As Fed raises interest rates to combat inflation, central banks around the world follow

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• Judy Woodruff:

  As we said a moment ago, another major news story today, and that is the Federal Reserve once again raising its key interest rate by three-quarters-of-a-point in order to beat back inflation.

  So far, the Fed has increased rates by three points this year. The benchmark short-term rate has now reached its highest level since 2008. And with Fed Chair Jay Powell saying today that — quote — "There's still a long way to go," it looks like the Fed's key rate will jump at least one more point before year's end.

  Other countries are following suit, posing more risks.

  Economics correspondent Paul Solman has the story.

• Paul Solman:

  The Fed's unusually aggressive third straight three-quarters-of-a-point interest rate hike is part of its ongoing struggle to tame inflation.

  Chairman Jay Powell today:

• Jerome Powell, Federal Reserve Chairman:

  Inflation is running too high. You don't need to know much more than that. If that's the one thing you know, you know that this committee is committed to getting to a meaningfully restrictive stance of policy and staying there until — until we feel confident that inflation is coming down.

• Paul Solman:

  Despite previous rate hikes, Powell noted that jobs remain unfilled throughout the economy.

• Jerome Powell:

  So far, there's only modest evidence that the labor market is cooling off. We think that we will need to bring our funds rate to a restrictive level and to keep it there for some time.

• Paul Solman:

  Former New York Fed Executive Vice President Krishna Guha explained the mechanics.

  Krishna Guha, Former Executive Vice President, Federal Reserve Bank of New York: The Federal Reserve is trying to increase the cost of borrowing, tighten what are called financial conditions more broadly, in order to reduce demand in the economy, and bring it into a better balance with supply, which continues to be somewhat impaired following the pandemic.

  The hope is that, by doing so, they can help generate a reduction in what is currently very elevated inflation.

• Paul Solman:

  What are the risks?

• Krishna Guha:

  It raises the risk that, at some point, at least, the Fed might overshoot and raise rates too much, pushing the economy into a recession that perhaps didn't need to happen.

• Paul Solman:

  Today, Chair Powell acknowledged that risk.

• Jerome Powell:

  No one knows whether this process will lead to a recession or, if so, how significant that recession would be. That's going to depend on how quickly wage and price inflation — inflation pressures come down, whether expectations remain anchored, and whether, also, do we get more labor supply, which would help as well?

• Paul Solman:

  Now, it's not just the Federal Reserve. Most central banks in the world are raising rates.

• Krishna Guha:

  The effects of a rate hike in one country, of course, spills over into others as well. So the whole is more than the sum of the parts of this tightening. And that certainly presents risks to growth.

  But, at the same time, of course, it is the case it's very important for central banks to avoid a return to the 1970s, where higher invariable inflation became entrenched, causing great misery, for households, difficulties, for businesses, poor economic performance.

  So they are doing this for a reason. The problem of course, is that it's going to be hard to thread the needle, restore price stability, while sustaining ongoing global growth and employment.

• Paul Solman:

  Already here in the U.S., higher interest rates have hiked mortgage rates above 6 percent for the first time since 2008, slowing home sales. And, of course, the stock market is down.

• Krishna Guha:

  When the Fed raises the interest rate, and particularly, as today, signals that it expects to raise rates appreciably further from here, and that pushes up all borrowing costs, and longer-term borrowing costs, as well as short-term borrowing costs, on your mortgage, for instance, costs on an auto loan, costs on other consumer credit.

  It's also the case that, when interest rates go up, the value of assets that generate dividends, like shares, also tend to go down.

• Paul Solman:

  What next? Well, today the Fed revised its median forecasts for unemployment and inflation upward, predicting 4.4 percent unemployment by the end of next year and a core inflation rate of 4.5 percent by December, and projected they would raise the Fed funds rate by at least another one-and-a-quarter-point by the end of the year.

  We will all get to see if those projections are more accurate than the recent Fed forecasts that so underpredicted the inflation we now face.

  For the "PBS NewsHour," Paul Solman.