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What's next for the Fed after efforts to fight inflation with higher interest rates

JUANA SUMMERS, HOST:

Interest rates are going higher as the Federal Reserve continues its crackdown on runaway inflation. Today, the central bank ordered another super-sized increase in interest rates, and that is likely to mean higher borrowing costs for anyone getting a car loan, a home mortgage, or even just carrying a balance on their credit card. NPR's Scott Horsley has been following the Fed's action today, and now he's here in the studio. Hi, Scott.

SCOTT DETROW, BYLINE: Hi, Juana.

SUMMERS: So, Scott, interest rates have been rising at the fastest pace in decades. Where do they go from here?

DETROW: That is the trillion-dollar question. Rates have already gone up a lot from where they started last spring, which was next to zero. The Fed's benchmark interest rate is now close to 4%, and it's likely to go higher. The central bank has moved very aggressively, raising rates by three-quarters of a percentage point at each of its last four meetings, including today's. Now, Fed Chairman Jerome Powell did tell reporters this afternoon that at some point it will be appropriate to slow down and take stock.

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JEROME POWELL: That time is coming, and it may come as soon as the next meeting or the one after that.

DETROW: So markets now think the Fed may go with a smaller rate increase at its December meeting. But Powell cautioned no decision has been made yet, and there's no guarantee.

SUMMERS: OK. And so these higher rates, have they had much of an impact on inflation?

DETROW: Not much. Inflation has come down a little bit from its peak early in the summer, but prices are still climbing three or four times faster than the Fed's 2% inflation target, depending on which yardstick you use. Now, inflation has been both higher and more stubborn than a lot of the Fed's own forecasters expected. And as a result, Powell says, interest rates may ultimately have to go even higher than we thought to curb inflation. Powell cautioned, even if the Fed moves to slow the pace of rate increases, that doesn't mean rates are about to level off. And it certainly doesn't mean interest rates are coming down any time soon.

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POWELL: We know that we need to use our tools to get inflation under control. The world is not going to be better off if we fail to do that.

SUMMERS: Scott, how are these higher borrowing costs affecting the economy?

DETROW: They are starting to take a bite out of the most sensitive parts of the economy. You can especially see that in the housing market. Of course, mortgage rates are now upwards of 7%. And as a result, we've seen a sharp slowdown in both existing home sales and new home construction. Manufacturing is also feeling a slowdown.

So far, consumer spending has held up pretty well. One reason for that is the extra savings that a lot of people built up early in the pandemic have allowed them to keep spending, even though prices are up and interest rates are high. Some lawmakers are warning that the Fed's crackdown could tip the economy into recession and drive millions of people out of work. But Powell says the Fed has a responsibility to get prices under control. Otherwise, he says, in the long run, the economy doesn't work for anybody.

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POWELL: No one knows whether there's going to be a recession or not, and if so, how bad that recession would be. You know, our job is to restore price stability so that we can have a strong labor market that benefits all over time.

SUMMERS: So sounds like the Fed is really sticking with its hard line. How did the stock market react today?

DETROW: You know, the market was all over the map today. Initially, stocks were up with news that the Fed might slow the pace of rate increases, but they ultimately fell on the prospect that interest rates will end up higher than maybe had been expected. The Dow Jones Industrial Average ended down more than 500 points today or 1.5%. The broader S&P 500 index was down more than 2.5%.

SUMMERS: NPR's Scott Horsley. Thank you, as always.

DETROW: You're welcome. 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.