LEILA FADEL, HOST:
Federal Reserve chairman Jerome Powell says the central bank is trying to strike a delicate balance, raising interest rates high enough to bring down inflation but not so high as to torpedo the economy.
A MARTÍNEZ, HOST:
Yeah. Markets are betting that balancing act will prompt Powell and his colleagues to hold interest rates steady when they meet today. But investors will be on the lookout for any signals about where interest rates might go in the future.
FADEL: NPR's Scott Horsley joins us now to discuss this. Hi, Scott.
SCOTT HORSLEY, BYLINE: Good morning, Leila.
FADEL: Good morning. So rates have already gone up a lot in the last year and a half and inflation is down. Do Fed officials feel like their work is done?
HORSLEY: Not yet. Inflation has come down a lot since last summer, when it topped out at just over 9%, but it's still north of 2%, which is the Fed's target. So the question Powell and his colleagues are wrestling with is, are interest rates high enough now that inflation will continue to come down on its own, or do they need to push rates even higher and possibly raise the risk of recession? For the moment, the Fed is expected to take a breather and leave rates where they are. But Michael Pearce, who's with Oxford Economics, thinks they'll pair that with a message that rates could go higher in November or December.
MICHAEL PEARCE: It's a no-brainer for the Fed to remain sounding hawkish this meeting. I mean, they want to keep that optionality of additional hikes if they need to.
HORSLEY: Of course, higher interest rates make it more expensive to borrow money for a house or a car or just to carry a balance on your credit card. Higher mortgage rates have been a drag on the housing market this year. But so far, the overall economy has been handling higher borrowing costs pretty well.
FADEL: August inflation a little higher than expected. How does that affect the Fed's decision-making?
HORSLEY: Yeah. The last cost of living report showed annual inflation in August was 3.7%. That's up from 3.2% in July. Most of the increase was the result of rising gas prices. And we've seen those oil production cuts by Russia and Saudi Arabia push the price of crude oil up to more than $90 a barrel. Steven Ricchiuto, who's the chief U.S. economist at Mizuho Securities, says that's probably not going to sway the Fed on its own, but if higher transportation costs start to push up other prices, that could be a different story.
STEVEN RICCHIUTO: I think they'll look past a political situation that's moving energy prices, but pass-through would worry them. And you've got to wait to see if you're going to get the pass-through.
HORSLEY: Last month, for example, we did see airfares go up as a result of rising jet fuel prices. Most of the other inflation forces the Fed's been watching, though - things like rent and service prices - are generally moving in the right direction, even if they are taking longer to come down than most people would like.
FADEL: So does that mean we're going to be living with higher interest rates for a while?
HORSLEY: Possibly. Back in June, a lot of Fed policymakers thought they'd be able to start cutting interest rates next year. On average, they were predicting that rates would drop maybe by a full percentage point in 2024. We will get an updated round of Fed forecasts today, and Michael Pearce thinks it may show policymakers in more of a holding pattern.
PEARCE: It feels like there's a higher bar for raising rates, but also a higher bar for cutting rates as well. It just feels like the committee setting themselves up for a prolonged pause and just waiting to see where the next few months of data will take us.
HORSLEY: Yeah. Powell said last month that the Fed is navigating by stars under cloudy skies, and you can now add some additional fog to that picture. We've got the UAW strike, the looming threat of a government shutdown, the resumption of student loan payments. So there's a lot of uncertainty, and you can expect the Fed to proceed with caution.
FADEL: NPR's Scott Horsley. Thanks, Scott.
HORSLEY: You're welcome.
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