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The Fed hopes another aggressive rate hike will help to tame high inflation

A MARTINEZ, HOST:

The Federal Reserve is expected to announce another big increase in interest rates today.

LEILA FADEL, HOST:

Prices have continued to rise at their fastest pace in a generation, and the Federal Reserve is trying to get inflation under control. But is it working?

MARTINEZ: NPR's David Gura is here to tell us all about it. David, I think we all expect an interest rate hike, but David, how high might it be?

DAVID GURA, BYLINE: Yeah, so Wall Street expects an interest rate increase of another three-quarters of a percentage point, which would be a big hike. It would be the fourth hike this year. And we haven't seen moves of this magnitude in decades. It's an indication that this continues to be an economy under pressure from inflation. Now, the Fed is trying to take away the incentive to spend by making the cost of borrowing more expensive. Michelle Meyer is the U.S. chief economist at the MasterCard Economics Institute, and she says the Fed is trying really hard here to strike the right balance.

MICHELLE MEYER: They need to push the economy enough in terms of weakening growth to take out some of that price pressure, but not too much where they create damage to the real economy and threaten recession.

GURA: Now, A, this is challenging because the Fed's tools are not precise. This isn't going to be painless, and this goes beyond demand. The war in Ukraine has sent the price of gas and other commodities like wheat higher. And then there were supply chain issues. And the Fed can't do much about either of those.

MARTINEZ: I think what people want to know is, are there signs of if the Fed's policies are working?

GURA: Absolutely. We've seen them cool what was a very hot housing market. The average rate on a 30-year fixed rate mortgage is now at about 5 1/2%. That's almost double what it was last year. And we've seen demand for those mortgages taper off along with new home sales and construction. You know, inflation did not go down in June. The Consumer Price Index jumped to 9.1% from a year earlier. Food and energy prices drove that. And we have seen the average cost of a gallon of regular gas drop from its record high in June, down by about 69 cents. But the economic data are sending mixed messages, and the Fed has not gotten a clear indication inflation has peaked, never mind a sign that it's started to subside.

MARTINEZ: So if the Fed continues on this path, what are the risks?

GURA: So the Fed's big fear is this doesn't end with a soft landing for the U.S. economy that we've heard so much about, that instead the Fed triggers a deep downturn. Now, some economists say a recession is necessary to get inflation under control. Basically, we need a sharper slowdown to kick this. Well, Fed Chair Jerome Powell says that is not what he and his colleagues are trying to do right now, and, A, he believes they have the capacity to deal with high inflation without triggering a recession.

MARTINEZ: David, it feels like what we've talked about is the if-this part. So now what will be the then-that part?

GURA: Yeah. If this works, borrowing costs will continue to go up. We'll see a decline in demand for goods and services. You know, I said this isn't going to be painless. And we've already seen some companies slow hiring and cut staff. This week, the e-commerce company Shopify laid off a thousand people, and hundreds of tech companies have cut jobs. Economist Michelle Meyer says we're going to see more of an effect on what has been a strong labor market, and Americans are going to feel that.

MEYER: To me, I think a lot of it comes down to jobs - whether you have a job, whether you expect to keep your job, and what that might mean for your future path of income.

MARTINEZ: David, one more thing - tomorrow we're going to get that all-important report card on the economy. Tell us about that.

GURA: That's right. GDP, gross domestic product for the second quarter - this will tell us how much the economy grew or how much it shrank. And what we could see are two consecutive quarters of negative growth, which in general has signaled a recession, even though it is not the technical official definition of one. And there is, I want to underscore, a lot that's unique about this moment. First and foremost, the economy is still adding jobs month after month - 372,000 new jobs in June - even as the Fed raised interest rates aggressively, which, A, is not something we've seen going into past recessions.

MARTINEZ: NPR's David Gura, thanks a lot.

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

A Martínez
A Martínez is one of the hosts of Morning Edition and Up First. He came to NPR in 2021 and is based out of NPR West.
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.