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The Federal Reserve finally hits pause on raising interest rates


A streak that lasted 15 months is over. Since March of 2022, the Federal Reserve has hiked interest rates each and every time it met. This week, it's pressed pause. The Fed hasn't won its war on high inflation, but policymakers feel comfortable enough to take a break. NPR's David Gura explains why.

DAVID GURA, BYLINE: When the Federal Reserve raises interest rates, the economy doesn't change overnight; it takes time, as I heard from every economist and market strategist I talked to. I'm serious - every single one.

CARL RICCADONNA: Monetary policy is - as is often said, happens with long and variable lags.

JULIA CORONADO: There are lags in monetary policy.

RUSS KOESTERICH: Milton Friedman famously spoke of the long and variable lag of monetary policy.

GURA: That's Russ Koesterich, Julia Coronado and Carl Riccadonna. Julia Coronado is a former Fed economist who translated that jargon for me. She runs the economic research firm MacroPolicy Perspectives.

CORONADO: There's some time between when the Fed actually raises interest rates and when the full impact of those interest rate hikes hit the economy.

GURA: Now, we haven't seen the full impact yet, but credit has gotten tighter as the Fed has raised interest rates, which is the goal, to slow down the economy by making it tough for people and companies to borrow money.

CORONADO: There's a lot of things pointing in the right direction.

GURA: Signs inflation is easing. You've probably noticed how far egg prices have fallen. Plane tickets cost less. So do tickets to sporting events.

CORONADO: The Fed doesn't think they're done necessarily, but they're seeing enough signs that things are moderating, that the economy's cooling off, that they can at least slow down the pace of rate hikes.

GURA: Growth is subdued, to quote Fed Chair Jerome Powell. And he and his colleagues expect that won't change anytime soon. A cautiously optimistic Powell noted inflation has moderated somewhat, and the latest data were better than Wall Street expected. Consumer prices in May were up 4% from a year ago, which means inflation is not running as hot as it was. It's less than half what it was at its recent peak. But it's still higher than the Fed wants. Here's Powell speaking this week.


JEROME POWELL: Inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.

GURA: Two percent inflation is the Fed's target, but there's no consensus among economists of how long it'll take to get there. And one reason policymakers didn't raise rates again is there is still so much uncertainty - uncertainty about the housing market, for instance. Mortgage rates have climbed very quickly, which has led to a dramatic slowdown. Then, there were the failures of those three U.S. banks earlier this year. Ryan Sweet of Oxford Economics says the Fed is still not sure what the effects of that will be and when we'll see them.

RYAN SWEET: So it's not going to affect the economy this week, next week or next month. It's going to be late this year, early next.

GURA: But, Sweet says, we've seen credit getting even tighter because lenders have gotten more cautious after Silicon Valley Bank collapsed - and Signature Bank and First Republic.

SWEET: So they're tightening the screws.

GURA: The Fed doesn't want credit to get too tight. That could lead to a recession, which Powell still believes is avoidable. And Wall Street has hopped on that bandwagon, according to Russ Koesterich. He's a portfolio manager at BlackRock who sees that optimism reflected in the stock market's performance.

KOESTERICH: The rally reflects the view that the Fed will be able to both bring inflation down and avoid a recession.

GURA: The S&P 500 is in a bull market again. It's up more than 20% from its recent low along with the Dow and the Nasdaq. But Koesterich says this is not your classic, broad-based bull market.

KOESTERICH: It isn't a very narrow rally. And, you know, gains have been disproportionally driven by a handful of stocks, almost all of which are on the tech side. And many are connected to the boom in AI.

GURA: The latest projections from Fed policymakers suggest there will be two more interest rate hikes before the end of the year. But Powell says he and his colleagues haven't decided how long this pause will last. There are six weeks to go until the Fed meets again in July. And right now, Wall Street is betting there will be another rate hike then. David Gura, NPR News, New York.


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.

Based in New York, David Gura is a correspondent on NPR's business desk. His stories are broadcast on NPR's newsmagazines, All Things Considered, Morning Edition and Weekend Edition, and he regularly guest hosts 1A, a co-production of NPR and WAMU.
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