SARAH MCCAMMON, HOST:
The Federal Reserve meets this week, and there is a lot to talk about. The U.S. is in economic recovery mode as we emerge from the worst days of the pandemic. Jobs are coming back, but slowly. And last week, the Labor Department released data showing that consumer prices have risen 5% over the past year.
For a look at what to expect from the Fed meeting, we turn now to David Wessel. He's director of the Hutchins Center at the Brookings Institution. Good morning, David.
DAVID WESSEL: Good morning, Sarah.
MCCAMMON: So inflation is at a 5% clip. That's eyebrow-raising, well above the Federal Reserve's inflation target of 2%. How do you expect the Fed will react to this?
WESSEL: Well, I think they're going to read very carefully. Fed officials are predicting a surge of inflation as consumers emerge from the pandemic lockdown and there have been some supply shortages. But they've insisted that it will be, in their words, transitory. And financial markets seem to agree. But inflation has been faster than they expected. And they're hearing growing unease from some corners that this might be more than temporary, especially if this leaves consumers and businesses and financial markets to expect more inflation in the future. So I think the Fed chair, Jay Powell, is going to really try and underscore that the Fed is willing to act if inflation does pick up momentum, but to reassure everyone that the Fed isn't rushing to hit the monetary brakes while so many people are still out of work. And that's going to be a very delicate balance for him to strike.
MCCAMMON: Right. And the Fed has been holding interest rates near zero since the beginning of the pandemic. As the economy picks up, will there be talk about raising interest rates?
WESSEL: No, not yet. Besides cutting its short-term interest rate to zero, as you said, the Fed has been buying $120 billion a month in long-term bonds, which is, among other things, helping to keep mortgage rates low. And the Fed has told us that it will, as it puts it, taper those bond purchases first. And only after it does that, it will raise interest rates. Now, it hasn't said when it expects to begin tapering, but it's beginning to talk about talking about tapering, as one official put it. I think it's very unlikely that Chair Powell will be specific at the press conference Wednesday afternoon, although reporters are going to press him for a timetable. But as the economy continues to improve, the Fed is going to probably offer a timetable later this summer.
One thing to watch on Wednesday is Fed officials at this meeting will show us, each of them, when they expect it will be appropriate to raise interest rates. In March, seven of the 18 saw the first rate hike in 2023; the rest saw it afterwards. So Fed watchers are really wondering if they'll be more policymakers joining the club of let's raise rates in 2023.
MCCAMMON: And really briefly, David - how is the Fed's approach today different than in the past? - in about 15 seconds.
WESSEL: It's different in a lot of ways. Basically, they used to try and keep inflation at 2%, and they let bygones be bygones. Now they're saying if inflation is below 2% for a while, they're going to let it run above 2%...
MCCAMMON: OK.
WESSEL: ...For a time to make up for that.
MCCAMMON: All right.
WESSEL: And that's really an experiment in something new.
MCCAMMON: Got to stop you there. David Wessel's director of the Hutchins Center at the Brookings Institution. Transcript provided by NPR, Copyright NPR.