An NPR member station
Play Live Radio
Next Up:
0:00 0:00
Available On Air Stations

This week in economics


There was a lot of news about the economy this week and, well, it was confusing. We learned, for example, that employers added 428,000 jobs last month, and that the unemployment rate stayed at 3.6%, the lowest it's been since before the pandemic. But also this week, the stock market swung from one of its best days in recent years to one of its worst. And that came after the Federal Reserve set one of its sharpest rate hikes in years as part of their strategy to curb inflation. NPR's Scott Horsley is here with us now to talk us through this and try to help us understand it. Scott, thank you so much for joining us.

SCOTT HORSLEY, BYLINE: Great to be with you, Michel.

MARTIN: So the Federal Reserve raised interest rates by half a percentage point this week. It's the sharpest increase in more than two decades. Why?

HORSLEY: The Fed is deliberately making it more expensive for people to borrow money in an effort to get inflation under control. You know, for the last two years, the Fed kept interest rates really low - next to zero - as a way to prop up the economy and cushion the effects of the pandemic. That worked maybe a little too well. And so now we've got inflation that's the highest it's been since the early 1980s. Fed Chairman Jerome Powell and his colleagues say they are determined to get inflation back down.


JEROME POWELL: Some of us are old enough to have lived through high inflation, and many aren't, but it's very unpleasant. You're paying more for the same thing. If you're a normal person, then you probably don't have that much extra to spend. And it's immediately hitting your spending on groceries, on gasoline, on energy and things like that. So we understand the pain involved.

HORSLEY: The Fed not only raised short-term interest rates by half a percentage point this week, but it also signaled two more of those jumbo rate hikes are likely at its next two meetings in June and July.

MARTIN: And the stock market initially seemed to welcome the Fed's move, but after thinking it over, investors dumped stocks. And the Dow tumbled more than a thousand points on Thursday. What's the market worried about?

HORSLEY: Well, investors are worried that in order to get control over inflation, the Fed is going to have to push interest rates so high that it tips the economy into recession. And historically, that is often what happens when the Fed goes down this path. Now, Powell argues this time it could be different. He thinks the economy is in strong enough shape right now to weather these higher interest rates without going into a ditch. But even if it's not, even if there is real economic pain associated with this higher interest rate campaign, Powell suggests that'll be worth it in order to get control over inflation.


POWELL: We see restoring price stability as absolutely essential for the country in coming years. Without price stability, the economy doesn't work for anybody.

HORSLEY: Now, this is a pretty big turnaround for the Fed. Remember, the central bank has two goals - full employment and stable prices. For most of the last decade, inflation was really low, so the central bank decided it could afford to focus primarily on the full employment side of the ledger. Now, though, prices are climbing really rapidly, and so the Fed's gotten this rude awakening. And Powell says if they don't get prices under control, then they're not going to get back to full employment either.

MARTIN: OK. So Chairman Powell used that term normal people. I think we all get what he's saying. OK. But normal people are the ones who will suffer the most if there is a recession. I mean, already with this interest rate spike, normal people who want to buy a house, for example, are going to have a harder time. People who might have retirement accounts in the stock market are seeing, you know, with that slide last week and, you know, may be temporary, are seeing that kind of wealth disappear. And if there is a recession and more people are thrown out of work, more and more people are going to suffer. I think many people may remember former President Trump famously tried to jawbone Chairman Powell in his direction, even though, you know, Powell was his appointee. If the economy goes into recession, who takes the blame for that? And does Chairman Powell take responsibility for that?

HORSLEY: You know, I think the responsibility will be shared pretty widely. The whole point, though, of having a Federal Reserve that is insulated from political pressure, that is able to make tough decisions like this, is that that's what gives people the credibility that they will do the right thing. They will make what might be painful choices in the short run in order to control inflation in the long run.

MARTIN: That's NPR's Scott Horsley. Scott, thank you so much.

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

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.