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Fed holds interest rates steady... for now

JUANA SUMMERS, HOST:

The Federal Reserve decided to hold interest rates steady today, but that doesn't mean the Fed's battle against inflation is over. Fed policymakers signaled that there could be one more rate hike before the end of the year. Inflation has come down a lot from its four-decade high last year, but there are still challenges ahead, including the prospect of triple-digit oil prices. NPR's Scott Horsley joins us now. And, Scott, the Fed has raised rates aggressively over the last year and a half in its efforts to curb inflation. So why have they decided to take a break now?

SCOTT HORSLEY, BYLINE: You know, the Fed is trying to strike a balance, Juana. They want to push borrowing costs high enough to get prices under control but not so high that they torpedo the economy. And when they started this process, their benchmark rate was close to zero, so they had a long way to go. After 11 rate hikes in the last 18 months though, Fed Chairman Jerome Powell says they're now pretty close to where they want to be.

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JEROME POWELL: We have come very far, very fast in the rate increases that we've made. And I think it was important at the beginning that we move quickly, and we did. As we get closer to the rate that we think the stance of monetary policy - that we think is appropriate to bring inflation down to 2% over time, you know, the risks become more two-sided.

HORSLEY: That is, the Fed now has to worry more about pushing rates too high. So Powell and his colleagues are going to take a breather, see how the economy reacts. Most members of the rate-setting committee still think, though, there will be one more rate hike either in November or December.

SUMMERS: OK, we'll keep watching that. I mean, Scott, so far, the economy seems to have weathered these rate hikes pretty well. So does that mean the Fed has achieved that elusive soft landing?

HORSLEY: You know, the economy has done pretty well. We've seen a drag in some sectors, notably the housing market. But overall, consumer spending and the job market have fared better than a lot of forecasters expected. Fed policymakers today raised their forecast for GDP growth. They lowered their forecast for unemployment. Powell says he thinks they might be able to get inflation under control without tipping the economy into recession.

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POWELL: I've always thought that the soft landing was a plausible outcome, that there was a path.

HORSLEY: You know, Powell says that path has seemed very narrow at some points in the last year and a half. Right now, maybe it looks a little bit easier. But he acknowledged there are still headwinds facing the economy, so the outcome is not entirely under the central bank's control.

SUMMERS: Give us some examples of those headwinds he's talking about.

HORSLEY: Well, one is what you mentioned - the uptick in oil prices and gasoline prices which has led to higher headline inflation the last couple of months. You know, energy prices tend to bounce up and down a lot. But Powell said if oil prices stay up, that could do some damage.

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POWELL: Energy prices are very important for the consumer. This can affect consumer spending. It certainly can affect consumer sentiment. I mean, gas prices are one of the big things that affects consumer sentiment. It really comes down to how persistent, how sustained these energy prices are.

HORSLEY: Another wild card is the ongoing UAW strike. Powell was careful not to take sides in that labor dispute, but if it goes on for a long time, that could affect the broader economy and inflation. We've also got the looming threat of a government shutdown. Now, government shutdowns typically don't have a big economic impact. But if one were to happen, the government agencies that gather economic data could be sidelined for a while. And it's - of course, it's harder to make a soft landing when you're flying blind.

SUMMERS: Makes sense to me. NPR's Scott Horsley, thanks as always.

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

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.

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.