Inflation is at a 30-year high. Here's how the Federal Reserve plans to deal with it

The Fed left interest rates near zero on Wednesday but announced plans to start removing some of the support it has provided to the economy as inflation hits its highest point in 30 years.

Transcript

AUDIE CORNISH, HOST:

The Federal Reserve is leaving interest rates at rock bottom levels even though inflation is running much hotter than the central bank would ordinarily like. Consumer prices in September, as measured by the Fed's preferred yardstick, were up nearly 4.5% from a year ago, and that's the sharpest increase in three decades. Now, the Fed still believes those price hikes will settle down once the pandemic passes, although inflation has already stayed higher for longer than many forecasters expected.

NPR's Scott Horsley has been following the Fed's announcement, and he joins us now. Welcome back, Scott.

SCOTT HORSLEY, BYLINE: Hi. Good to be with you, Audie.

CORNISH: So you were following the Fed's announcement today, right? The Fed is still describing this high inflation as a temporary byproduct of the pandemic. What more did they have to say?

HORSLEY: Well, the Fed added some language to its formal statement today, spelling out what it thinks is behind this high inflation. Basically, Americans are buying a ton of stuff, but pandemic-related bottlenecks are making it hard for businesses to keep up with that demand. Now, the central bank doesn't think that imbalance is going to last forever, but it does say the bottlenecks and the resulting high inflation are likely to last well into next year. And of course, the longer inflation stays high, the more it eats into people's pocketbooks. Fed Chairman Jerome Powell took pains to say today he gets that.

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JEROME POWELL: Particularly people who are living paycheck to paycheck or seeing higher grocery costs, higher gasoline costs, when the winter comes, higher heating costs for their homes, we understand completely what they're going through. And, you know, we will use our tools over time to make sure that that doesn't become a permanent feature of life.

HORSLEY: If it looked like inflation was in danger of becoming permanent, the Fed would raise interest rates. But Powell and his colleagues don't want to do that just yet.

CORNISH: Well, what are the signals that they're looking for or waiting for?

HORSLEY: Well, the thing is, raising rates wouldn't necessarily fix the root cause of this inflation. It wouldn't unpack those cargo ships in the West Coast ports any faster. It wouldn't produce any more computer chips for the automakers. But it would potentially put the brakes on job growth. And Powell and his colleagues at the Fed are reluctant to do that when there are still millions of people out of work.

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POWELL: We don't think it's time yet to raise interest rates. There is still ground to cover to reach maximum employment, both in terms of employment and in terms of participation.

HORSLEY: The Fed did express a vote of confidence in the economy, though, today. It announced plans to start phasing out the big bond-buying program that it launched in the early days of the pandemic in an effort to prop up the economy. Financial markets were well primed for that announcement. It was widely telegraphed, and investors seemed to take the news in stride.

CORNISH: Scott, on another subject, I know the Fed also addressed this controversy over trading activity of a couple of regional Fed bank presidents. What is it doing?

HORSLEY: That's right. The presidents of both the Dallas and Boston Fed banks stepped down under pressure last month after reports that they had been actively trading stocks and other securities last year at a time when the central bank was deeply involved in the financial markets. Since then, the Fed has imposed some stricter rules about the kinds of investments that senior staff can buy or hold and the kind of disclosures and approvals they have to go through. This new rule is designed to avoid any appearance of a conflict of interest.

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POWELL: We need to have the complete trust of the American people that we're working in their interest all the time - absolutely critical to our work as it is for any government agency. And I feel like this called that into question, so we reacted, I would characterize it, strongly and forcefully.

HORSLEY: And Powell said he discussed these moves with both the administration and members of Congress. We should say this all comes at a sensitive time for Powell. His term as Fed chairman expires in just a few months, and we are awaiting word on whether he's going to be renominated.

CORNISH: That's NPR's Scott Horsley. Scott, thank you.

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