, really, in a savings account because interest rates were so low, so stocks were a place where that was happening. And people had an inclination or a willingness to make bets on the future of companies, particularly high-growth companies or tech companies.

That's kind of dissipated now as these interest rates have gone up, and we've seen those tech companies getting really hard-hit. Netflix is down more than 60% this year. And Meta, Facebook's parent company, is down more than 45%. So now there just isn't much of an appetite for investments that are seen as speculative.

SUMMERS: One thing I want to talk about that I've been thinking a lot about certainly is cryptocurrency. David, when you talked about speculative assets, that was the first thing that came to my mind.

GURA: Yeah. I mean, cryptocurrencies really grew in value last year kind of - in kind of a crazy way. It coincided with this big marketing blitz that companies made. They were spending tens of millions of dollars on ads kind of leading up to the Super Bowl - you remember that - and we saw Bitcoin really go up in value. That kind of happened at the beginning of November of last year. Since then, it's really dropped. There's been this huge, steep sell-off.

And we were talking about how people got into investing for the first time with Robinhood app. A lot of people got into investing in crypto for the first time, and they saw it as a volatile asset, but the volatility was really only in one direction. It just seemed like it kept going up and up and up, and now there's been this really big crater.

I think it's kind of emblematic of where Wall Street is right now. It's more conservatism prevailing on Wall Street. Companies are being cautious. They're waiting to see what happens. There's been 80% fewer companies that have gone public, making their shares available to trade on the stock market. They've decided to hit pause. They're waiting out this uncertainty.

And I think that that's, you know, a major takeaway from this moment. People don't know what's going to happen. That makes them a bit nervous. And I think there's this - bottom line, there've been a lot of bubbles that have been bursting, and crypto is certainly one of them.

HORSLEY: The other place you really see the impact of those rising borrowing costs is in the housing market. Mortgage rates are about twice what they were this time last year. As a result, a typical monthly house payment has jumped nearly $750 this year. That's putting houses out of reach for a lot of would-be buyers. And so builders are building fewer homes. Sales of existing homes are down. The average selling price has still continued to climb across the country, but in some of the hottest markets, you are starting to see price cuts. And it will take some time for these housing changes to show up in the inflation data, but it will happen eventually.

SUMMERS: Scott, how have these dramatic inflation numbers that we have all been watching and talking about affected the Fed's actions?

HORSLEY: Well, you said it, Juana. They are dramatic. Inflation topped 9% in June. If you're under 40, you've never seen prices climbing this fast. So the Fed is trying to, as David says, pump the brakes. It does that by making it more expensive for people to borrow money. It started boosting interest rates in March, and those rate hikes have actually accelerated since then. We expect the central bank to raise rates by another three-quarters of a percentage point later this week. That would match its increase back in June.

SUMMERS: Where do we expect rates to go from here?

HORSLEY: Well, they're probably going to go higher. But the pace of those increases is still up in the air. The Fed is kind of taking it month by month as it sees how this all plays out. I will say that we have gotten a little bit of reassuring news since the June meeting, when the Fed was really nervous that people's expectations for long-term inflation might start to come unglued. That's worrisome because if people think prices are just going to keep climbing at a rapid rate, it can feed into the kind of wage price spiral we saw back in the 1970s.

Since then, though, we've seen some survey data showing that most people, even though they're really worried about high inflation this year, they think inflation is going to come down three to five years out. So they still believe the Fed's going to get control over this, even if they are worried that the higher interest rates are going to cause a lot of pain along the way.

SUMMERS: That was NPR's chief economics correspondent Scott Horsley and business correspondent David Gura. Thank you both for breaking this down for us.

HORSLEY: You're welcome.

GURA: Thank you. Transcript provided by NPR, Copyright NPR.

Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.
David Gura
Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.