Federal Reserve raises interest rates amid stubbornly high prices and recession concerns

The Federal Reserve raised interest rates significantly again Wednesday in a bid to put the brakes on inflation. The economy is no longer running nearly as hot as it did last year, but Fed Chair Jerome Powell said it was crucial to tame high prices by raising rates later this year, and said he hopes a recession can be avoided. Economics correspondent Paul Solman reports.

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  • Judy Woodruff:

    The Federal Reserve raised interest rates significantly again today in a bid to put the brakes on inflation. The economy is no longer running nearly as hot as it did last year.

    But Chairman Jay Powell said it was crucial to tame high prices. And the Fed raised rates by three-quarters-of-a-point. He also said he hopes that a recession can still be avoided.

    Our economics correspondent, Paul Solman, reports on the Fed's latest moves, whether it can strike the right balance and the impact these changes are already having.

  • Paul Solman:

    In Oklahoma City, a local institution shuttered. Morgan Harris was forced to close her kids store, Green Bambino, after 12 years, as inflation and pandemic losses overwhelmed her margins.

  • Morgan Harris, Owner, Green Bambino:

    Revenue this summer has slumped considerably. And while I didn't expect the boom of 2021 to continue, I didn't expect it to collapse as suddenly as it did.

  • Paul Solman:

    And, in Fresno, California, Annette De Dios experiencing what so many Americans are these days, consumer inflation.

  • Annette de Dios, California Resident:

    My husband and I are having to sit down and evaluate, OK, what's our monthly budget? Because groceries are more expensive, gas is more expensive, things that our kids need are more expensive.

  • Paul Solman:

    To try to quell inflation by slowing the economy, the Federal Reserve raised its benchmark interest rate by a whopping three-quarters-of-a-percentage point today, the fourth hike this calendar year alone.

  • Jerome Powell, Federal Reserve Chairman:

    Good afternoon.

  • Paul Solman:

    Federal Reserve Chairman Jay Powell at a news conference this afternoon.

  • Jerome Powell:

    Restoring price stability is just something that we have to do. There isn't an option to fail to do that, because that is the thing that enables you to have a strong labor market over time.

    But if you look at the labor market, you have got growth, I think payroll jobs averaging 450,000 per month. That's a remarkably strong level for this state of affairs.

  • Paul Solman:

    I asked economist Nela Richardson for her take.

  • Nela Richardson, ADP Research Institute:

    It's a weird time. It's a weird time. But what is certain is inflation is just too high.

  • Paul Solman:

    Richardson means weird in that inflation is soaring because of factors outside the Fed's control, the war in Ukraine driving up energy and food prices, the pandemic causing supply chain snags as consumers lurch from goods to services and back again, no buying to hyper-buying, suppliers cutting back and then suddenly ramping up. Think airplanes.

    In response, the Fed, lurching from no rate hikes to big ones.

  • Nela Richardson:

    Everybody's really taking big actions, but they're taking big actions based on historical trends a lot of the times. And we are in no point in the historical timeline that anyone has ever seen.

  • Paul Solman:

    Moreover, said Chair Powell today, the economy already shows signs of slowing down.

  • Jerome Powell:

    I do not think the U.S. is currently in a recession. And the reason is, there are just too many areas of the economy that are performing too well.

  • Paul Solman:

    On the other hand, the economy officially shrank in the winter and may have this spring as well.

    So, the Fed is tightening dramatically to slow the economy, but, by some accounts, we're already in a recession, six consecutive months of negative growth, of shrinking economy. What do you make of it?

  • Nela Richardson:

    If we are in a recession, it'll be a very unique one. We have an incredibly tight labor market, where the number of job openings outweigh the number of unemployed people looking for work 2-1.

    So this is different. The recession is going to feel different. And what's more, it's being swallowed up by inflation.

  • Paul Solman:

    So, maybe this is what's called stagflation, economic stagnation and inflation in tandem, which we last saw in the 1970s.

    So, is the Fed right to raise rates dramatically now?

  • Nela Richardson:

    In the middle of this is a changing economy, so the Fed has to keep its eye on multiple balls this time around. But their only tool right now is to increase interest rates, curb demand and hope that eventually supply catches up.

  • Paul Solman:

    The only tool because we're living through a supply-demand mismatch, which drives up prices, says economist Kathryn Dominguez, once a research consultant for the Fed.

    So, the Fed uses the tool, raising rates.

    Kathryn Dominguez, University of Michigan: Making it more difficult for households to continue to demand goods at a pace that outstrips supply.

    So, the idea of tightening credit is actually kind of getting at the underlying reasons for inflation, which is that, currently, demand outstrips supply.

  • Paul Solman:

    But as we have seen in the last few days, consumer spending is already going down.

  • Kathryn Dominguez:

    It is. And the issue is getting it to slow down at just the right level, so that, in fact, firms can stop raising prices, households will stop demanding higher wages, and, slowly, prices will start to stabilize.

  • Paul Solman:

    In other words, inflation expectations matter.

  • Jerome Powell:

    To the extent people start to see it as just part of their economic lives, they start to factor high inflation into their decisions on a sustained basis. And we don't think that's happened yet.

    But, when that starts to happen, it just gets that much harder. And the pain will be that much greater.

  • Paul Solman:

    So, you have confidence that the Fed will be able to engineer a relatively soft landing, as they're calling it?

  • Kathryn Dominguez:

    I'm optimistic that the Fed has the tools that they need to be able to bring down inflation.

  • Paul Solman:

    Nela Richardson?

  • Nela Richardson:

    Its hard for the Fed to fine-tune without all the elements of the economy cooperating. They're used to doing rate hikes in a different style than they're doing them now.

    Usually, it's a very moderate quarter-of-a-percentage-point increase every single Fed meeting, and it's very slow, very steady, very predictable uptick in interest rates. We're not seeing that right now. We're seeing pretty aggressive moves with each rate decision.

  • Paul Solman:

    Aggressive moves that could seem over aggressive if second-quarter GDP turns out to have fallen. Those numbers come out tomorrow.

    For the "PBS NewsHour," Paul Solman.

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