LEILA FADEL, HOST:
For more analysis on the Fed's decision expected today, Mark Zandi joins me now. He's chief economist with Moody's Analytics. Good morning, and welcome back.
MARK ZANDI: Good morning, Leila.
FADEL: So as we just heard from Scott, the Fed is widely expected to raise rates by a quarter percentage point or so. How did we get here?
ZANDI: Well, it's inflation. Inflation is well above the Federal Reserve's target, which is about 2%. Depending on the inflation measure, we're at 3%-plus. And of course, that's cutting into people's real incomes and making life more difficult financially. So the Fed's focused on that, and that's why they're going to raise rates.
And most fundamentally, though, the higher inflation is primarily due to the war - the Iran war and the higher oil and gasoline prices that we're paying at the pump. Diesel prices are at record highs. You know, gas prices are pretty back - are back pretty close to where they were just a few months ago when the war was raging. That's the key. And there's other factors. The tariffs certainly aren't helping. That's adding to inflationary pressures. Even the restrictive immigration policy's having an impact. So a lot of different factors are coming together, but inflation is just too high, and that's what the Fed's focused on.
FADEL: Now, the president has really tried to exercise influence over interest rates. He doesn't want them to go up. If the Fed does raise rates today, do you expect more tension or renewed tension between the president and the Fed, especially just before the midterm elections?
ZANDI: Well, Leila, maybe the word will be drama. I expect a lot more drama, for sure. You know, the president's been point-blank clear on this. He wants the Fed to lower interest rates, let alone raise them. So there's no - but there's no appetite at the Fed for that, so that's not going to happen. So yeah. I expect there might be a fair amount of fireworks and increased tension here.
But, you know, at the end of the day, the Fed is - you know, has to make sure that inflation comes back in because if they don't, the - we'll see even higher long-term interest rates. You know, we'll be paying more for mortgages and everything else. So it would be very counterproductive at this point to cut interest rates. So yeah. I would buckle up. I expect more drama.
FADEL: Do you expect there to be dissent among voting members over how to proceed?
ZANDI: Yeah. I would. You know, it's a reasonable debate. I mean, inflation - nobody's going to debate that inflation's too high. It clearly is. It's a real problem. You know, Americans are feeling it there. That's why most Americans just feel pretty bad about their financial situation. So there's no doubt about that.
But it - the question is - can higher interest rates impact the root causes of the inflation? I mean, you know, if it's the war, you know, if it's tariffs, if it's immigration policy, then you raise interest rates, it's not really going to make a difference here. And you might risk pushing the economy into a much weaker state. It's already pretty soft. You know, pretty tough to create jobs in this economy. You might even cause a recession. So that's a reasonable debate. And as a result, I wouldn't be surprised if there weren't some dissent - these dissents.
FADEL: What do you think is weighing most heavily on the Fed's mind as they look at raising rates?
ZANDI: Well, I think they're - you know, they're wondering the same things that we just articulated. You know, will it work? You know, will the higher rates work to lower inflation? Or, you know - and to what degree will it damage the economy? I mean, you can make a strong argument that, you know, the economy is on the soft side. We're not creating a whole lot of jobs. You know, hiring is very low. Wage growth is very weak. It's decelerating. You know, all those things. And if you layer on top of that higher interest rates - and that's how the Fed gets inflation down, by slowing growth by raising interest rates. If you do that, and the economy's already pretty soft, you know, will that push you into a situation where the economy's, you know, weak, weaker or even, you know, potentially going into recession? I think that's what's weighing on their minds the most.
FADEL: If the Fed does raise rates, how does that - what does it mean for customers, consumers, beyond borrowing?
ZANDI: Well, it - you know, clearly, it means higher rates, you know, for everything. I mean, credit card rates are going to go up. Rates on home equity lines of credit are going to go up. You know, if you're a small-business person or a mid-sized company that borrows from a bank, you know, your borrowing costs are going to go up - going to make it more difficult for you to go out and hire and to invest. Most obviously, mortgage rates. I mean, you know, we all focus on the 30-year fixed-rate mortgage. It's now well over 7%. There's only one other brief period when it was higher in the last 25 years. And, you know, you combine that with high house prices, and it's just very unaffordable to buy a home. And that's a key litmus test for many Americans in thinking about their own financial situation.
So borrowing costs go up. And, you know, it also puts the stock market at risk. I mean, the stock market has been going skyward because of the boom in AI stocks, and that's been a key source of growth. And stock prices are ultimately - particularly AI stocks - they're, for various reasons, very sensitive to interest rates. So we could see pressure on the stock market, which could reverberate back on the economy. So there's lots of different ways these higher rates are going to affect all of us.
FADEL: That's Mark Zandi, chief economist with Moody's Analytics. Thank you.
ZANDI: Thanks, Leila. Transcript provided by NPR, Copyright NPR.
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