Fed Raises Interest Rates, Iran War and Oil Prices, EU-Canada Alliance

A Martínez (0:02)

President Trump's handpicked Fed chair, Kevin Warsh, did the opposite of what Trump wanted him to do. He raised interest rates.

Michel Martin (0:08)

The president is not happy and pressed the Fed to reverse course and lower rates. How is the new chair reacting to the pressure?

A Martínez (0:14)

I'm A Martinez, that is Michel Martin, and this is Up First from NPR News. From Syria to Portugal, people are protesting higher fuel prices, with the war in Iran showing no sign of ending. Countries are drawing from their oil reserves and Saudi pipelines are under attack.

Michel Martin (0:31)

Canada's Prime Minister will address the European Parliament today. After an invitation to become the EU's first associate member, Trump threatened more tariffs if he decides it's a hostile act. Stay with us, we'll give you news you need to start your day.

Interest rates are higher this morning after the Federal Reserve raised them for the first time in three years.

A Martínez (0:54)

The vote on Wednesday was unanimous, and now the Fed's benchmark short-term interest rate is a quarter of a percentage point higher, which is exactly the opposite of what President Trump wanted when he chose a new Fed chair.

Michel Martin (1:07)

And Piers, I'm going to sell you, because you have to walk us through the latest good morning.

Alina Selger (1:09)

Hello, hello.

Michel Martin (1:10)

Okay, so we know what happened. Let's talk about why and what it means that the Fed has raised the interest rate.

Alina Selger (1:16)

Well, it means the Federal Reserve is making the move to cool down inflation. I'll tell you my corny metaphor for this. You know how in a fire there's like a red box that says, in case of emergency, break glass. Well, if you think of inflation as a fire, the rate hike is like the Fed saying, emergency, and breaking that glass to grab the extinguisher. But the Fed is also hoping they don't have to blast away for a long time, which is to say the Fed's rate setting committee signaled one more rate hike this year, and that's it.

Michel Martin (1:45)

Not quite a dad joke, but we'll take it.

Do my best. Let's get to the political drama here. Trump pressured the previous Fed chair Jerome Powell to lower interest rates. He even threatened to fire Powell over this. Not clear that he could, but he threatened it. So Powell's term as chair ended, Trump picked a replacement, Kevin Warsh, and now pretty soon after Warsh took over, the Fed raised rates. So where does this leave the Fed chair now?

Alina Selger (2:05)

Yeah, last night, Trump again on social media pressed the Fed for lower rates. This dynamic came up a lot in Warsh's press conference yesterday.

Like Powell, Warsh refused to engage. He kept saying the Fed is independent, the Fed should stay in its lane, and he has nothing to say about the president.

Michel Martin (2:20)

Say more about the argument for raising rates.

Alina Selger (2:22)

So fundamentally, the Fed has a certain credibility maintain, and the data is the data, which is what Warsh essentially said. The inflation trends are simply not improving.

Kevin Warsh (2:32)

The plain fact is that inflation is too high and has been for too long.

Alina Selger (2:38)

Inflation has been above the Fed's goal for five years.

Warsh made the case that this is a strong economy to absorb this rate hike. People are employed, they're still shopping, but actually just yesterday we got the latest date on retail sales that showed people spending more across the board, including on fun things like hobby supplies and sporting goods. The Fed has to walk a narrow line, putting the brakes on the economy without tipping it into a recession, and that's part of why this rate hike is not huge, only a quarter of a percent.

Michel Martin (3:05)

And also you were reminding us that actually it wasn't just Warsh, it was all 12 members of the Fed Ratesetting Committee voting unanimously. Okay, so for people who aren't economists, how does a rate hike by the Fed work to fix inflation?

Alina Selger (3:16)

Raising interest rates makes it more expensive to borrow money, which theoretically means people and businesses will think long and hard before getting a mortgage or a business loan, buying a car, shopping on credit. And that kind of cool down forces prices to stay in check.

Michel Martin (3:31)

But only theoretically though?

Alina Selger (3:32)

Well, one big factor right now is the fact that the big driver of current inflation is the war in Iran. It has pushed up the cost of gasoline and the price of diesels at historic highs. And that's definitely not something an interest rate hike can fix. The Fed also has no say on tariff policy, which is another driver. And we have the fact that wages have not been keeping pace with inflation. For five months now, people's paychecks have been losing their buying power. Warsh hopes the stable prices will help families keep their heads above water.