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The Fed held interest rates as inflation shows signs of cooling


Today could mark a milestone in monetary policy. The Federal Reserve signaled that it is probably done raising interest rates. And Fed policymakers say they could start cutting rates sometime next year. That would be welcome news for many people. Higher interest rates make it more expensive to borrow money for a car or a business or to carry a balance on your credit card. The Fed's comments come amid signs of cooling inflation. NPR's Scott Horsley is here with details. Hey, Scott.


SHAPIRO: The Fed voted today to hold interest rates steady, but suggested they may not stay there. Sounds like no news is news in this case. What's the message?

HORSLEY: Yeah. The Fed is sounding cautiously optimistic. You know, inflation has come down a lot. This week we learned that consumer prices in November were up just over 3% from a year ago. That's less than half the inflation rate we saw at the beginning of this year. It is still above the Fed's target of 2%. So Fed chairman Jerome Powell says he and his colleagues would like to see more progress. But right now they don't anticipate any more rate increases, although Powell cautioned, they're not ruling that out altogether.


JEROME POWELL: We still have a ways to go. No one is declaring victory. That would be premature. And we can't be guaranteed of this progress. So we're moving carefully and making that assessment of whether we need to do more or not.

HORSLEY: Up until today, Powell said he and his colleagues weren't even talking about cutting interest rates. Well, now they clearly are talking about cutting interest rates. In fact, the informal forecast that policymakers put out this afternoon show that, on average, they expect to cut rates by three-quarters of a percentage point next year and by another full point in 2025. That would be a big turnaround, although rates would still end up well above the near-zero mark where we started this process.

SHAPIRO: The experts on Wall Street seem to like that. The Dow Jones Industrial Average hit a record high today. But ordinary people are still feeling pretty unhappy about the economy. So what does that tell us?

HORSLEY: Wall Street was definitely happy with the Fed's message today. Lower interest rates generally mean higher stock prices, and the Dow soared more than 500 points. But Powell was asked about public opinion polls that show even with solid GDP growth and very low unemployment, many people are grumpy about the economy. The Fed chairman suggested one explanation is that a lot of stuff still costs more than people would like.


POWELL: Well, inflation is coming down, and that's very good news. The price level is not coming down. Prices of some goods and services are coming down. But overall, people are still living with high prices, and that is something that people don't like.

HORSLEY: Now the good news, Powell says, is that thanks to the strong job market, wages have been rising faster than prices. In fact, wage growth has outpaced inflation for the last seven months. If that positive trend continues and people see their paychecks catching up and stretching further, then perhaps their mood will improve.

SHAPIRO: And timing here matters politically because 2024 is an election year. So when might we start to see rates begin to come down?

HORSLEY: That is hard to say. The forecast the Fed offered today doesn't give any guidance about precise timing, and we know it takes time for rate cuts to make their way through to the real economy. Of course, people's political views tend to harden well before the November election. The Fed is supposed to be politically independent, and Powell has guarded that independence very carefully.


POWELL: We don't think about political events. We don't think about politics. We think about, what's the right thing to do for the economy? The minute we start thinking about those things - you know, we just can't do that. We have to think, what's the right thing? We'll do the things that we think are right for the economy at the time we - when we think is the right time.

HORSLEY: This is politically sensitive, though. When Donald Trump was in the White House, he often jawboned the Fed to lower interest rates and goose the economy. President Biden's more circumspect, but I suspect his campaign would prefer to see rate cuts sooner rather than later. The elder George Bush famously blamed the Federal Reserve for not lowering interest rates more aggressively. Bush thought that cost him his reelection in 1992.

SHAPIRO: NPR's Scott Horsley. Thank you.

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.

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.