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Stocks tumble after Fed announces plan to keep interest rates up

SCOTT SIMON, HOST:

Inflation cooled a bit last month, but the Federal Reserve is still not satisfied. It plans to raise interest rates and to keep them up until it's confident that prices are under control. Fed Chairman Jerome Powell spoke to an economic conference in Jackson Hole, Wyo., yesterday, and what he said appeared to alarm investors. It caused the Dow to tumble more than a thousand points. NPR's Scott Horsley joins us. Scott, thanks so much for being with us.

SCOTT HORSLEY, BYLINE: Good morning.

SIMON: What did the chairman say that rattled the stock market like that?

HORSLEY: He said the Fed is going to raise interest rates. That's not really a surprise. Rates have already been going up, and they were expected to keep going up as the central bank tries to get a handle on inflation. What seemed to spook Wall Street, though, is the idea that rates are not then going to turn around and come back down any time soon. Powell was very clear. Borrowing costs are likely to remain high, at least through the end of next year, and he suggested it's going to take some time to get inflation back down to the Fed's target of 2%.

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JEROME POWELL: We must keep at it until the job is done. History shows that the employment costs of bringing down inflation are likely to increase with delay. Our aim is to avoid that outcome by acting with resolve now.

HORSLEY: The idea that interest rates are not just going up but staying up appeared to trigger that sharp sell-off on Wall Street. The Dow fell more than 3%, and the tech-heavy Nasdaq, which is particularly sensitive to interest rates, dropped almost 4%.

SIMON: Beyond that reaction in the stock market, what do the Fed's moves mean for people's lives?

HORSLEY: They mean it is going to cost more to borrow money. You can see that already in the housing market where mortgage rates jumped back above 5 1/2% this week. That's up from less than 3% a year ago. Powell also cautioned that businesses could see slower economic growth during this period, and workers could see somewhat higher unemployment. As tough as that might be, though, Powell says the alternative of just letting high inflation go unchecked would be worse. He recalled what happened back in the 1970s, when many policymakers turned a blind eye to inflation. Ultimately, it took even longer and an even more painful crackdown to get prices under control.

SIMON: So what are we doing to try and avoid that?

HORSLEY: Hopefully we are starting in a better place. You know, inflation is still a fairly recent problem. People have not gotten to the point where they just assume prices are going to keep climbing eight, nine, 10% year after year. Powell says it's important to get prices under control now before that kind of runaway inflation mindset takes root.

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POWELL: If the public expects that inflation will remain low and stable over time, then, absent major shocks, it likely will. Unfortunately, the same is true of expectations of high and volatile inflation.

HORSLEY: We did get some encouraging numbers yesterday from the Commerce Department showing that inflation eased a bit in July, partly thanks to falling gasoline prices. That is good to see. Powell cautions, though, it's going to take more than one month of good data to signal prices are moving in the right direction.

SIMON: Next week, another update on the job market - what can we expect?

HORSLEY: The job market remains really strong. Unemployment's just 3 1/2%. Employers added more than half a million jobs in July. We're going to get the August jobs numbers next week. We also got an early look this week at some updated numbers from the Labor Department, showing job growth in the 12 months leading up to March was even stronger than originally reported - close to 7 million jobs added during that 12-month period. So with all those jobs, we continue to see a rise in personal income. That's good. People have money in their pockets. It also means, though, demand is outrunning supply, and that's one of the reasons we're seeing upward pressure on inflation.

SIMON: NPR's Scott Horsley, thanks so much.

HORSLEY: 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.