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The Federal Reserve is growing more concerned about higher prices

A MARTINEZ, HOST:

Inflation is now at its highest level in almost 40 years, so the Federal Reserve is reconsidering its so-called easy money policies and taking steps toward raising interest rates next year. Some officials at the central bank believe rates will need to climb higher than had been expected to keep prices from soaring out of control. NPR's Scott Horsley joins us now to dissect all of it. And, Scott, the Fed has been keeping interest rates near zero throughout the pandemic in an effort to prop up the economy, but it looks like there's been a significant shift in thinking at the central bank. What can you tell us about it?

SCOTT HORSLEY, BYLINE: Yeah, inflation has stayed higher for longer than a lot of people at the Fed expected, and that's forcing Fed policymakers to think about really tapping the brakes next year. Most members of the Fed's rate-setting committee now expect at least three quarter-percentage-point interest rate hikes next year, and that's a substantial turnaround from September, when most members of the committee thought rates would stay near zero throughout 2022 or go up at most by a quarter percentage point. What is driving this turnaround is, of course, rising prices. Consumer prices in November were up 6.8% from a year ago. That's the biggest increase we've seen since 1982. And Fed Chairman Jerome Powell says the central bank can't allow that level of price hikes to continue unchecked.

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JEROME POWELL: We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation.

HORSLEY: Yesterday, the Fed announced that it plans to wind down its big bond buying program by spring, a few months earlier than had been planned. And that timing, A, is important because the central bank wants to end the bond purchases before it starts raising interest rates.

MARTINEZ: And one reason the Fed has been keeping interest rates low is to promote more job growth. What does the shift in policy mean for that?

HORSLEY: We're looking at a really unusual job market right now. You know, unemployment has come way down from near 15% in April of last year to 4.2% last month. But there's still about 4 million fewer people in jobs than there were before the pandemic. And what's more, a lot of people who dropped out of the workforce during the pandemic have not yet returned. Now, there are lots of reasons for that. Some people have simply retired. Some people are looking after children. And Powell says some are understandably worried about the pandemic, which is still killing more than a thousand people in this country every day.

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POWELL: What does the labor market look like in a world without COVID? That would be the thing that they would really like to see. But, you know, it doesn't look like that's coming anytime soon.

HORSLEY: And in the meantime, Powell says the job market looks to be pretty tight. We've been seeing pretty substantial wage increases. That's generally good news. But the Fed is on the lookout for any sign of a kind of wage-price spiral that helped fuel runaway inflation back in the 1970s.

MARTINEZ: Scott, the stock market seems to like what it's hearing from the Fed. What does this mean for the broader economy?

HORSLEY: You know, markets were relieved to see this tougher line on inflation from the Federal Reserve. The Dow Jones Industrial Average jumped more than 380 points yesterday. You know, businesses don't like runaway prices any more than consumers do. Keep in mind, this is all happening in the context of a really rapid economic recovery that was fueled in part by the Fed's easy money policies, along with trillions of dollars in spending by the federal government. Now, while those support measures may have contributed to higher inflation, Powell says he is not second-guessing the rescue efforts by either Congress or the central bank.

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POWELL: We're coming out of the first really global modern pandemic, which looked at the beginning like it might cause a global depression, so we threw a lot of support at it. And what's coming out now is really strong growth, really strong demand, high incomes and all that kind of thing. People will judge in 25 years whether we overdid it or not.

HORSLEY: Of course, that judgment will depend a lot on what happens going forward. Fed forecasters do think inflation will settle down to around 2.5% by the end of next year, while economic growth stays pretty strong and the unemployment rate dips to about 3.5%.

MARTINEZ: All right, that's NPR's Scott Horsley. Scott, thanks a lot.

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