A MARTÍNEZ, HOST:
Let's take a closer look now at the Federal Reserve's decision to raise interest rates with economist Claudia Sahm. She's a former section chief for the Federal Reserve and currently chief economist at New Century Advisors. So, Claudia, last time the Fed changed its interest rate was in December, when it lowered them. So why is now the time to raise them?
CLAUDIA SAHM: So the Fed is concerned that inflation is not moving down to 2%. Fed Chair Kevin Warsh - the question he put to the committee is, are you confident that inflation is coming down? And when they met this time, the unanimous answer was, we're not confident without doing a little more - without raising interest rates.
MARTÍNEZ: And how confident are you that inflation will go down by doing this?
SAHM: So I think the Fed took a step in the right direction. They're really trying to contain the inflation, not fight the higher energy prices - just make sure they don't seep into everything else. So I think that's appropriate. But I'm not going to be confident about inflation coming down until I see a real breakthrough in the Middle East and I see a real breakthrough in terms of tariff wars and things like that. So there's a lot that's got to happen to get inflation down, but the Fed is doing its part to keep a bad situation from getting worse.
MARTÍNEZ: President Trump wants the Fed to slash interest rates to 1% or less. So, Claudia, I'm wondering - what would happen if that happened?
SAHM: At this point, if the Fed were to dramatically cut interest rates, I think the risk would be high that we'd end up with even more inflation. Now, there are economies - there are points in time where a 1% inflation rate would be the right thing for the U.S. economy, but that is not the world we are living in right now. So I completely agree with the Fed instead raising rates just a little bit - not a lot - as opposed to a big cut. I just don't think that's the place we're at right now.
MARTÍNEZ: Now, you mentioned some of the outside factors that would make you feel more confident about things. But when it comes to employment, employment has remained fairly strong. Fed Chair Kevin Warsh acknowledged that, quote, saying, "that doesn't mean that individuals aren't searching for a job." But I'm wondering - how did the employment picture, you think, factor into this rate hike?
SAHM: Well, the Fed has two jobs. They need to keep prices stable, so inflation low. But they also have a responsibility to the labor market, so maximum employment. And we're in a moment right now where we can look at the labor market broadly and say it's in a pretty good place. We can't say that if we look at inflation, right? Inflation is too high. So it's appropriate for the Fed to be focused in their decision on fighting inflation, but they always have to keep an eye on the labor market.
And, frankly, there is a risk. Anytime the Fed is raising interest rates, there's a risk that that's going to create costs back on American workers, whether it's how many jobs are out there or how big paychecks get. So, like, they really do have to be careful, and they are being careful, right? They understand the seriousness of this. So I wouldn't say the higher rates have to have negative effects on the labor market, but we need to keep an eye on it. It is a risk.
MARTÍNEZ: What about things as buying homes or buying cars - things that might require a loan?
SAHM: Right. So I think we need to understand - these higher interest rates? This is costly medicine. Like, the Fed is fighting a real problem. Inflation is too high. Americans agree. This is a problem. Affordability - this is an issue. The path to a solution - these higher interest rates? This is pushing more cost in the economy.
The Americans who are out there who are on the fence about buying a home, and now the mortgage rate goes up and they can't buy their home 'cause they have too much in interest costs? They're the ones whose sacrifice is going to help get inflation down. Right? Like, it's - it is a costly process to get inflation down, and it's the people who are most affected by those interest rates. Do I buy the home? Do I buy the car? Do I not? Like, they're the ones on the margin who are going to help kind of quote-unquote cool things off. But that cooling off - that's a pain, right?
MARTÍNEZ: Yeah.
SAHM: I mean...
MARTÍNEZ: And...
SAHM: ...If you have to put off buying.
MARTÍNEZ: And I can't help but think about, you know, further - farther ripple effects. And so, like, say there's a family that wants to scale down their home and maybe move to something else, and that would open up that home for, say, a family that has saved money and can afford to buy. Now no one can move. It seems like everyone is just stuck now with these interest rates going up.
SAHM: I mean, the housing market has been a real issue, frankly, since the pandemic. There's just been lots of disruptions. And we've had - you know, we're talking about mortgage rates increasing from this latest Fed action a little bit. But we've seen really big mortgage rate increases, say, from the depths of the pandemic, which was a time interest rates were low 'cause it was a bad, bad economy, right? So we don't want to go back there. But it does mean this whole ability of people to move around, downsize, upsize homes is just - housing markets have been really - it's been tough for buyers, for sellers. And, frankly, that is not getting better now that we have the interest rates. But we're...
MARTÍNEZ: Yeah.
SAHM: ...On a path. Get things stabilized. We can get to a better place. It's just - there's probably more pain out there before we get to that stable-prices, maximum-employment place.
MARTÍNEZ: Claudia Sahm is a former section chief for the Federal Reserve, and she now works as the chief economist at New Century Advisors. She also publishes a Substack called Stay-At-Home-Macro. Claudia, thanks a lot.
SAHM: Thank you. 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.
