MARY LOUISE KELLY, HOST:
The Federal Reserve raised interest rates today in an effort to tamp down stubborn inflation. Now, this is the first time the central bank has raised rates in more than three years, and it's the first move of any kind since the new Fed chairman, Kevin Warsh, took over this spring. NPR's Scott Horsley is here to tell us more. Hiya, Scott.
SCOTT HORSLEY, BYLINE: Hi, Mary Louise.
KELLY: All right, so raising interest rates, we know that will make it more expensive to borrow money to, say, buy a car, to carry a balance on your credit card. Why did they make this move now?
HORSLEY: In a word, inflation. And that is largely due to the U.S. war with Iran. Back in February, before the war started, inflation had fallen to just 2.4%. It looked to be headed towards the central bank's target of 2%. But with the fighting in the Strait of Hormuz, crude oil prices have soared, gasoline and diesel prices are way up. And last month, inflation was clocked at 3.4%. Now, Kevin Warsh had told an audience in Jackson Hole, Wyoming, last month, unless there were clear signs that inflation was moderating, he and his colleagues would have to act. And that time came this afternoon.
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KEVIN WARSH: The plain fact is that inflation is too high and has been for too long. The least well-off are the ones who have the most to gain from stable prices.
HORSLEY: Warsh and his colleagues also feel like they have room to raise interest rates because even with today's high prices, the overall economy has remain fairly strong. You know, unemployment's still quite low. Consumer spending has been resilient. So policymakers feel like the economy can weather somewhat higher borrowing cost. At past Fed meetings, we've heard some mixed opinions, but the vote to raise interest rates today was unanimous.
KELLY: Unanimous. That's interesting. OK, so give us an example or two of what these higher rates will actually mean for consumers.
HORSLEY: Well, what it's not going to mean is immediate relief at the gas pump. And, of course, that's one of the biggest pain points for a lot of people. One of the challenges of the Fed is they don't control oil prices. You know, they can't wave a wand and open up shipping traffic in the Strait of Hormuz. What the central bank can do, though, is turn the knobs on borrowing cost and thereby make it more expensive to borrow money and tap the brakes on consumer demand. And Warsh says that might stop inflation in one part of the economy from metastasizing.
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WARSH: We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store. But what we can do and will do is ensure that any change in relative prices don't broaden out.
HORSLEY: We've been paying particular attention to diesel prices - which hit an all-time high today of $6.31 a gallon - because higher diesel prices can push up the cost of lots of other goods that get transported by truck or train. So far, we have not seen a lot of that kind of spillover effect, and Warsh and his colleagues want to keep it that way.
KELLY: Timing? If this works, Scott, how soon might inflation start to come down?
HORSLEY: Yeah, good question. In announcing the rate hike today, the Fed said it was designed to support a timelier return to the central bank's 2% inflation target. But on average, members of the Fed's rate-setting committee expect a very gradual improvement with inflation not falling all the way to 2% until 2029. Warsh was asked about that by Bloomberg's Michael McKee, and the Fed chairman had a ready answer.
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WARSH: One easy way to square that, Mike is those aren't my forecasts.
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WARSH: My business is to not give forward guidance.
HORSLEY: Warsh has bucked the Fed's custom of offering projections like that. So we don't know how long he thinks it's going to get - to take to get inflation back to 2%. On average, though, members of the rate-setting committee do not expect a whole lot more rate hikes. They just anticipate one more this year.
KELLY: One more this year. NPR's Scott Horsley, thank you.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.
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