The Federal Reserve raises interest rates for the first time since 2018

The central bank raises its benchmark rate by a quarter percentage point in an effort to tamp down inflation. Additional rate hikes are likely in the months to come.

Transcript

JUANA SUMMERS, HOST:

The days of borrowing money for next to nothing are coming to an end as the Federal Reserve moves to slow down inflation. Today the central bank announced that it's raising interest rates for the first time in more than three years. Additional rate hikes are likely to follow as the Fed tries to regain control over consumer prices, which have been climbing at the fastest pace in decades.

NPR's Scott Horsley joins us now. Hello, Scott.

SCOTT HORSLEY, BYLINE: Hi, Juana.

SUMMERS: So the Fed has kept interest rates close to zero since the beginning of the pandemic. So just how big of a change is this?

HORSLEY: The actual jump in interest rates is pretty small, just 1/4 of 1%. But the change in direction is enormous. For the last two years, the Fed's been mostly focused on propping up the economy, trying to cushion the damage done by the pandemic and get people back to work. And it's been pretty successful at that. Unemployment is low. Last year saw the fastest economic growth since the 1980s.

But as a byproduct of that, annual inflation has soared to 7.9%. And you can see that in the price of gasoline, in groceries, in rent. Fed Chairman Jerome Powell told reporters the central bank cannot allow that kind of runaway inflation to continue.

(SOUNDBITE OF ARCHIVED RECORDING)

JEROME POWELL: If you're a middle-income person, you've got room to absorb some inflation. If you're at the lower end of the income spectrum, it's very hard because you're spending most of your money already on necessities, and the price is going up. So - but it's punishing for everyone.

HORSLEY: Over time, the Fed hopes raising interest rates will help to tamp down what has been really strong consumer demand, bring demand back in line with supply, and that inflation will settle back down towards the Fed's long-term target of around 2%.

SUMMERS: Scott, so just how much higher could interest rates go as a part of this effort to crack down on inflation?

HORSLEY: Well, quite a bit higher. And that's a big change from just a few months ago. As recently as December, most members of the Fed's rate-setting committee thought we would need to raise interest rates about three times this year.

Now they're projecting at least seven rate hikes, including today's. That would still leave interest rates relatively low by historical standards - you know, around 2% or 3% - but a world away from the near-zero rates that we've all gotten used to over the last couple of years.

SUMMERS: When could people see some relief from runaway prices?

HORSLEY: Unfortunately, not right away. It usually takes some time for higher interest rates to work their effect on inflation. And Russia's invasion of Ukraine is not helping matters. Before the war started, Powell thought he would be seeing peak inflation right about now. Now he thinks the big price hikes are likely to continue for a bit longer.

(SOUNDBITE OF ARCHIVED RECORDING)

POWELL: We're already seeing a little bit of short-term upward pressure in inflation due to higher oil prices. You're seeing supply chain issues around shipping, lots of countries and companies and people not wanting to touch Russian goods. So that's going to mean more tangled supply chains.

HORSLEY: You know, Powell and his colleagues had thought that inflation would ease as supply chain bottlenecks got worked out. But those bottlenecks are proving to be more stubborn than forecasters expected. Fed policymakers now think inflation is still going to be above 4% at the end of this year, more than double their long-term target.

SUMMERS: Quickly, Scott, what will these rising interest rates mean for people who want to borrow money?

HORSLEY: Well, variable rates on car loans and credit cards are going to be going up. Mortgage rates have already increased. Home loans are still cheap by historical standards but not as cheap as they were a year ago. On the other hand, if you've got money in the bank, you may not see much of an increase in the interest you get on your savings account because most banks already have more deposits than they know what to do with, so they're not going to be paying to attract more money.

SUMMERS: NPR's Scott Horsley, thank you.

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