MICHEL MARTIN, HOST:
Interest rates are higher this morning after the Federal Reserve raised them for the first time in three years.
A MARTÍNEZ, HOST:
The vote on Wednesday was unanimous, and now the Fed's benchmark short-term interest rate is a quarter of a percentage point higher, which is exactly the opposite of what President Trump wanted when he chose a new Fed chair.
MARTIN: NPR's Alina Selyukh is here to walk us through the latest. Good morning.
ALINA SELYUKH, BYLINE: Hello, hello.
MARTIN: OK. So we know what happened. Let's talk about why and what it means that the...
SELYUKH: Yes.
MARTIN: ...Fed has raised the interest rate.
SELYUKH: Well, it means the Federal Reserve is making the move to cool down inflation. I'll tell you my corny metaphor for this. You know how in a fire, there's, like, a red box that says, in case of emergency, break glass?
MARTIN: Yeah.
SELYUKH: Well, if you think of inflation as a fire, the rate hike is like the Fed saying emergency and breaking that glass to grab the extinguisher. But the Fed is also hoping they don't have to, like, blast away for a long time, which is to say, the Fed's rate-setting committee signaled one more rate hike this year, and that's it.
MARTIN: Not quite a dad joke, but we'll take it. So...
SELYUKH: Doing my best.
MARTIN: Let's get to the political drama here. Trump pressured the previous Fed chair, Jerome Powell, to lower interest rates. He even threatened to fire Powell over this. Not clear that he could, but he threatened it. So Powell's term as chair ended. Trump picked a replacement, Kevin Warsh. And now, pretty soon after Warsh took over, the Fed raised rates. So where does this leave the Fed chair now?
SELYUKH: Yeah. Last night, Trump, again, on social media pressed the Fed for lower rates. This dynamic came up a lot in Warsh's press conference yesterday. Like Powell, Warsh refused to engage. He kept saying the Fed is independent. The Fed should stay in its lane, and he has nothing to say about the president.
MARTIN: Say more about the argument for raising rates.
SELYUKH: So fundamentally, the Fed has a certain credibility maintained, and the data is the data, which is what Warsh essentially said. The inflation trends are simply not improving.
(SOUNDBITE OF ARCHIVED RECORDING)
KEVIN WARSH: The plain fact is that inflation is too high and has been for too long.
SELYUKH: Inflation has been above the Fed's goal for five years. And Warsh made the case that this is a strong economy to absorb this rate hike. People are employed. They're still shopping. Actually, just yesterday, we got the latest date on retail sales that showed people spending more across the board, including on fun things like hobby supplies and sporting goods. The Fed has to walk a narrow line, putting the brakes on the economy without tipping it into a recession, and that's part of why this rate hike is not huge, only a quarter of a percent.
MARTIN: And also you were reminding us that actually, it wasn't just Warsh. It was all 12 members...
SELYUKH: Unanimously.
MARTIN: ...Of the Fed rate-setting committee voting unanimously. OK. So for people who aren't economists, how does a rate hike by the Fed work to fix inflation?
SELYUKH: Well, raising interest rates makes it more expensive to borrow money, which theoretically means people and businesses will think long and hard before getting a mortgage or a business loan, buying a car, shopping on credit, and that kind of cool down forces prices to stay in check.
MARTIN: But only theoretically, though?
SELYUKH: Well, one big factor right now is the fact that the big driver of current inflation is the war in Iran. It has pushed up the cost of gasoline and the price of diesel's at historic highs, and that's definitely not something an interest rate hike can fix. The Fed also has no say on tariff policy, which is another driver. And we have the fact that wages have not been keeping pace with inflation. For five months now, people's paychecks have been losing their buying power. Warsh hopes the stable prices will help families keep their heads above water. Either way, any positive effects of this are unlikely to be very quick.
MARTIN: That is NPR's Alina Selyukh. Alina, thank you.
SELYUKH: Thank you. Transcript provided by NPR, Copyright NPR.
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