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The Federal Reserve is expected to take a big step to try to lower inflation

A MARTINEZ, HOST:

It's about to get more expensive to borrow money. Leaders of the Federal Reserve are meeting today, and they're expected to approve the biggest jump in interest rates in more than two decades. It's all part of an escalating push to address stubbornly high inflation. But the Fed's action is not without risk. NPR's Scott Horsley is here. Scott, the Fed has kept interest rates super low for most of the last two years. What's behind this turnaround?

SCOTT HORSLEY, BYLINE: Inflation. According to the Fed's preferred yardstick for inflation, prices in March were up 6.6% from a year ago. That's more than triple the central bank's target rate for inflation, and it's the sharpest increase in prices since 1982. Even if you strip out volatile food and energy costs, prices were up 5.2%. There's just this real mismatch right now between consumers' strong demand for goods and services and what businesses are able to deliver, especially when those businesses are still scrambling to find enough workers and parts. So you've got inflation heating up. The Fed wants to cool things off. And the way it does that is by making it more costly to borrow money.

MARTINEZ: All right, so what's this going to mean for consumers?

HORSLEY: Well, anyone who's been shopping for a home loan has already seen the big jump in mortgage rates. Other interest rates are going to be going up as well - so car loans, credit card balances. Any sort of borrowing is going to get more expensive. For most of the pandemic, the Fed kept interest rates close to zero as it tried to prop up the economy, but starting this spring, it made this U-turn. It raised rates by a quarter percentage point back in March, and today it's expected to raise rates by another half percentage point. If so, that'd be the first half-point rate hike since Bill Clinton was in the White House. And forecasters think rates are going to keep going up in the months to come.

MARTINEZ: Scott, look into your crystal ball, if you can. Any clue how this is going to affect the economy?

HORSLEY: There's a lively debate about that. Ideally, these higher interest rates would gently tap the brakes on demand, bring it back into balance with supply, and inflation would gradually coast down to something closer to 2%, the Fed's target. That's what economists call a soft landing, and it's what Fed Chairman Jerome Powell and his colleagues hope to achieve.

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JEROME POWELL: That's our goal. I don't think you'll hear anyone at the Fed say that that's going to be straightforward or easy. It's going to be very challenging.

HORSLEY: Some analysts think the Fed has waited too long to react and that now it's going to be very hard to get control over inflation, especially when you've got the war in Ukraine and ongoing lockdowns in Shanghai putting more upward pressure on prices. The concern is that the Fed might have to raise interest rates so high that it won't just slow the economy but push it into reverse. And the fear that that could trigger a recession is one of the factors that's been prompting all the volatility we've seen in the stock market in recent days.

MARTINEZ: Scott, you mentioned earlier how employers are still struggling to find enough workers. How does the job market affect the Fed's thinking?

HORSLEY: Well, right now there is a record number of job openings. There are almost twice as many openings as there are unemployed people to fill those jobs. That means employers are having to compete for workers. They're having to pay more and offer higher benefits. Now, that's good for workers, but it is somewhat worrisome for the Fed. Here's Powell speaking at an IMF conference a couple weeks ago.

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POWELL: The labor market is extraordinarily tight, extremely tight, historically so, to the point where really there's an imbalance between supply and demand for workers.

HORSLEY: Private sector wages this spring were up about 5% from a year ago. Powell and his colleagues are worried that if wages continue to climb at a really rapid pace, that will just fuel additional inflation, the kind of wage-price spiral we saw back in the 1970s. And of course, workers are already seeing their real buying power eroded by the high pace of inflation.

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

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