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The Fed is expected to end its string of consecutive interest rate hikes

STEVE INSKEEP, HOST:

After raising rates at its last 10 meetings, the Federal Reserve is widely expected to do nothing this afternoon.

LEILA FADEL, HOST:

But this could be just a rest stop in the Fed's campaign against inflation, not the end of the road. Yesterday, we learned the annual inflation rate fell to 4% in May. That's the lowest it's been in more than two years. But it's still well above the Fed's target of 2%.

INSKEEP: NPR's Scott Horsley joins us now.

Scott, good morning.

SCOTT HORSLEY, BYLINE: Good morning, Steve.

INSKEEP: Hey, 4% sounds better than 8%, which is where we were. But is that low enough?

HORSLEY: You know, inflation has come down a lot, but at 4%, it's still double the Fed's target. And what's more, some of the decline last month was the result of a drop in gasoline prices. And as we know, gas prices bounce up and down a lot, so there's no guarantee they're going to stay down. If you look at so-called core inflation, which strips out volatile food and energy prices, it's still 5.3%, which is only a little bit lower than the month before. That's why Greg McBride, who's chief financial analyst at Bankrate, thinks the Fed will leave the door open for additional rate hikes in the future if inflation remains stubbornly high.

GREG MCBRIDE: Progress is coming. It's just coming very, very slowly. And I think the report validates the Fed's stance that they're going to pause rate hikes in June. But if we don't see more substantive improvement and sustained improvement on the inflation front, they could be back to raising rates, and it may be happening as soon as their July meeting.

HORSLEY: That's why forecasters are calling this a pause in rate hikes, not a full stop.

INSKEEP: Why would the Fed pause at all if they're still concerned about inflation?

HORSLEY: Well, rates have already gone up a lot. The Fed's benchmark rate, which was near zero just 15 months ago, is now over 5%. And the borrowing costs that consumers face are higher than that. Mortgage rates are up close to 7%. The average credit card's now charging over 20% interest.

INSKEEP: Wow.

HORSLEY: Now, if you pay your credit card bill in full every month, that doesn't much matter. But nearly half of all card users carry a balance. And we know those balances have been going up as people try to keep pace with these rising prices. The Fed's whole goal in raising interest rates is to make people think twice about spending money in hopes that tamping down demand will bring prices under control. Now, that doesn't happen overnight. So after 10 consecutive rate hikes, Fed policymakers are expected to take a break and hold rates steady for a while to assess how these higher borrowing costs are affecting the broader economy.

INSKEEP: You know, we assume that higher interest rates are bad, and for many people, of course, they are. But is there any upside?

HORSLEY: Yes. For people who are lucky enough to have some money in the bank, rising interest rates can be a good thing. Some of the best-paying savings accounts are now finally keeping up with inflation. But Bankrate's Greg McBride says you do have to shop around.

MCBRIDE: Savers are seeing the best returns that they've seen in 15 years, provided that they're looking in the right place. A lot of banks are still dragging their feet and have been pretty stingy on their payouts for savings accounts and CDs, but the top yielding accounts are over 5%. And that's where you need to have your money.

HORSLEY: McBride suggests checking out internet banks, smaller community banks and credit unions. Oftentimes, they offer the most competitive interest rates.

INSKEEP: All right. So if interest rate hikes are only paused, how much higher might they go?

HORSLEY: Well, we could get some insight on that this afternoon when policy makers issue their forecasts. There's likely to be a range of opinion. Some Fed officials may think rates are high enough already, and they just have to be patient now. Others could see a need for at least one more rate hike this year in order to get prices under control.

INSKEEP: NPR's Scott Horsley.

Thanks so much.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Steve Inskeep is a host of NPR's Morning Edition, as well as NPR's morning news podcast Up First.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.