AMARTÍNEZ, HOST:
Today, Federal Reserve officials begin a two-day meeting. They're likely to raise interest rates as we deal with record inflation, labor shortages and rising energy prices. For more insight on this, we turn to David Wessel, director of the Hutchins Center of the Brookings Institution. David, so how do you think this meeting is going to go?
DAVID WESSEL: Good morning, A. Well, I think this meeting is a milestone in a couple of respects. First, Fed officials are meeting in person at their Washington headquarters for the first time in more than two years. And second, as you said, the Fed has been holding short-term interest rates at zero since the pandemic began. And tomorrow, they're likely to announce a quarter-point increase in interest rates, which will be the beginning of a series of rate increases aimed at slowing the economy a little bit to bring inflation down. The big question really now is, how far and how fast will the Fed raise interest rates? And we'll be looking to get some clues from that tomorrow when Fed officials issue a new set of economic projections and, importantly, we hear Fed Chair Jay Powell at his press conference.
MARTÍNEZ: Is this all too little, too late though?
WESSEL: Well, look, the Fed is definitely disappointed and surprised that inflation is as virulent as it is - 7.9 percent increase in consumer prices in the last year. If it had to do over again, I think it probably would have made this interest rate increase last year. The question really is, how far will it have to take interest rates to break the back of inflation - it surely is not going to get to its 2% target this year - and will it push the economy into recession in order to beat back inflation?
MARTÍNEZ: What about the ripple effects of Russia's war on Ukraine - rising prices for energy, food? I mean, the financial market turbulence - how has that complicated the Fed's job?
WESSEL: Well, quite a bit. Look, when the pandemic hit, the Fed pushed the gas pedal to the floor by cutting short-term rates to zero and then turbo-charged that by buying $5 trillion in bonds to push down longer-term interest rates, like the ones we pay on mortgages. Then, as the economy grew strongly last year, the unemployment rate fell, the Fed decided it was time to turn off the turbochargers and begin to pull its foot off the gas pedal. And then came Ukraine - higher energy prices. That produces a really ugly mix. It means the economy will grow more slowly, but it also means we'll have more inflation.
And as if that weren't enough, the Fed had been hoping that global supply chains would return to normal soon, maybe relieving some of the upward pressure on prices. But now China is locking down Shenzhen, the big industrial hub there where Apple iPhones and other products are made for export to the U.S., and that's likely to keep prices rising for a while. So it's a tough mix.
MARTÍNEZ: Yeah. And, David, you know, in the past, rising oil prices have led to a recession in the U.S. So how likely is that this time?
WESSEL: Well, look, the risks have definitely risen. Economists at Goldman Sachs said the other day that they put the odds of a recession at 35%. That's up from 10% last year. And I was talking to some of my colleagues in the Brookings Economic Studies Department the other day about this, and several of them put the odds at 50-50 or even a little higher.
I mean, the Fed has to worry about raising rates too little and failing in its quest for price stability and raising rates too much as the economy slows and inadvertently triggering a recession. But the U.S. economy has a lot of momentum now. The job market is strong. Consumers have been spending readily, and it isn't as vulnerable to oil price increases as it was in the 1970s.
MARTÍNEZ: One more thing quickly. I know President Biden's trying to fill three vacancies on the seven-member Federal Reserve Board. One of his nominee's in trouble. What's the latest on that?
WESSEL: Right. The president nominated Sarah Bloom Raskin to be vice chair of the Fed for bank supervision. She ran into implacable Republican opposition. And yesterday, Democratic Senator Joe Manchin said he'd oppose her because of comments she's made in the past about using the Fed to fight climate change. I expect she'll pull out, and that'll clear the way for confirmation of the other two Biden nominees and for confirmation of Jay Powell for a second term as Fed chair.
MARTÍNEZ: That's Dave Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. David, thanks.
WESSEL: You're welcome. Transcript provided by NPR, Copyright NPR.