STEVE INSKEEP, HOST:
President Trump keeps pressuring Federal Reserve Chair Jerome Powell to lower interest rates. The Fed keeps making independent decisions. And yesterday, the central bank said it is holding its benchmark interest rates steady for the fourth time in a row. Here's Powell yesterday.
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JEROME POWELL: Despite elevated uncertainty, the economy is in a solid position. The unemployment rate remains low, and the labor market is at or near maximum employment. Inflation has come down a great deal, but has been running somewhat above our 2% longer-run objective.
INSKEEP: Jerome Powell is one of the few people whose job matters so much that it is news when he chooses to do nothing. So we've called back Diane Swonk. She's chief economist at the accounting firm KPMG U.S. and can help us see why this matters. Good morning.
DIANE SWONK: Good morning.
INSKEEP: What do you think Powell is trying to tell us?
SWONK: Well, basically, he's saying, there's no news here. Move along. And we're not going to cut rates any time soon because of the threat of inflation. And that's really important because if this had been a different world, the Fed would already be cutting rates back to what it considers neutral - not the 2% cut we heard recommended yesterday, but actually what they think is neutral, which is close to 3%. They're at 4.25% to 5% - 4.5% right now. But they're willing to hold back a little bit because they're uncertain about how long and how big the bump in inflation will be due to tariffs, something that Powell made the point of over and over again yesterday.
INSKEEP: Now, this is very interesting. Essentially, Powell is saying, I'd like to cut interest rates, but the president might still go through with huge tariffs. We don't know what's going to happen. And he's saying - I wonder if he's also saying, I'd like to cut interest rates, but you might be diving into a war soon.
SWONK: There's a lot going on, and it's not just that the tariffs - you know, there might be more tariffs. It's the tariffs we've seen already are much more than anybody anticipated. And they've come through in a staggered way and caused supply chain disruptions that are really reminiscent of the pandemic. And we know what happened then. Now we have - we don't have the cushion of COVID-era stimulus to support the kind of inflation we saw then, but some kind of bump in prices.
One point Powell made over and over again is that somebody's got to pay this tax. And whether it be through production cuts, whether it be squeezing profit margins at retailers and layoffs there or an increase in prices, or all of the above, which is what the Fed is essentially forecasting - stagflation, which is a toxic mix of rising unemployment and rising inflation. Not like the 1970s, but enough that the Fed has to hold off until they see the full effects dissipate. And they want to see that inflation is going to be coming back down again. Unfortunately, what they're forecasting is that that's not likely until unemployment moves up. Not enough to trigger a recession, but we've already seen, in this economy, it doesn't take...
INSKEEP: Yeah.
SWONK: ...An actual recession to feel like one.
INSKEEP: So what does it mean for me? If I'm a consumer, if I'm a homebuyer, if I'm a homeseller, if I'm just trying to deal with a credit card bill, what does it mean for me that interest rates are not coming down in the way the Fed might have liked?
SWONK: Well, it means that it's going to stay more expensive to get hold of that credit. And that's the, you know, end of the line. That is where we're at. And the reason for that is that he's trying to constrain demand to meet a supply-constrained economy now. And the Fed is still smarting, and so are consumers, from the blistering inflation we saw in the wake of the pandemic. And that inflation itself gives us a bit of a muscle memory about inflation that you don't want with yet another supply shock. And this isn't just a one-time shock. It's an on-again, off-again shock that's caused many more problems that could be more inflationary, and the Fed can't move until they know we've passed that point.
INSKEEP: Very briefly, is it good for me if I'm trying to save some money? I can get a little higher interest rate on it.
SWONK: You can get a little higher interest rate. There's no question about that.
INSKEEP: Diane Swonk is chief economist at KPMG U.S. Thanks for the analysis. Really appreciate it.
SWONK: Thank you. Transcript provided by NPR, Copyright NPR.
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