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Fed is expected to boost its benchmark interest rate by a quarter percentage point

STEVE INSKEEP, HOST:

The Federal Reserve has a decision to make this afternoon. The central bank will determine whether to keep raising interest rates. The effort to bring down inflation would seem to call for a rate increase. Concern about the banking system may argue against that. Forecasters expect the central bank to push against inflation, boosting the benchmark interest rate by a quarter percentage point. Once again, that would make it more expensive to get a car loan or carry a balance on your credit card. NPR's Scott Horsley joins us now. Hey there, Scott.

SCOTT HORSLEY, BYLINE: Good morning, Steve.

INSKEEP: OK, people had been suggesting the Fed might take a break from raising rates, but I guess not.

HORSLEY: Right. Those concerns about the banking system have not entirely been put to rest. But banks do seem to be on more solid ground now than they did a week or so ago. Yesterday, Treasury Secretary Janet Yellen said big depositors are not pulling money out of banks the way they were a week or so ago. Bank stocks have rebounded in recent days. As a result, people now expect the Fed to kind of return to its regularly scheduled program, which means another hike in interest rates. One might read that as a vote of confidence that the banking system is stable enough to handle higher interest rates. In fact, economist Kathy Bostjancic, who's with Nationwide, says at this point, it might be alarming if the Fed decided to stand pat.

KATHY BOSTJANCIC: I think it does come down to market psychology. If the Fed Reserve decided not to raise rates, it does raise that question of, uh-oh, what does the Fed know that we don't know, and are things much worse than we perceive?

INSKEEP: Wow.

HORSLEY: Obviously, that's not the signal the Fed wants to send. As of this morning, oddsmakers put the likelihood of a quarter-point interest rate hike at close to 90%.

INSKEEP: Well, what does that say about the fight against inflation, then?

HORSLEY: It says the fight's not over. Prices certainly aren't going up as fast as they were last summer, when annual inflation topped out around 9%. But at 6% in February, inflation is still much higher than the Fed would like. In fact, just a couple of weeks ago, before these bank failures rattled the market, there was some expectation the Fed might go with an even larger half-point interest rate hike today. That's pretty much been taken off the table now. But Fed policymakers are definitely concerned about inflation. In particular, they're worried that the price of services, like airline tickets and streaming TV subscriptions, is still climbing at a pretty rapid rate. A quarter-point interest rate hike today would push the Fed's benchmark rate to just under 5%. That's up from near zero a year ago. That's a very aggressive increase, and it's designed to make people think twice about borrowing and spending money.

INSKEEP: Scott, I know the Fed tries not to surprise people, to telegraph where they're going next with interest rates. So how much higher might they go?

HORSLEY: Well, that's a good question. The forecast we got from Fed policymakers back in December suggested there might be one more quarter-point rate hike in store after today. We'll get an updated forecast from Fed officials this afternoon, and we'll see if that, you know, end state changes. Just before the banking crash, a lot of people thought rates would have to go higher in order to get a handle on this stubborn inflation. But now that's not so sure. The troubles at Silicon Valley Bank and Signature Bank could make other banks more stingy about making loans. And Bostjancic says that could put the brakes on the economy in the same way higher interest rates do.

BOSTJANCIC: If that credit starts to get choked off - credit is the grease that makes the small businesses' wheels run and makes the overall economy run. And you're going to have a pretty big - I would expect a pullback.

HORSLEY: Now, a slowdown like that would help to curb inflation. Unfortunately, it would also make it more likely the economy tips into recession.

INSKEEP: NPR's Scott Horsley, thanks.

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

Steve Inskeep is a host of NPR's Morning Edition, as well as NPR's morning news podcast Up First.
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.