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The Fed is not ready to declare victory in its long-running battle against inflation

A MARTÍNEZ, HOST:

The Federal Reserve is not ready to declare victory yet in its long-running battle against inflation. But for today, at least, the central bank is expected to hold interest rates steady. NPR's Scott Horsley explains.

SCOTT HORSLEY, BYLINE: Inflation has cooled off considerably from its peak last summer, but prices are still climbing faster than the Federal Reserve would like. Ordinarily, the Fed tries to fight inflation by raising short-term interest rates, making it more expensive for people to borrow and spend money. The central bank's done that 11 times in the last 20 months. Today, though, the Fed is expected to leave its benchmark rate unchanged. That's partly because the effects of those earlier rate hikes are still being felt, and partly because long-term interest rates are climbing on their own.

GREG MCBRIDE: The rise in long-term rates has done some of the Fed's dirty work for them.

HORSLEY: Greg McBride of Bankrate says long-term interest rates, which are set by the bond market, have climbed sharply in the last two months. That takes some of the pressure off the Fed to act today.

MCBRIDE: They can afford to sit back and not raise short-term interest rates at this point because the move up in long-term rates has been so pronounced, and it has the effect of reducing demand in the economy.

HORSLEY: The average interest rate on a 30-year mortgage, for example, is now close to 8%, the highest it's been since the year 2000. Sky-high mortgage rates have thrown a wet blanket on the housing market. Existing home sales have fallen to their lowest level in more than a dozen years. Despite those high borrowing costs, though, other parts of the economy are still humming as Americans spend freely on cars, travel and entertainment. Last week, we learned that GDP grew at an annual pace of nearly 5% in July, August and September, more than twice as fast as the previous quarter. Blistering growth like that could reignite inflation. McBride says the Fed's alert to that and keeping its options open.

MCBRIDE: The economy's been remarkably robust despite the fastest pace of interest rate increases in 40 years. Now, the Fed may feel the need to raise interest rates at some point down the road simply because the underlying economy is doing as well as it is.

HORSLEY: McBride thinks the Fed's move today will be similar to what it did in September, when policymakers left interest rates unchanged but hinted at another rate hike in the future. The Fed shows no sign that it plans to cut interest rates any time soon. That's a challenge for anyone taking out a car loan or carrying a balance on a credit card, but it's a plus for those who've managed to save money. Some bank savings accounts and CDs are now paying upwards of 5% interest. That's more than enough to outpace inflation.

Scott Horsley, NPR News, Washington.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

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.