Brookings Institution

Bad News From the Fed? We’ve Been Here Before.

The Federal Reserve’s decision to raise interest rates again is hardly a positive development for anyone with a job, a business or an investment in the stock or bond market.

But it isn’t a great shock, either.

This is all about curbing inflation, which is running at 8.3 percent annually, near its highest rate in 40 years. On Wednesday, the Fed raised the short-term federal funds rate for a third consecutive time, to 3.25 percent, and said it would keep increasing it.

“We believe a failure to restore price stability would mean far greater pain later on,” Jerome H. Powell, the Fed chair, said. He acknowledged that the Fed’s rate increases would raise unemployment and slow the economy.

last time severe inflation tested the mettle of the Federal Reserve was the era of Paul A. Volcker, who became Fed chair in August 1979, when inflation was already 11 percent and still rising. He managed to bring it below 4 percent by 1983, but at the cost of two recessions, sky-high unemployment and horrendous volatility in financial markets.

around 6 percent — and had set the country on a path toward price stability that lasted for decades.

The Great Moderation.” This halcyon period lasted long after he left the Fed, and ended only with the financial crisis of 2007-9. As the Fed now puts it on a website devoted to its history, “Inflation was low and relatively stable, while the period contained the longest economic expansion since World War II.”

mandates — “the economic goals of maximum employment and price stability”— as new information arrived.

Donald Kohn, a senior fellow at the Brookings Institution in Washington, was a Fed insider for 40 years, and retired as vice chair in 2010. With his inestimable guidance, I plunged into Fed history during the Volcker era.

I found an astonishing wealth of material, providing far more information than reporters had access to back then. In fact, while the current Fed provides vast reams of data, what goes on behind closed doors is better documented, in some respects, for the Volcker Fed.

That’s because transcripts of Fed meetings from that period were reconstructed from recordings that, Mr. Kohn said, “nobody was thinking about as they were talking because nobody knew about them or expected that this would ever be published, except, I guess Volcker.” By the 1990s, when the Fed began to produce transcripts available on a five-year time delay, Mr. Kohn said, participants in the meetings “were aware they were being recorded for history, so we became more restrained in what we said.”

So reading the Volcker transcripts is like being a fly on the wall. Some names of foreign officials have been scrubbed, but most of the material is there.

In a phone conversation, Mr. Kohn identified two critical “Volcker moments,” which he discussed at a Dallas Federal Reserve conference in June. “In both cases, the Fed moved in subtle ways and surprised people by changing its focus and its approach,” he said.

Congress, financial circles and academic institutions. Economics students may remember Milton Friedman saying: “Inflation is always and everywhere a monetary phenomenon.”

For Fed watchers, the change in the central bank’s emphasis had practical implications. Richard Bernstein, a former chief investment strategist at Merrill Lynch who now runs his own firm, said that back then: “You needed a calculator to figure out the numbers being released by the Fed. By comparison, now, there are practically no numbers. You just need to look at the words of Fed statements.”

The Fed as Psychologist

The Fed’s methods of dealing with inflation are abstruse stuff. But its conversations about the problem in 1982 were pithy, and its decisions appeared to be based as much on psychology as on traditional macroeconomics.

As Mr. Volcker put it at a Federal Open Market Meeting on Oct. 6, 1979, “I have described the state of the markets as in some sense as nervous as I have ever seen them.” He added: “We are not dealing with a stable psychological or stable expectational situation by any means. And on the inflation front, we‘re probably losing ground.”

17 percent by March 1980. The Fed plunged the economy into one recession and then, when the first one failed to curb inflation sufficiently, into a second.

unemployment rate stood at 10.8 percent, a postwar high that was not exceeded until the coronavirus recession of 2020. But in 1982, even people at the Fed were wondering when the economy would begin to recover from the damage that had been done.

The Pivot in 1982

The fall of 1982 was the second “Volcker moment” discerned by Mr. Kohn, who was in the room during meetings. The Fed decided that inflation was coming down — although in September 1982, it was still in the 6 to 7 percent range. The economy was contracting sharply, and the extraordinarily high interest rates in the United States had ricocheted around the world, worsening a debt crisis in Mexico, Argentina and, soon, the rest of Latin America.

Fed meeting that October, when one official said, “There have certainly been some other problem situations” in Latin America, Mr. Volcker responded, “That’s the understatement of the day, if I must say so.”

Penn Square Bank in Oklahoma had collapsed, a precursor of other failures to come.

“We are in a worldwide recession,” Mr. Volcker said. “I don’t think there’s any doubt about that.” He added: “I don’t know of any country of any consequence in the world that has an expansion going on. And I can think of lots of them that have a real downturn going on. Obviously, unemployment is at record levels. It is rising virtually everyplace. In fact, I can’t think of a major country that is an exception to that.”

It was time, he and others agreed, to provide relief.

The Fed needed to make sure that interest rates moved downward, but the method of targeting the monetary supply wasn’t working properly. It could not be calibrated precisely enough to guarantee that interest rates would fall. In fact, interest rates rose in September 1982, when the Fed had wanted them to drop. “I am totally dissatisfied,” Mr. Volcker said.

It was, therefore, time, to shift the Fed’s focus back to interest rates, and to resolutely lower them.

This wasn’t an easy move, Mr. Kohn said, but it was the right one. “It took confidence and some subtle judgment to know when it was time to loosen conditions,” he said. “We’re not there yet today — inflation is high and it’s time to tighten now — but at some point, the Fed will have to do that again.”

The Payoff

The Fed pivot in 1982 had a startling payoff in financial markets.

As early as August 1982, policymakers at the central bank were discussing whether it was time to loosen financial conditions. Word trickled to traders, interest rates fell and the previously lackluster S&P 500 started to rise. It gained nearly 15 percent for the year and kept going. That was the start of a bull market that continued for 40 years.

In 1982, the conditions that set off rampant optimism in the stock market didn’t happen overnight. The Volcker-led Fed had to correct itself repeatedly while responding to major crises at home and abroad. It took years of pain to reach the point at which it made sense to pivot, and for businesses to start rehiring workers and for traders to go all-in on risky assets.

Today, the Fed is again engaging in a grand experiment, even as Russia’s war in Ukraine, the lingering pandemic and political crises in the United States and around the globe are endangering millions of people.

When will the big pivot happen this time? I wish I knew.

The best I can say is that it would be wise to prepare for bad times but to plan and invest for prosperity over the long haul.

I’ll come back with more detail on how to do that.

But I would try to stay invested in both the stock and bond markets permanently. The Volcker era demonstrates that when the moment has at last come, sea changes in financial markets can occur in the blink of an eye.

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Federal Reserve Attacks Inflation With Another Big Hike, Expects More

The central bank raised its key short-term rate by a substantial three-quarters of a point for the third consecutive time.

Intensifying its fight against high inflation, the Federal Reserve raised its key interest rate Wednesday by a substantial three-quarters of a point for a third straight time and signaled more large rate hikes to come — an aggressive pace that will heighten the risk of an eventual recession.

The Fed’s move boosted its benchmark short-term rate, which affects many consumer and business loans, to a range of 3% to 3.25%, the highest level since early 2008.

The officials also forecast that they will further raise their benchmark rate to roughly 4.4% by year’s end, a full percentage point higher than they had forecast as recently as June. And they expect to raise the rate further next year, to about 4.6%. That would be the highest level since 2007.

On Wall Street, stock prices fell and bond yields rose in response to the Fed’s projection of further steep rate hikes ahead.

The central bank’s action Wednesday followed a government report last week that showed high costs spreading more broadly through the economy, with price spikes for rents and other services worsening even though some previous drivers of inflation, such as gas prices, have eased. By raising borrowing rates, the Fed makes it costlier to take out a mortgage or an auto or business loan. Consumers and businesses then presumably borrow and spend less, cooling the economy and slowing inflation.

Fed officials have said they’re seeking a “soft landing,” by which they would manage to slow growth enough to tame inflation but not so much as to trigger a recession. Yet economists increasingly say they think the Fed’s steep rate hikes will lead, over time, to job cuts, rising unemployment and a full-blown recession late this year or early next year.

In their updated economic forecasts, the Fed’s policymakers project that economic growth will remain weak for the next few years, with rising unemployment. It expects the jobless rate to reach 4.4% by the end of 2023, up from its current level of 3.7%. Historically, economists say, any time the unemployment rate has risen by a half-point over several months, a recession has always followed.

Fed officials now see the economy expanding just 0.2% this year, sharply lower than its forecast of 1.7% growth just three months ago. And it expects sluggish growth below 2% from 2023 through 2025.

And even with the steep rate hikes the Fed foresees, it still expects core inflation — which excludes the volatile food and gas categories — to be 3.1% at the end of next year, well above its 2% target.

Chair Jerome Powell acknowledged in a speech last month that the Fed’s moves will “bring some pain” to households and businesses. And he added that the central bank’s commitment to bringing inflation back down to its 2% target was “unconditional.”

Falling gas prices have slightly lowered headline inflation, which was a still-painful 8.3% in August compared with a year earlier. Declining gas prices might have contributed to a recent rise in President Joe Biden’s public approval ratings, which Democrats hope will boost their prospects in the November midterm elections.

Short-term rates at a level the Fed is now envisioning would make a recession likelier next year by sharply raising the costs of mortgages, car loans and business loans. The economy hasn’t seen rates as high as the Fed is projecting since before the 2008 financial crisis. Last week, the average fixed mortgage rate topped 6%, its highest point in 14 years. Credit card borrowing costs have reached their highest level since 1996, according to Bankrate.com.

Inflation now appears increasingly fueled by higher wages and by consumers’ steady desire to spend and less by the supply shortages that had bedeviled the economy during the pandemic recession. On Sunday, though, President Biden said on CBS’ “60 Minutes” that he believed a soft landing for the economy was still possible, suggesting that his administration’s recent energy and health care legislation would lower prices for pharmaceuticals and health care.

Some economists are beginning to express concern that the Fed’s rapid rate hikes — the fastest since the early 1980s — will cause more economic damage than necessary to tame inflation. Mike Konczal, an economist at the Roosevelt Institute, noted that the economy is already slowing and that wage increases – a key driver of inflation — are levelling off and by some measures even declining a bit.

Surveys also show that Americans are expecting inflation to ease significantly over the next five years. That is an important trend because inflation expectations can become self-fulfilling: If people expect inflation to ease, some will feel less pressure to accelerate their purchases. Less spending would then help moderate price increases.

Konczal said there is a case to be made for the Fed to slow its rate hikes over the next two meetings.

“Given the cooling that’s coming,” he said, “you don’t want to rush into this.”

The Fed’s rapid rate hikes mirror steps that other major central banks are taking, contributing to concerns about a potential global recession. The European Central Bank last week raised its benchmark rate by three-quarters of a percentage point. The Bank of England, the Reserve Bank of Australia and the Bank of Canada have all carried out hefty rate increases in recent weeks.

And in China, the world’s second-largest economy, growth is already suffering from the government’s repeated COVID lockdowns. If recession sweeps through most large economies, that could derail the U.S. economy, too.

Even at the Fed’s accelerated pace of rate hikes, some economists — and some Fed officials — argue that they have yet to raise rates to a level that would actually restrict borrowing and spending and slow growth.

Many economists sound convinced that widespread layoffs will be necessary to slow rising prices. Research published earlier this month under the auspices of the Brookings Institution concluded that unemployment might have to go as high as 7.5% to get inflation back to the Fed’s 2% target.

Only a downturn that harsh would reduce wage growth and consumer spending enough to cool inflation, according to the research, by Johns Hopkins University economist Laurence Ball and two economists at the International Monetary Fund.

Additional reporting by The Associated Press.

: newsy.com

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Biden Announces Long-Awaited Student Debt Forgiveness Plan

President Biden is also extending a pause on federal student loan payments for what he called the “final time” through the end of 2022.

President Joe Biden on Wednesday announced his long-awaited plan to deliver on his campaign promise to provide $10,000 in debt cancellation for millions of Americans — and up to $10,000 more for those with the greatest financial need.

Borrowers who earn less than $125,000 a year, or families earning less than $250,000, would be eligible for the $10,000 loan forgiveness, President Biden announced in a tweet. For recipients of Pell Grants, which are reserved for undergraduates with the most significant financial need, the federal government would cancel up to an additional $10,000 in federal loan debt.

President Biden is also extending a pause on federal student loan payments for what he called the “final time” through the end of 2022. He was set to deliver remarks Wednesday afternoon at the White House to unveil his proposal to the public.

If his plan survives legal challenges that are almost certain to come, it could offer a windfall to a swath of the nation in the run-up to this fall’s midterm elections. More than 43 million people have federal student debt, with an average balance of $37,667, according to federal data. Nearly a third of borrowers owe less than $10,000, and about half owe less than $20,000. The White House estimates that President Biden’s announcement would erase the federal student debt of about 20 million people.

Proponents say cancellation will narrow the racial wealth gap — Black students are more likely to borrow federal student loans and at higher amounts than others. Four years after earning bachelor’s degrees, Black borrowers owe an average of nearly $25,000 more than their White peers, according to a Brookings Institution study.

Still, the action is unlikely to thrill any of the factions that have been jostling for influence as President President Biden weighs how much to cancel and for whom.

President Biden has faced pressure from liberals to provide broader relief to hard-hit borrowers, and from moderates and Republicans questioning the fairness of any widespread forgiveness. The delay in his decision has only heightened the anticipation for what his own aides acknowledge represents a political no-win situation. The people spoke on the condition of anonymity to discuss President Biden’s intended announcement ahead of time.

The continuation of the coronavirus pandemic-era payment freeze comes just days before millions of Americans were set to find out when their next student loan bills will be due. This is the closest the administration has come to hitting the end of the payment freeze extension, with the current pause set to end Aug. 31.

Details of the plan have been kept closely guarded as President Biden weighed his options. The administration said Wednesday the Education Department will release information in the coming weeks for eligible borrowers to sign up for debt relief. Cancellation for some would be automatic, if the department has access to their income information, but others would need to fill out a form.

Current students would only be eligible for relief if their loans were originated before July 1, 2022. President Biden is also set to propose capping the amount that borrowers pay monthly on undergraduate loans at 5% of their earnings.

During the 2020 presidential campaign, President Biden was initially skeptical of student loan debt cancellation as he faced off against more progressive candidates for the Democratic nomination. Sens. Elizabeth Warren and Bernie Sanders had proposed cancellations of $50,000 or more.

As he tried to shore up support among younger voters and prepare for a general election battle against President Donald Trump, President Biden unveiled his initial proposal for debt cancellation of $10,000 per borrower, with no mention of an income cap.

President Biden narrowed his campaign promise in recent months by embracing the income limit as soaring inflation took a political toll and as he aimed to head off political attacks that the cancellation would benefit those with higher take-home pay. But Democrats, from members of congressional leadership to those facing tough reelection bids this November, have pushed the administration to go as broad as possible on debt relief, seeing it in part as a galvanizing issue, particularly for Black and young voters this fall.

Democrats are betting that President Biden, who has seen his public approval tumble over the past year, can help motivate younger voters to the polls with the announcement.

Although President Biden’s plan is changed from what he initially proposed during the campaign, “he’ll get a lot of credit for following through on something that he was committed to,” said Celinda Lake, a Democratic pollster who worked with President Biden during the 2020 election.

A survey of 18- to 29-year-olds conducted by the Harvard Institute of Politics in March found that 59% of those polled favored debt cancellation of some sort — whether for all borrowers or those most in need — although student loans did not rank high among issues that most concerned people in that age group.

Some advocates say President Biden’s plan still falls short.

“If the rumors are true, we’ve got a problem,” Derrick Johnson, the president of the NAACP, which has aggressively lobbied President Biden to take bolder action, said Tuesday.

“President Biden’s decision on student debt cannot become the latest example of a policy that has left Black people — especially Black women — behind,” he said. “This is not how you treat Black voters who turned out in record numbers and provided 90% of their vote to once again save democracy in 2020.”

John Della Volpe, who worked as a consultant on President Biden’s campaign and is the director of polling at the Harvard Kennedy School Institute of Politics, said the particulars of President Biden’s announcement were less important than the decision itself.

“It’s about trust in politics, in government, in our system. It’s also about trust in the individual, which in this case is President Biden,” Della Volpe said.

Republicans, meanwhile, see a political upside if President Biden pursues a large-scale cancellation of student debt ahead of the November midterms, anticipating backlash for Democrats — particularly in states where there are large numbers of working-class voters without college degrees. Critics of broad student debt forgiveness also believe it will open the White House to lawsuits, on the grounds that Congress has never given the president the explicit authority to cancel debt on his own.

The Republican National Committee on Tuesday blasted President Biden’s expected announcement as a “handout to the rich,” claiming it would unfairly burden lower-income taxpayers and those who have already paid off their student loans with covering the costs of higher education for the wealthy.

President Biden’s long deliberations have led to grumbling among federal loan servicers, who had been instructed to hold back billing statements while President Biden weighed a decision.

Industry groups had complained that the delayed decision left them with just days to notify borrowers, retrain customer service workers and update websites and digital payment systems, said Scott Buchanan, executive director of the Student Loan Servicing Alliance.

It increases the risk that some borrowers will inadvertently be told they need to make payments, he said.

“At this late stage I think that’s the risk we’re running,” he said. “You can’t just turn on a dime with 35 million borrowers who all have different loan types and statuses.”

Additional reporting by The Associated Press.

: newsy.com

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Scientists Say New Climate Law Is Likely To Reduce Warming

By Associated Press
August 16, 2022

Scientists say new climate investment will have some beneficial effect on global warming, but the U.S. has a way to go.

Massive incentives for clean energy in the U.S. law signed Tuesday by President Joe Biden should reduce future global warming “not a lot, but not insignificantly either,” according to a climate scientist who led an independent analysis of the package.

Even with nearly $375 billion in tax credits and other financial enticements for renewable energy in the law, the United States still isn’t doing its share to help the world stay within another few tenths of a degree of warming, a new analysis by Climate Action Tracker says. The group of scientists examines and rates each country’s climate goals and actions. It still rates American action as “insufficient” but hailed some progress.

“This is the biggest thing to happen to the U.S. on climate policy,” said Bill Hare, the Australia-based director of Climate Analytics which puts out the tracker. “When you think back over the last decades, you know, not wanting to be impolite, there’s a lot of talk, but not much action.”

This is action, he said. Not as much as Europe, and Americans still spew twice as much heat-trapping gases per person as Europeans, Hare said. The U.S. has also put more heat-trapping gas into the air over time than any other nation.

Before the law, Climate Action Tracker calculated that if every other nation made efforts similar to those of the U.S., it would lead to a world with catastrophic warming — 5.4 to 7.2 degrees (3 to 4 degrees Celsius) above pre-industrial times. Now in the best case scenario, which Hare said is reasonable and likely, U.S. actions, if mimicked, would lead to only 3.6 degrees (2 degrees Celsius) of warming. If things don’t work quite as optimistically as Hare thinks, it would be 5.4 degrees (3 degrees Celsius) of warming, the analysis said.

Even that best case scenario falls short of the overarching internationally accepted goal of limiting warming to 2.7 degrees warming (1.5 degrees Celsius) since pre-industrial times. And the world has already warmed 2 degrees (1.1 degrees Celsius) since the mid-19th century.

Other nations “who we know have been holding back on coming forward with more ambitious policies and targets” are now more likely to take action in a “significant spillover effect globally,” Hare said. He said officials from Chile and a few Southeast Asian countries, which he would not name, told him this summer that they were waiting for U.S. action first.

And China “won’t say this out loud, but I think will see the U.S. move as something they need to match,” Hare said.

Scientists at the Climate Action Tracker calculated that without any other new climate policies, U.S. carbon dioxide emissions in 2030 will shrink to 26% to 42% below 2005 levels, which is still short of the country’s goal of cutting emissions in half. Analysts at the think tank Rhodium Group calculated pollution cuts of 31% to 44% from the new law.

Other analysts and scientists said the Climate Action Tracker numbers makes sense.

“The contributions from the U.S. to greenhouse gas emissions are huge,” said Princeton University climate scientist Gabriel Vecchi. “So reducing that is definitely going to have a global impact.”

Samantha Gross, director of climate and energy at the Brookings Institution, called the new law a down payment on U.S. emission reductions.

“Now that this is done, the U.S. can celebrate a little, then focus on implementation and what needs to happen next,” Gross said.

Additional reporting by The Associated Press.

: newsy.com

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Economy Is at Risk of Recession by a Force Hiding in Plain Sight

This past week brought home the magnitude of the overlapping crises assailing the global economy, intensifying fears of recession, job losses, hunger and a plunge on stock markets.

At the root of this torment is a force so elemental that it has almost ceased to warrant mention — the pandemic. That force is far from spent, confronting policymakers with grave uncertainty. Their policy tools are better suited for more typical downturns, not a rare combination of diminishing economic growth and soaring prices.

Major economies including the United States and France reported their latest data on inflation, revealing that prices on a vast range of goods rose faster in June than anytime in four decades.

China reported that its economy, the world’s second-largest, expanded by a mere 0.4 percent from April through June compared with the same period last year. That performance — astonishingly anemic by the standards of recent decades — endangered prospects for scores of countries that trade heavily with China, including the United States. It reinforced the realization that the global economy has lost a vital engine.

The specter of slowing economic growth combined with rising prices has even revived a dreaded word that was a regular part of the vernacular in the 1970s, the last time the world suffered similar problems: stagflation.

Most of the challenges tearing at the global economy were set in motion by the world’s reaction to the spread of Covid-19 and its attendant economic shock, even as they have been worsened by the latest upheaval — Russia’s disastrous attack on Ukraine, which has diminished the supply of food, fertilizer and energy.

“The pandemic itself disrupted not only the production and transportation of goods, which was the original front of inflation, but also how and where we work, how and where we educate our children, global migration patterns,” said Julia Coronado, an economist at the University of Texas at Austin, speaking this past week during a discussion convened by the Brookings Institution in Washington. “Pretty much everything in our lives has been disrupted by the pandemic, and then we layer on to that a war in Ukraine.”

Great Supply Chain Disruption.

meat production to shipping exploited their market dominance to rack up record profits.

The pandemic prompted governments from the United States to Europe to unleash trillions of dollars in emergency spending to limit joblessness and bankruptcy. Many economists now argue that they did too much, stimulating spending power to the point of stoking inflation, while the Federal Reserve waited too long to raise interest rates.

Now playing catch-up, central banks like the Fed have moved assertively, lifting rates at a rapid clip to try to snuff out inflation, even while fueling worries that they could set off a recession.

Given the mishmash of conflicting indicators found in the American economy, the severity of any slowdown is difficult to predict. The unemployment rate — 3.6 percent in June — is at its lowest point in almost half a century.

American consumers have enhanced fears of a downturn. This past week, the International Monetary Fund cited weaker consumer spending in slashing expectations for economic growth this year in the United States, from 2.9 percent to 2.3 percent. Avoiding recession will be “increasingly challenging,” the fund warned.

Orwellian lockdowns that have constrained business and life in general. The government expresses resolve in maintaining lockdowns, now affecting 247 million people in 31 cities that collectively produce $4.3 trillion in annual economic activity, according to a recent estimate from Nomura, the Japanese securities firm.

But the endurance of Beijing’s stance — its willingness to continue riding out the economic damage and public anger — constitutes one of the more consequential variables in a world brimming with uncertainty.

sanctions have restricted sales of Russia’s enormous stocks of oil and natural gas in an effort to pressure the country’s strongman leader, Vladimir V. Putin, to relent. The resulting hit to the global supply has sent energy prices soaring.

The price of a barrel of Brent crude oil rose by nearly a third in the first three months after the invasion, though recent weeks have seen a reversal on the assumption that weaker economic growth will translate into less demand.

major pipeline carrying gas from Russia to Germany cut the supply sharply last month, that heightened fears that Berlin could soon ration energy consumption. That would have a chilling effect on German industry just as it contends with supply chain problems and the loss of exports to China.

euro, which has surrendered more than 10 percent of its value against the dollar this year. That has increased the cost of Europe’s imports, another driver of inflation.

ports from the United States to Europe to China.

“Everyone following the economic situation right now, including central banks, we do not have a clear answer on how to deal with this situation,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Norway. “You have a lot of things going on at the same time.”

The most profound danger is bearing down on poor and middle-income countries, especially those grappling with large debt burdens, like Pakistan, Ghana and El Salvador.

As central banks have tightened credit in wealthy nations, they have spurred investors to abandon developing countries, where risks are greater, instead taking refuge in rock-solid assets like U.S. and German government bonds, now paying slightly higher rates of interest.

This exodus of cash has increased borrowing costs for countries from sub-Saharan Africa to South Asia. Their governments face pressure to cut spending as they send debt payments to creditors in New York, London and Beijing — even as poverty increases.

U.N. World Food Program declared this month.

Among the biggest variables that will determine what comes next is the one that started all the trouble — the pandemic.

The return of colder weather in northern countries could bring another wave of contagion, especially given the lopsided distribution of Covid vaccines, which has left much of humanity vulnerable, risking the emergence of new variants.

So long as Covid-19 remains a threat, it will discourage some people from working in offices and dining in nearby restaurants. It will dissuade some from getting on airplanes, sleeping in hotel rooms, or sitting in theaters.

Since the world was first seized by the public health catastrophe more than two years ago, it has been a truism that the ultimate threat to the economy is the pandemic itself. Even as policymakers now focus on inflation, malnutrition, recession and a war with no end in sight, that observation retains currency.

“We are still struggling with the pandemic,” said Ms. Haugland, the DNB Markets economist. “We cannot afford to just look away from that being a risk factor.”

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Pandemic’s Economic Impact Is Easing, but Aftershocks May Linger

The pandemic’s grip on the economy appears to be loosening. Job growth and retail spending were strong in January, even as coronavirus cases hit a record. New York, Massachusetts and other states have begun to lift indoor mask mandates. California on Thursday unveiled a public health approach that will treat the coronavirus as a manageable long-term risk.

Yet the economy remains far from normal. Patterns of work, socializing and spending, disrupted by the pandemic, have been slow to readjust. Prices are rising at their fastest pace in four decades, and there are signs that inflation is creeping into a broader range of products and services. In surveys, Americans report feeling gloomier about the economy now than at the height of the lockdowns and job losses in the first weeks of the crisis.

In other words, it may no longer be that “the virus is the boss” — as Austan Goolsbee, a University of Chicago economist, has put it. But the changes that it set in motion have proved both more persistent and more pervasive than economists once expected.

“I — totally naïvely — thought that once a vaccine was available, that we were six months away from a complete re-evaluation of the economy, and instead we’re just grinding it out,” said Wendy Edelberg, director of the Hamilton Project, an economic policy arm of the Brookings Institution. “A switch didn’t get flipped, and I thought it was going to.”

computer chips, lumber and even garage doors have held up production of items from cars to houses, while a lack of shipping containers has led to delays in almost anything transported from overseas. Some bottlenecks have let up in recent months, but logistics experts expect it to take months if not years for supply chains to run smoothly again.

disproportionate share of them women — have not.

Diahann Thomas was at work at a Brooklyn call center in January when she got a call from her son’s school: Her 11-year-old had been exposed to a classmate who had tested positive for Covid-19, and she needed to pick him up.

“There are all these moving parts now with Covid — one moment, they’re at school, the next moment they’re at home,” she said.

Ms. Thomas, 50, said her employer declined to provide flexibility while her son was in quarantine. So she quit — a decision she said was made easier by the knowledge that employers are eager to hire.

“It did boost my confidence to know that at the end of this, it’s not going to be difficult for me to pick up the pieces, and I have more bargaining power now,” she said. “There is this whole entire shift in terms of employee-employer relationship.”

Ms. Thomas expects to return to work once school schedules become more reliable. But the pandemic has shown her the value of being at home with her three children, she said, and she wants a job where she can work from home.

Whether and how people like Ms. Thomas return to work will be crucial to the economy’s path in coming months. If workers flood back to the job market as school and child care becomes more dependable and health risks recede, it will be easier for manufacturers and shipping companies to ramp up production and deliveries, giving supply a chance to catch up to demand. That in turn could allow inflation to cool without losing the economy’s progress over the past year.

care for children may not go back to work right away, or may choose to work part time. And other changes may be similarly slow to reverse: Companies that were burned by shortages may maintain larger inventories or rely on shorter supply chains, driving up costs. Workers who enjoyed flexibility from employers during the pandemic may demand it in the future. Rates of entrepreneurship, automation and, of course, remote work all increased during the pandemic, perhaps permanently.

Some of those changes could lead to higher inflation or slower growth. Others could make the economy more dynamic and productive. All make it harder for forecasters and policymakers to get a clear picture of the postpandemic economy.

“In almost every respect, economic ripple effects that we might have expected to be temporary or short-lived are proving to be more long-lasting,” said Luke Pardue, an economist for Gusto, a payroll platform for small businesses. “The new normal is looking a lot different.”

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Rapid Inflation Fuels Debate Over What’s to Blame: Pandemic or Policy

The price increases bedeviling consumers, businesses and policymakers worldwide have prompted a heated debate in Washington about how much of today’s rapid inflation is a result of policy choices in the United States and how much stems from global factors tied to the pandemic, like snarled supply chains.

At a moment when stubbornly rapid price gains are weighing on consumer confidence and creating a political liability for President Biden, White House officials have repeatedly blamed international forces for high inflation, including factory shutdowns in Asia and overtaxed shipping routes that are causing shortages and pushing up prices everywhere. The officials increasingly cite high inflation in places including the euro area, where prices are climbing at the fastest pace on record, as a sign that the world is experiencing a shared moment of price pain, deflecting the blame away from U.S. policy.

But a chorus of economists point to government policies as a big part of the reason U.S. inflation is at a 40-year high. While they agree that prices are rising as a result of shutdowns and supply chain woes, they say that America’s decision to flood the economy with stimulus money helped to send consumer spending into overdrive, exacerbating those global trends.

The world’s trade machine is producing, shipping and delivering more goods to American consumers than it ever has, as people flush with cash buy couches, cars and home office equipment, but supply chains just haven’t been able to keep up with that supercharged demand.

by 7 percent in the year through December, its fastest pace since 1982. But in recent months, it has also moved up sharply across many countries, a fact administration officials have emphasized.

“The inflation has everything to do with the supply chain,” President Biden said during a news conference on Wednesday. “While there are differences country by country, this is a global phenomenon and driven by these global issues,” Jen Psaki, the White House press secretary, said after the latest inflation data were released.

the euro area. Data released in the United Kingdom and in Canada on Wednesday showed prices accelerating at their fastest rate in 30 years in both countries. Inflation in the eurozone, which is measured differently from how the U.S. calculates it, climbed to an annual rate of 5 percent in December, according to an initial estimate by the European Union statistics office.

“The U.S. is hardly an island amidst this storm of supply disruptions and rising demand, especially for goods and commodities,” said Eswar Prasad, a professor of trade policy at Cornell University and a senior fellow at the Brookings Institution.

But some economists point out that even as inflation proves pervasive around the globe, it has been more pronounced in America than elsewhere.

“The United States has had much more inflation than almost any other advanced economy in the world,” said Jason Furman, an economist at Harvard University and former Obama administration economic adviser, who used comparable methodologies to look across areas and concluded that U.S. price increases have been consistently faster.

The difference, he said, comes because “the United States’ stimulus is in a category of its own.”

White House officials have argued that differences in “core” inflation — which excludes food and fuel — have been small between the United States and other major economies over the past six months. And the gaps all but disappear if you strip out car prices, which are up sharply and have a bigger impact in the United States, where consumers buy more automobiles. (Mr. Furman argued that people who didn’t buy cars would have spent their money on something else and that simply eliminating them from the U.S. consumption basket is not fair.)

Administration officials have also noted that the United States has seen a robust rebound in economic growth. The International Monetary Fund said in October that it expected U.S. output to climb by 6 percent in 2021 and 5.2 percent in 2022, compared with 5 percent growth last year in the euro area and 4.3 percent growth projected for this year.

“To the extent that we got more heat, we got a lot more growth for it,” said Jared Bernstein, a member of the White House Council of Economic Advisers.

$5 trillion in spending in 2020 and 2021. That outstripped the response in other major economies as a share of the nation’s output, according to data compiled by the International Monetary Fund.

Many economists supported protecting workers and businesses early in the pandemic, but some took issue with the size of the $1.9 trillion package last March under the Biden administration. They argued that sending households another round of stimulus, including $1,400 checks, further fueled demand when the economy was already healing.

Consumer spending seemed to react: Retail sales, for instance, jumped after the checks went out.

loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.

Americans found themselves with a lot of money in the bank, and as they spent that money on goods, demand collided with a global supply chain that was too fragile to catch up.

Virus outbreaks shut down factories, ports faced backlogs and a dearth of truckers roiled transit routes. Americans still managed to buy more goods than ever before in 2021, and foreign factories sent a record sum of products to U.S. shops and doorsteps. But all that shopping wasn’t enough to satisfy consumer demand.

stop spending at the start of the pandemic helped to swell savings stockpiles.

And the Federal Reserve’s interest rates are at rock bottom, which has bolstered demand for big purchases made on credit, from houses and cars to business investments like machinery and computers. Families have been taking on more housing and auto debt, data from the Federal Reserve Bank of New York shows, helping to pump up those sectors.

But if stimulus-driven demand is fueling inflation, the diagnosis could come with a silver lining. It may be easier to temper consumer spending than to rapidly reorient tangled supply lines.

People may naturally begin to buy less as government help fades. Spending could shift away from goods and back toward services if the pandemic abates. And the Fed’s policies work on demand — not supply.

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Could This Covid Wave Reverse the Recovery? Here’s What to Watch.

The spread of the Delta variant has delayed office reopenings, disrupted the start of school and generally dashed hopes for a return to normal after Labor Day. But it has not pushed the U.S. economic recovery into reverse.

Now that recovery faces a new test: the removal of much of the aid that has helped keep households and businesses afloat for the past year and a half.

The Paycheck Protection Program, which distributed hundreds of billions of dollars in grants and loans to thousands of small businesses, concluded last spring. A federal eviction moratorium ended last month after the Supreme Court blocked the Biden administration’s last-minute effort to extend it. Most recently, an estimated 7.5 million people lost unemployment benefits when programs that expanded the system during the pandemic were allowed to lapse.

Next up: the Federal Reserve, which on Wednesday indicated it could start pulling back its stimulus efforts as early as November.

OpenTable, for example, have fallen less than 10 percent from their early-July peak. That is a far smaller decline than during the last Covid surge, last winter.

“It has moved down, but it’s not the same sort of decline,” Mr. Bryson said of the OpenTable data. “We’re living with it.”

$120 billion in monthly bond purchases — which have kept borrowing cheap and money flowing through the economy — but it will almost certainly keep interest rates near zero into next year. Millions of parents will continue to receive monthly checks through the end of the year because of the expanded child tax credit passed in March as part of President Biden’s $1.9 trillion aid package.

That bill, known as the American Rescue Plan, also provided $350 billion to state and local governments, $21.6 billion in rental aid and $10 billion in mortgage assistance, among other programs. But much has not been spent, said Wendy Edelberg, director of the Hamilton Project, an economic-policy arm of the Brookings Institution.

“Those delays are frustrating,” she said. “At the same time, what that also means is that support is going to continue having an effect over the next several quarters.”

Household savings could provide a buffer — if they last.

Economists, including officials in the Biden administration, say that as the economy heals, there will be a gradual “handoff” from government aid to the private sector. That transition could be eased by a record-setting pile of household savings, which could help prop up consumer spending as government aid wanes.

A lot of that money is held by richer, white-collar workers who held on to their jobs and saw their stock portfolios swell even as the pandemic constrained their spending. But many lower-income households have built up at least a small savings cushion during the pandemic because of stimulus checks, enhanced unemployment benefits and other aid, according to researchers at the JPMorgan Chase Institute.

“The good news is that people are going into the fall with some reserves, more reserves than normal,” said Fiona Greig, co-director of the institute. “That can give them some runway in which to look for a job.”

recent survey by Alignable, a social network for small business owners. Not all have had sales turn lower, said Eric Groves, the company’s chief executive. But the uncertainty is hitting at a crucial moment, heading into the holiday season.

“This is a time of year when business owners in the consumer sector in particular are trying to pull out their crystal ball,” he said. “Now is when they have to be purchasing inventory and doing all that planning.”

open a new location as part of a development project on the West Side of Manhattan.

Go big. If some aid ended up going to people or businesses that didn’t really need help, that was a reasonable trade-off for the benefit of getting money to the millions who did.

Today, the calculus is different. The impact of the pandemic is more tightly focused on a few industries and groups. At the same time, many businesses are having trouble getting workers and materials to meet existing demand. Traditional forms of stimulus that seek to stoke demand won’t help them. If automakers can’t get needed parts, for example, giving money to households won’t lead to more car sales — but it might lead to higher prices.

That puts policymakers in a tight spot. If they don’t get help to those who are struggling, it could cause individual hardship and weaken the recovery. But indiscriminate spending could worsen supply problems and lead to inflation. That calls for a more targeted approach, focusing on the specific groups and industries that need it most, said Nela Richardson, chief economist for ADP, the payroll processing firm.

“There are a lot of arrows in the quiver still, but you need them to go into the bull’s-eye now rather than just going all over,” Ms. Richardson said.

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Treasury’s Janet Yellen Is Being Tested by Debt Limit Fight

Ms. Yellen’s task has been complicated by the fact that while she can readily convey the economic risks of default, the debt limit has become wrapped up in a larger partisan battle over Mr. Biden’s entire agenda, including the $3.5 trillion spending bill.

Republicans, including Mr. McConnell, have insisted that if Democrats want to pass a big spending bill, then they should bear responsibility for raising the borrowing limit. Democrats call that position nonsense, noting that the debt limit needs to be raised because of spending that lawmakers, including Republicans, have already approved.

“This seems to be some sort of high-stakes partisan poker on Capitol Hill, and that’s not what her background is,” said David Wessel, a senior economic fellow at the Brookings Institution who worked with Ms. Yellen at Brookings.

While lawmakers squabble on Capitol Hill, Ms. Yellen’s team at Treasury has been trying to buy as much time as possible. After a two-year suspension of the statutory debt limit expired at the end of July, Ms. Yellen has been employing an array of fiscal accounting tools known as “extraordinary measures” to stave off a default.

Uncertainty over the debt limit has yet to spook markets, but Ms. Yellen is receiving briefings multiple times a week by career staff on the state of the nation’s finances. They are keeping her informed about the use of extraordinary measures, such as suspending investments of the Exchange Stabilization Fund and suspending the issuing of new securities for the Civil Service Retirement and Disability Fund, and carefully reviewing Treasury’s cash balance. Because corporate tax receipts are coming in stronger than expected, the debt limit might not be breached until mid- to late October, Ms. Yellen has told lawmakers.

A Treasury spokeswoman said that Ms. Yellen is not considering fallback plans such as prioritizing debt payments if Congress fails to act, explaining that the only way for the government to address the debt ceiling is for lawmakers to raise or suspend the limit. However, she has reviewed some of the ideas that were developed by Treasury during the debt limit standoff of 2011, when partisan brinkmanship brought the nation to the cusp of default.

A new report from the Bipartisan Policy Center underscored the fact that if Congress fails to address the debt limit, Ms. Yellen will be left with no good options. If the true deadline is Oct. 15, for example, the Treasury Department would be approximately $265 billion short of paying all of its bills through mid-November. About 40 percent of the funds that are owed would go unpaid.

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Low-Wage Workers Now Have Options, Which Could Mean a Raise

McDonald’s is raising wages at its company-owned restaurants. It is also helping its franchisees hang on to workers with funding for backup child care, elder care and tuition assistance. Pay is up at Chipotle, too, and Papa John’s and many of its franchisees are offering hiring and referral bonuses.

The reason? “In January, 8 percent of restaurant operators rated recruitment and retention of work force as their top challenge,” Hudson Riehle, senior vice president for research at the National Restaurant Association, said in an email. “By May, that number had risen to 72 percent.”

Restaurant workers — burger flippers and bussers, cooks and waiters — have emerged from the pandemic recession to find themselves in a position they could not have imagined a couple of years ago: They have options. They can afford to wait for a better deal.

In the first five months of the year, restaurants put out 61 percent more “workers wanted” posts for waiters and waitresses than they had in the same months of 2018 and 2019, before the coronavirus pandemic shut down bars and restaurants around the country, according to data from Burning Glass, a job market analytics firm.

replace their face-to-face workers with robots and software. Yet there are signs that the country’s low-wage labor force might be in for more lasting raises.

Even before the pandemic, wages of less-educated workers were rising at the fastest rate in over a decade, propelled by shrinking unemployment. And after the temporary expansion of unemployment insurance ends, with Covid-19 under control and children back at school, workers may be unwilling to accept the deals they accepted in the past.

Jed Kolko, chief economist at the job placement site Indeed, pointed to one bit of evidence: the increase in the reservation wage — the lowest wage that workers will accept to take a job.

According to data from the Federal Reserve Bank of New York, the average reservation wage is growing fastest for workers without a college degree, hitting $61,483 in March, 26 percent more than a year earlier. Aside from a dip at the start of the pandemic, it has been rising since November 2017.

“That suggests it is a deeper trend,” Mr. Kolko noted. “It’s not just about the recovery.”

Other trends could support higher wages at the bottom. The aging of the population, notably, is shrinking the pool of able-bodied workers and increasing demand for care workers, who toil for low pay but are vital to support a growing cohort of older Americans.

“There was a work force crisis in the home care industry before Covid,” said Kevin Smith, chief executive of Best of Care in Quincy, Mass., and president of the state industry association. “Covid really laid that bare and exacerbated the crisis.”

more families turning their backs on nursing homes, which were early hotbeds of coronavirus infections, Mr. Smith said, personal care aides and home health aides are in even shorter supply.

“The demand for services like ours has never been higher,” he said. “That’s never going back.”

And some of the changes brought about by the pandemic might create new transition opportunities that are not yet in the Brookings data. The accelerated shift to online shopping may be a dire development for retail workers, but it will probably fuel demand for warehouse workers and delivery truck drivers.

The coronavirus outbreak induced such an unusual recession that any predictions are risky. And yet, as Ms. Escobari of Brookings pointed out, the recovery may provide rare opportunities for those toiling for low wages.

“This time, people searching for jobs may have a lot of different options,” she said. “That is not typical.”

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Brookings Institution

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Understand Inflation and How It Impacts You

The Coronavirus Pandemic: Key Things to Know

Household savings could provide a buffer — if they last.