The Fed aims to clamp down on inflation with rate hikes. Will it work?

The Federal Reserve is shifting its approach to the economy and monetary policy. It's a major change after holding interest rates at near zero levels. Given the pandemic, it's not without its own risks. But the Fed chairman said the state of the economy required changing course. Lisa Desjardins begins the report, with more from Greg Ip, chief economics commentator for The Wall Street Journal.

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  • Judy Woodruff:

    The Federal Reserve is shifting its approach to the economy and to monetary policy. It is a major change, after many months of holding interest rates at near zero levels. And given the pandemic, it's not without its own risks.

    But, as Lisa Desjardins reports, the Fed chairman said the state of the economy required changing course.

  • Lisa Desjardins:

    From the Fed chair today, a clear message the Central Bank hopes to clamp down on inflation with an interest rate hike in a matter of weeks.

  • Jerome Powell, Federal Reserve Chairman:

    The committee is of a mind to raise the Federal Funds Rate at the March meeting.

  • Lisa Desjardins:

    Fed Chief Jerome Powell is signaling what would be the first Fed interest rate increase in three years, and the potential for more in future months, this as rising inflation weaves into daily American life, with costs up in gas stations and grocery stores.

    In December, prices were up 7 percent over the previous year. But the Fed must also balance the continued spread of the Omicron variant of the coronavirus and its effect on the economy.

    On that, Powell indicated reason for optimism.

  • Jerome Powell:

    Health experts are finding that the Omicron variant has not been as virulent as previous strains of the virus. If the wave passes quickly, the economic effects should as well.

  • Lisa Desjardins:

    Powell noted that unemployment is low overall, 3.9 percent, arguing the job market can handle a shift from the Fed.

  • Jerome Powell:

    I think there is quite a bit of room to raise interest rates without risking the labor market. This is, by so many measures, a historically tight labor market.

  • Lisa Desjardins:

    But the jobs picture is not the same for all Americans. Unemployment remains high for Black Americans at 7.1 percent vs. white Americans at 3.2 percent.

    That economic concern for still struggling Americans is on the front burner at the White House, where President Biden met with corporate CEOs to try to revitalize his stalled Build Back Better plan.

  • President Joe Biden:

    The Build Back Better plan lowers prices for families and gets people working. It creates the best-educated work force hopefully in the world and ensures it will remain the most dynamic and productive economy in the world.

  • Lisa Desjardins:

    Meantime, businesses, like this cafe just two miles from the White House, are feeling a shaky economy.

  • Alex Kramer, D.C. Cafe Owner:

    You can see when people are not getting the extras, when they're getting coffee, drip coffee instead of cappuccino. You can see it.

  • Lisa Desjardins:

    For the "PBS NewsHour," I'm Lisa Desjardins.

  • Judy Woodruff:

    Let's break down a bit more of today's developments and how this fits into the larger economic picture going forward.

    Greg Ip is the chief economics commentator for The Wall Street Journal.

    Greg, welcome back to the "NewsHour."

    So, first question, how much do we expect the Fed is going to raise interest rates, and how quickly?

  • Greg Ip, The Wall Street Journal:

    Well, they signaled about as clearly as they could that the process is going to get started in the month of March with a quarter-point increase.

    Now, the last time they gave us detailed projections, they thought they would raise rates three times, three quarter-point increases, this year. But the clear body language from Chairman Jerome Powell today is that the risks are that they will do more, possibly quite a few more, rate increases this year. And the reasons why are quite simple.

    In the last two months, all the data they look at has made the case for higher interest rates even stronger. Inflation, if anything, has gotten worse since we got that bad 7 percent number. And the job market is just extremely strong, with far more job openings than there are unemployed people.

    So, the two things the Fed cares about most, which is a strong job market and low — and keeping inflation down, those — the evidence on both fronts tells them that rates right now are way too low. So, I think there's a possibility, in fact, a probability, that they will raise rates at least four times this year, and possibly many more times than that.

  • Judy Woodruff:

    Possibly many more times? And you're referring to his body language.

    What made you come away with that impression?

  • Greg Ip:

    Well, the last cycle where the Federal Reserve raised interest rates, they did it every other meeting, which meant every three months, so about four times per year.

    The reporters asked him, well, is that going to be the same kind of template you follow this time? And he repeatedly emphasized the difference between the economy today and the economy in 2018-2019, when they were last raising interest rates. The economy is stronger today. The job market is tighter. And, most important, inflation is a lot higher. It's around 7 percent, instead of 2 percent.

    So, the message he's trying to say is, you cannot look at the slow pace of rate increases last time around and believe that's an appropriate model for how we're going to behave right now.

    I think the Fed is worried that they are, in the jargon, behind the curve. That is to say, they're facing an economy and an inflation that are just — I should say, they're sitting here with interest rates way too low already for the strength of the economy and how high inflation is now.

    And they have a lot of work to do to get rates to a more appropriate level.

  • Judy Woodruff:

    So, we heard in Lisa's report obviously reference to why they're doing it now.

    Anything you would add to that to help us understand why they have made this major course correction?

  • Greg Ip:

    I think that they have a lot — like a lot of people, including the Biden administration, the economy is just not behaving the way they thought a year or two ago.

    Like, coming into this last year, the expectation was that the economy would, like after the global financial crisis a decade ago, be one where there was prolonged and very high unemployment, a lack of spending, a lack of demand, and just lots and lots of unused capacity.

    And it's really kind of the opposite. We just have way — lots and lots of demand, red-hot demand, like, shortages of everything. The problem today is that there's too much demand and not enough supply.

    And so all the fiscal stimulus we had, all the monetary stimulus we had, they did the job. They got the economy back to a healthy state. But now we're in this situation where policy is completely inappropriate for the shape of the economy.

  • Judy Woodruff:

    So…

  • Greg Ip:

    There's one last point here which I think that the Fed and everybody is struggling, which is the virus. We're discovering that the virus just doesn't lead to weaker spending, fewer people going and shopping and fewer people going in restaurants.

    It also, like, means fewer people are willing to work. And that adds to the problems reopening the economy, and adds to these inflation risks. And it makes a very complicated picture for the Fed.

  • Judy Woodruff:

    So, we heard Chair Powell make — talk about the connection between the economy and the pandemic.

    I mean, how much is it thought that they are tied together, that, if the pandemic lifts, the economy gets better? I mean, what's the thinking?

  • Greg Ip:

    Well, in the perfect world, and the world that they thought we were going — that they were assuming until a few months ago was that, as the pandemic receded, some of the distortions in the economy would go away, supply chains would normalize, prices for things like furniture and durable goods would come back down to earth.

    People would start shifting their spending from goods to services, and people who were worried about going back to work because of the virus, they would now be willing to go back to work. All the child care issues would be fixed.

    The longer the virus hangs around, the more of these waves we get, the less that state of normalcy is likely to return. In fact, you have to sort of, like, come around to the idea that there's going to be a new normal that doesn't look like the old normal. And it's going to be a world where some of these shortages may be very persistent.

    And I think that weighs heavily on the Fed's thinking. And it adds to the inflation risk that they are now trying to tamp down with their coming rate increases.

  • Judy Woodruff:

    And in just a few seconds, Greg Ip, is it believed that this is going to work, that it's going to wring inflation out of the economy in the right way?

  • Greg Ip:

    I think there's several reasons to be somewhat cautiously optimistic.

    Most people still believe that the prices we are seeing right now are indeed distorted by the pandemic. And with time, those things should go away. It's simply not the case that used car prices will keep going up 30 percent every year. There are good reasons to believe that, as the Omicron variant wave works his way through and more people acquire some form of immunity, labor markets will normalize.

    The other thing that's happening is, we're not going to get another $2 trillion stimulus program from the federal government this year, like we did a year ago. So, just the absence of that fiscal push means that demand is going to cool off a little bit. And that will provide some scope for inflation to return to normal.

    But I would emphasize that there's enormous uncertainty about that. And that's one reason you see markets behaving in such a volatile way.

  • Judy Woodruff:

    Enormous uncertainty.

    Greg Ip with The Wall Street Journal, we thank you.

  • Greg Ip:

    All right, thank you.

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