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What to expect from the Federal Reserve meeting this week

AYESHA RASCOE, HOST:

The country got some good news and some bad news about the economy last week. The economy is growing for the first time this year, but prices are still going up. To put it all in perspective and to look forward to a Federal Reserve meeting this coming week is Michael Hanson, executive director and global economist at JPMorgan Chase.

Welcome to the show.

MICHAEL HANSON: Thank you.

RASCOE: So the gross domestic product rose at a better-than-expected 2.6% annual rate from July through September. But that news didn't seem to make economic observers, like, all that excited. Like, why not?

HANSON: Yeah, I think that there's a lot of cross-currents in the economy right now. And so what you did see was an increase in GDP, which means that the economy is producing more strongly than before. And it's against the backdrop where the labor market's very tight. But at the same time, you've got very high inflation, as you said. You've got the Fed raising interest rates, and that's resulted, for example, in some notable softness in the housing market. So I think overall, there's a mixed sort of message coming out of the economic data of late.

RASCOE: So the higher the Fed's target goals, the more expensive it is to borrow. And that's supposed to slow down spending. And that's supposed to control inflation. Like, that's the whole goal. When is it going to work, I guess, is the question.

HANSON: Yeah. The challenge for central bankers is the oft-cited quip from Milton Friedman that monetary policy works with long and variable lags. So the Fed was a little late to get started. And inflation got, I think, much higher than they ended up being comfortable with. And so they've had to move fairly aggressively so far since March of this year. And they're probably not done because it's not clear that they've reached a level of interest rates that will be sufficient to slow the economy but more importantly, convince people that inflation's not going to stay high. So we think the Fed will probably be hiking a bit further. But the pace in which the Fed is going to be increasing interest rates should start to slow, in our view, in December because you're getting closer to a level that the Fed hopes and thinks should be good enough to cool the economy enough to bring inflation down gradually over time and hopefully not push the economy into the recession. And that's the real challenge that the Fed faces.

RASCOE: So what are we on the road to? Are we on the road to that soft landing that everyone keeps talking about, where we ease out of inflation without a recession? Or is it too soon to really know?

HANSON: Yeah, the crystal ball is a bit cloudy on this one - right? - because of all the cross-currents we discussed earlier. So the labor market has remained arguably stronger than I think a lot of people, including Fed officials, had thought it would. And inflation is starting to come down, although gradually. And so I think what we've learned over the last several months is that despite the big rise in, you know, gasoline prices and despite the ongoing supply chain disruptions, the U.S. economy actually has a fair bit of resiliency. And so that probably means that on the one hand, we're not slipping into recession in the next month or two. On the other hand, though, it means the Fed may have a little more work to do. And I think the risk is less that the economy is simply going to run out of steam in the near term. But now the concern, as we mentioned, is that the Fed may actually have to hit the brakes a bit harder and stomp on them a bit longer, and that ultimately could push the economy into recession.

RASCOE: There are some brands that say that they're going to, like, pull back a bit, maybe pulling back from advertising on tech platforms and stuff like that, signaling that maybe they think we're not headed for a soft landing or people saying, look - things may get rough, and they're pulling back. Like, is that a concern?

HANSON: Yeah, well, there's no way you're going to slow the economy without pulling back to some extent, right? And so the goal for the Fed, of course, is to try to find a middle ground where they slow the economy enough that we don't continue to have very rapid high inflation and inflation that potentially could get embedded in the economy - maybe not as bad as in the 1970s and early '80s, but one that would be, you know, uncomfortably high for a longer period of time. But it's very hard to know for sure what level of interest rates will deliver that outcome. The Fed will only really know if they're successful when they're able to view it in the rearview mirror and see if the economy managed to hold up or slow down into a recession.

RASCOE: And so I understand that historically, over the last 50 years, where we are now in terms of interest rates is still pretty much on the low end. I don't want to say that we've gotten spoiled over the past 10 or 20 years with low interest rates. But are we as consumers going to have to get used to higher interest rates than we've had for the past two decades?

HANSON: Certainly for the next several months, if not a year or more, borrowing costs are likely to remain high. The flip side is it probably means that returns on things like savings accounts will have picked up, as well, right? So it's a generally higher rate of interest than we've seen, both for savers and for borrowers. And so that is a bit of a shift and that may impact people's behavior and psychology.

RASCOE: Michael Hanson, executive director and global economist at JPMorgan Chase, thank you so much for joining us.

HANSON: Thank you very much. Transcript provided by NPR, Copyright NPR.

Ayesha Rascoe is a White House correspondent for NPR. She is currently covering her third presidential administration. Rascoe's White House coverage has included a number of high profile foreign trips, including President Trump's 2019 summit with North Korean leader Kim Jong Un in Hanoi, Vietnam, and President Obama's final NATO summit in Warsaw, Poland in 2016. As a part of the White House team, she's also a regular on the NPR Politics Podcast.