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As Fed Meeting Wraps Up, Interest Rates Will Likely Remain Near Zero

STEVE INSKEEP, HOST:

The job market is faltering; the pandemic is not. And inflation is higher than it's been in years. So how will the Federal Reserve react as its leaders finish a meeting this afternoon? Now, the central bank is expected to leave interest rates near zero, but we may get some hints about future moves, so NPR's chief economics correspondent Scott Horsley is following along. Scott, good morning.

SCOTT HORSLEY, BYLINE: Good morning, Steve.

INSKEEP: Just a reminder, the Fed has two missions - promote maximum employment and also keep inflation down, both of which don't seem to be going terribly well right now. So what does the central bank do?

HORSLEY: Well, they're acting carefully. We are, as you say, still a long way from full employment, and inflation's running pretty hot. The consumer price index for August was up 5.3% from a year ago - just a tick below the June and July figure. The Fed has argued a lot of these price hikes are temporary - tied to the pandemic - and they think that prices will cool off over time. But you've also got this wild card, which is the delta variant. As economist Julia Coronado of MacroPolicy Perspectives says, the spike in coronavirus cases has been pushing prices in both directions at the same time.

JULIA CORONADO: On the one hand, we saw it depress demand for travel, and that showed up in falling hotel rates and airfares and rental car prices. At the same time, it is gumming up global supply chains even more.

HORSLEY: That's because outbreaks have affected both manufacturing and shipping, and those supply chain bottlenecks are raising prices for things like new cars. So one thing we're going to be watching for this afternoon is whether the Fed adjusts its forecast for inflation up for this year and if it still expects prices to cool off next year.

INSKEEP: I just want to remember the Fed, of course, changes interest rates. It influences interest rates throughout the economy is maybe the best way to put it. It has also shoved trillions of dollars out into the economy with certain effects. How long is that going to continue?

HORSLEY: Well, that's what a lot of investors want to know. When the pandemic started, the Fed went to extraordinary lengths to support the U.S. economy, including launching a big bond-buying program that's designed to keep long-term interest rates low. At some point, the central bank is expected to scale back those bond purchases, but it wants to be careful not to pull the plug too soon before the economy is strong enough.

You know, we had that weak jobs report for August, when employers added just 235,000 jobs. Fed policies - Fed policymakers may want to wait to see if hiring picks up in September and October. Kathy Bostjancic, who's with Oxford Economics, thinks the Fed also might want to wait for Congress to get past this game of chicken that lawmakers have been playing with the debt ceiling because that could also rattle financial markets.

KATHY BOSTJANCIC: I do think that that probably gives them a little pause, too, right? Let's just wait (laughter) and make sure we get through that without too much market upheaval. And we think they start to taper, you know, December, early next year.

HORSLEY: Investors will also be looking for signals this afternoon about when the Fed might be ready to raise interest rates off in the future. Back in June, policymakers thought it would be 2023 at the earliest, most of them. We'll see if that timeline has moved up at all in the three months since.

INSKEEP: Is this an especially sensitive time for the Fed chairman, Jerome Powell?

HORSLEY: It is. His term as chair expires in February, so President Biden's in the process of deciding whether to reappoint him for a second term. Powell generally gets high marks for his stewardship during the pandemic, and he would almost certainly win easy Senate confirmation. But he is a Republican, and some progressive Democrats would like to see the president pick somebody else, maybe Lael Brainard, who currently sits on the Fed's governing board - so just one more thing to ratchet up the pressure on the Fed chairman this afternoon.

INSKEEP: NPR's Scott Horsley, thanks.

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