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 today 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.
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.
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
in Fresno, California videos experiencing what so many Americans
are these days, consumer inflation. My husband and I are having to
sit down and really evaluate. Okay. What's our monthly budget because
groceries are more expensive gas is more expensive.
Things that are kids need are more expensive.
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.
Good afternoon. Federal Reserve Chairman Jay Powell at a news conference
this afternoon. Restoring price stability is is just something that
we have to do. There's 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've got
growth. I think payroll jobs averaging 450,000 per month that's remarkably
strong level for this state of affairs. I asked economist Neela Richardson
for her take. It's a weird time. It's a weird time.
But what is certain is inflation is just too high.
Richardson means weird in that inflation is soaring because of factors
outside the feds control.
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 has
lurched from no rate hikes, the big ones
Everybody is really, uh, taking big actions. Um, 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.
Moreover, said Chair Powell today, economy already shows signs of
slowing down. Do not think the U. S is currently in a recession.
And the reason is they're just too many areas of the economy that
are performing, uh
You know too well. 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 were already
in a recession. Six consecutive months of negative growth of shrinking
economy. What do you make of it?
If we are in the 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 to 1.
So this is different. The recession is going to feel different and
what's more, it's being swallowed up by inflation. So maybe this
is what's called stagflation, economic stagnation and inflation in
tandem, which we last saw in the 19 seventies. So is the Fed right
to raise rates.
Dramatically. Now in the middle of this is a changing economy, so
the Fed has to keep its eye on multiple balls this time around, but
they're only tool right now is to increase interest rates, curb demand
and hope that eventually supply catches up the only tool because
we're living through a supply demand mismatch which drives up prices,
says economist Catherine Dominguez.
Once a research consultant for the Fed.
So the Fed uses the tool raising rates, making it more difficult
for, um 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. But as we've seen in the last few days,
consumer spending is already
Eddie going down. It is, uh and the issue is getting it to slow down
at just the right level so that
In fact, uh, firms can stop raising prices. Households will stop
demanding higher wages and slowly, prices will start to stabilize.
In other words, inflation expectations matter 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.
So you have confidence that the Fed will be able to engineer relatively
soft landing as they're calling it optimistic that the Fed has the
tools that they need to be able to bring down inflation. Richardson
it's hard for the federal fine tune without all the elements of the
economy, cooperating.
They're used to doing great heights and a different style than they're
doing them now. Usually it's a very moderate quarter of a percentage
point, increase every single bad meeting and it's very slow, very
steady, very predictable uptake and interest rates. We're not saying
that right now we're seeing pretty aggressive moves with each rate
decision.
Aggressive moves that could seem over aggressive if second quarter
GDP turns out to have fallen.