Federal Reserve raises interest rates in effort to tame inflation

In addition to Wednesday's hike in a key interest rate, the Federal Reserve also signaled it expects to continue to raise rates through the year. Nick Timiraos, chief economics correspondent for The Wall Street Journal and author of a new book on the Fed's pandemic response called "Trillion Dollar Triage, joins John Yang to discuss.

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  • Judy Woodruff:

    The chair of the Federal Reserve, Jay Powell, acknowledged today that he and the wider Federal Reserve board had underestimated the threat of inflation last year.

    But with the annual inflation rate now closing in on 8 percent, that attitude has changed, and Powell committed to ramping up a fight against ever-rising prices, beyond what had even been projected.

    John Yang has the story.

  • John Yang:

    Judy, today's rate increase and the prospect of more to come this year is a sharp reversal from just two years ago, when the Fed cut rates to near zero to support the economy, as the pandemic shut much of it down.

    Nick Timiraos is the Wall Street journal's chief economics correspondent. He is author of a new book on the Fed's response to the pandemic, "Trillion Dollar Triage".

    Nick, thanks so much for joining us.

    Today's quarter-point increase was widely expected, but the road map ahead of the prospect of more increases through the year — through this year was not. How much more aggressive is this Fed stance than what had been anticipated? And what's the Fed trying to accomplish here?

  • Nick Timiraos, The Wall Street Journal:

    Well, it is more aggressive than what had been anticipated, though investors in bond markets had begun to sense the Fed might raise rates at every meeting this year.

    And that is what the Fed projected at this meeting today. They said they could raise rates at their six remaining meetings this year. That would be a faster pace of increases than in — since 2005.

    The problem here is that supply and demand are out of whack. And, as you mentioned, the Fed misjudged this last year. And so now they're trying to catch up.

  • John Yang:

    And how is this going to affect average Americans, mortgage rates, car loan rates, credit card rates?

  • Nick Timiraos:

    Even before the Fed raised interest rates today, you had seen borrowing costs go up because the Fed had effectively signaled they were going to do this. So mortgage rates have gone up by more than a percentage point in just the last two months. You're seeing it's getting more expensive for businesses to borrow in the corporate bond market.

    And that should continue as the Fed becomes more and more hawkish about dealing with these supply and demand imbalances. You know, the Fed can't do anything about busted supply chains, but they can fix demand. They can reduce demand. And that what higher interest rates eventually will do. They will reduce job growth, slow the pace of wage growth. That is how the Fed fights inflation.

    When Jay Powell says, we will use our tools, he's talking about slowing economic growth.

  • John Yang:

    What did Powell say about the — or how does he assess the risks of what's going on in Ukraine and the geopolitical situation?

  • Nick Timiraos:

    Yes, that's — it's a tough time for the Fed, because they had been counting on supply chains improving.

    At the beginning of the year, they thought inflation would come down largely as these bottle next eased. And it's a little bit like the Mike Tyson quote. Everybody has a plan until they get punched in the face. And what the Ukraine war does to the Fed, it's a blow, because you know have more disruption in supply chains, oil prices, commodity prices.

    And on top of that, you have China, large parts of China manufacturing hubs going back into lockdown. So that will keep pressure on inflation for longer than the Fed was anticipating. And at a certain point, 9 percent, 10 percent inflation, the Fed will get concerned that consumers and businesses will expect prices to be high for longer. And that is how you start a wage-price spiral that we don't want to have in this country.

  • John Yang:

    We have heard some economists, Larry Summers, the former Treasury secretary among them, say that this is too little too late to really fight inflation.

    And then, today, you had on Wall Street traders saying that it was too much, that it could tip the economy into a recession. What did Powell have to say about those criticisms?

  • Nick Timiraos:

    Well, Powell was asked about whether this would — whether there was a rising risk of a recession.

    And, as one analyst put it, the fact he's even being asked the question isn't great. If the Fed chair has to say, no recession, it suggests that the risk is rising somewhat.

    I think the takeaway, though, from all of this, is that, if you look back two years — I write about this in my book — two years ago, when the pandemic was bringing commerce to a halt, Powell got after his colleagues a little bit and said, it feels like we're swimming after a speedboat. We need to do more. We need to get ahead of this.

    And it seems as if, right now, the Fed is in a similar place, obviously, with the risks coming from the completely opposite direction. They need to find that gear where they can get interest rates up faster, but not so fast that they crash the plane here, and you have a hard landing.

  • John Yang:

    Nick Timiraos of The Wall Street Journal, thank you very much.

  • Nick Timiraos:

    Thanks for having me.

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