Eighteen months into the pandemic, Jerome H. Powell, the Federal Reserve chair, has offered the strongest sign yet that the Fed is prepared to soon withdraw one leg of the support it has been providing to the economy as conditions strengthen.
At the same time, Mr. Powell made clear on Friday that interest rate increases remained far away, and that the central bank was monitoring risks posed by the Delta variant of the coronavirus.
The Fed has been trying to bolster economic activity by buying $120 billion in government-backed bonds each month and by leaving its policy interest rate at rock bottom. Officials have been debating when to begin slowing their bond buying, the first step in moving toward a more normal policy setting. They have said they would like to make “substantial further progress” toward stable inflation and full employment before doing so.
Mr. Powell, speaking at a closely watched conference that the Kansas City Fed holds each year, used his remarks to explain that he thinks the Fed has met that test when it comes to inflation and is making “clear progress toward maximum employment.”
six million fewer jobs than before the pandemic. And the Delta variant could cause consumers and businesses to pull back as it foils return-to-office plans and threatens to shut down schools and child care centers. That could lead to a slower jobs rebound.
Mr. Powell made clear that the Fed wants to avoid overreacting to a recent burst in inflation that it believes will most likely prove temporary, because doing so could leave workers on the sidelines and weaken growth prematurely. While the Fed could start to remove one piece of its support, he emphasized that slowing bond purchases did not indicate that the Fed was prepared to raise rates.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said in his address to the conference, which was held online instead of its usual venue — Jackson Hole in Wyoming — because of the latest coronavirus wave.
The distinction he drew — between bond buying, which keeps financial markets chugging along, and rates, which are the Fed’s more traditional and arguably more powerful tool to keep money cheap and demand strong — sent an important signal that the Fed is going to be careful to let the economy heal more fully before really putting away its monetary tools, economists said.
told CNBC on Friday that he supported winding down the purchases “as quickly as possible.”
“Let’s start the taper, and let’s do it quickly,” he said. “Let’s not have this linger.”
James Bullard, the president of the Federal Reserve Bank of St. Louis, said on Friday that the central bank should finish tapering by the end of the first quarter next year. If inflation starts to moderate then, the country will be in “great shape,” Mr. Bullard told Fox Business.
“If it doesn’t moderate, then I think the Fed is going to have to be more aggressive in 2022,” he said.
ushered in a new policy framework at last year’s Jackson Hole gathering that dictates a more patient approach, one that might guard against a similar overreaction.
But as Mr. Bullard’s comments reflected, officials may have their patience tested as inflation climbs.
The Fed’s preferred price gauge, the personal consumption expenditures index, rose 4.2 percent last month from a year earlier, according to Commerce Department data released on Friday. The increase was higher than the 4.1 percent jump that economists in a Bloomberg survey had projected, and the fastest pace since 1991. That is far above the central bank’s 2 percent target, which it tries to hit on average over time.
“The rapid reopening of the economy has brought a sharp run-up in inflation,” Mr. Powell said.
They warn that if the Fed overreacts to today’s inflationary burst, it could wind up with permanently weak inflation, much as Japan and Europe have.
White House economists sided with Mr. Powell’s interpretation in a new round of forecasts issued on Friday. In its midsession review of the administration’s budget forecasts, the Office of Management and Budget said it expected the Consumer Price Index inflation rate to hit 4.8 percent for the year. That is more than double the administration’s initial forecast of 2.1 percent.
initially expected. But they still insist that it will be short-lived and foresee inflation dropping to 2.5 percent in 2022. The White House also revised its forecast of growth for the year, to 7.1 percent from 5.2 percent.
Slow price gains sound like good news to anyone who buys oat milk and eggs, but they can set off a vicious downward cycle. Interest rates include inflation, so when it slows, Fed officials have less room to make money cheap to foster growth during times of trouble. That makes it harder for the economy to recover quickly from downturns, and long periods of weak demand drag prices even lower — creating a cycle of stagnation.
“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Mr. Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”
Mr. Powell offered a detailed explanation of the Fed’s scrutiny of prices, emphasizing that inflation is “so far” coming from a narrow group of goods and services. Officials are keeping an eye on data to make sure prices for durable goods like used cars — which have recently taken off — slow and even fall.
Mr. Powell said the Fed saw “little evidence” of wage increases that might threaten high and lasting inflation. And he pointed out that measures of inflation expectations had not climbed to unwanted levels, but had instead staged a “welcome reversal” of an unhealthy decline.
Still, his remarks carried a tone of watchfulness.
“We would be concerned at signs that inflationary pressures were spreading more broadly through the economy,” he said.
Jim Tankersley contributed reporting.
>>> Don’t Miss Today’s BEST Amazon Deals! <<<<
Fed officials are willing to look past the elevated readings specifically because they are expected to be, as central bankers often say, “transitory.” They would worry more about a generalized, economywide pickup in prices that happens year after year, chipping away at consumer paychecks and potentially influencing how businesses and households live their economic lives.
But policymakers are still eager to see their expectation for an inflation slowdown borne out.
A “narrative for why the current supply and demand constraints might be expected to ease over time strikes me as a reasonable baseline,” Esther George, president of the Federal Reserve Bank of Kansas City, said in a speech Wednesday after the report, while emphasizing that the “narrative would be incomplete without acknowledging the risks.”
Ms. George pointed to the rise in coronavirus infections tied to the Delta variant, which could keep supply chains kinked, and to household savings, which could keep consumers spending strongly and economic conditions “tight.”
Economists have flagged other forces that could sustain inflation. Goldman Sachs noted in a recent research note that revised-down production schedules at automakers suggest that some price pressures in the car industry could last into the fall. Shipping experts report continued delays and cost increases, which could also feed into consumer prices.
And moderation alone is not enough to take the pressure off the Fed and White House: Policymakers need a substantial cool-down. July’s 0.5 percent monthly increase was less rapid than the 0.9 percent gain from May to June, but if the current pace continued for a year, inflation would pick up by nearly 6 percent on an annual basis. That could leave consumers with substantially less purchasing power.
Fed officials will be watching for signs that today’s price increases are getting locked into consumer and business expectations, which could make them more lasting.
Wage increases and inflation expectations offer key signals about the future of inflation. If pay takes off on a sustained basis, employers may find that they need to charge more to cover their expenses. Likewise, if consumers and businesses start to expect rapid price increases, they may be more willing to accept higher prices, setting off a self-fulfilling prophecy.
>>> Don’t Miss Today’s BEST Amazon Deals! <<<<
The Fed targets 2 percent annual price gains on average over time, a goal it defines using a different index. Still, the C.P.I. is closely watched because it comes out more rapidly than the Fed’s preferred gauge and it feeds into the favored number, which has also accelerated.
Republicans have pointed to rapid price gains as a sign of the Biden administration’s economic mismanagement, and an argument against the kind of additional spending that President Biden has called for as part of his $4 trillion economic agenda, including investments to fight climate change, bolster education and improve child care.
“Bidenflation is growing faster than paychecks, wiping out workers’ wage gains, and leaving American families behind,” Republicans on the House Ways and Means Committee said in a news release following the data report.
The talking point has proved potent because the recent strength in inflation has outstripped the pickup that many officials had expected. In Mr. Biden’s official budget request, released this spring, officials forecast an inflation rate that stayed near historical averages for 2021 and never rose past 2.3 percent a year over the course of a decade. Administration officials have now begun to acknowledge that higher inflation could stay with the economy for a year or two.
The possibility that inflation will not fade as quickly or as much as expected is becoming a defining economic risk of the era. Signs that strong demand could bolster prices, at least for a time, abound. A New York Fed survey out Monday showed that consumers expect to keep spending robustly in the year ahead.
Some members of the business community see price pressures lasting.
Hugh Johnston, the chief financial officer of PepsiCo, told analysts on Tuesday that the company was anticipating more inflationary pressures via higher costs for raw materials, labor and freight. “Are we going to be pricing to deal with it? We certainly are,” he said.
Jamie Dimon, JPMorgan Chase’s chief executive, told analysts on a conference call on Monday that “it’ll be a little bit worse than the Fed thinks. I don’t think it’s all going to be temporary. But that doesn’t matter if we have very strong growth.”
>>> Don’t Miss Today’s BEST Amazon Deals! <<<<
Federal Reserve officials left policy unchanged on Wednesday but moved up expectations for when they would first raise interest rates from rock bottom, a sign that a healing labor market and rising inflation were giving policymakers confidence that they would achieve their full employment and stable price goals in coming years.
Fed policymakers expect to make two interest rate increases by the end of 2023, the central bank’s updated summary of economic projections showed Wednesday. Previously, the median official had anticipated that rates would stay near zero — where they have been since March 2020 — at least into 2024. The Fed now sees rates rising to 0.6 percent by the end of 2023, up from 0.1 percent.
The significant upgrade comes as the economy is healing, and as Fed officials penciled in stronger growth in 2021, faster inflation and slightly quicker labor market progress next year.
“Progress on vaccinations has reduced the spread of Covid-19 in the United States,” the Fed said in a statement released at the conclusion of its June 15-16 policy meeting, one that contained several optimistic revisions. “Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.”
late April, and since it last released economic projections in March. Inflation data have come in faster than officials had expected, and consumer and market expectations for future inflation have climbed. Employers have been hiring more slowly than they were this spring, as job openings abound but it takes workers time to flow into them.
The Fed continued to call that inflation increase largely “transitory” in its new statement. It has consistently pledged to take a patient approach to monetary policy as the economic backdrop rapidly shifts.
Mr. Powell acknowledged that “inflation has come in above expectations” but suggested it was largely because of robust consumer demand coupled with shortages and bottlenecks as the economy reopens.
“Our expectation is that these high inflation readings that we’re seeing now will start to abate,” he said, adding that if prices moved up in a way that was inconsistent with the Fed’s goal, central bankers would be prepared to react by reducing monetary policy support.
The central bank made no changes on Wednesday to its main policy interest rate, which has been set at near zero since March 2020, helping keep borrowing cheap for households and businesses. The Fed will also continue to buy $120 billion in government-backed bonds each month, which keeps longer-term borrowing costs low and can bolster stock and other asset prices. Those policies work together to keep money flowing easily through the economy, fueling stronger demand that can help to speed up growth and job market healing.
Officials have pledged to continue to support the economy until the pandemic shock is well behind the United States. Specifically, they have said that they want to achieve “substantial” progress toward their two economic goals — maximum employment and stable inflation — before slowing their bond purchases. The bar for raising interest rates is even higher. Officials have said they want to see the job market back at full strength and inflation on track to average 2 percent over time before they will lift interest rates away from rock bottom.
a “number” of officials at the Fed’s April meeting suggested that they would like to start talking about how and when to begin the so-called taper soon, minutes from that gathering showed.
The Fed is buying $80 billion in Treasury bonds each month, and $40 billion in mortgage-backed securities. Those purchases have helped to push the central bank’s balance sheet holdings up to about $8 trillion — roughly twice as big as they were as recently as summer 2019.
Officials including Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, and Patrick Harker, the president of the Federal Reserve Bank of Philadelphia, have signaled that they think it would be appropriate to get those discussions going. Other important policymakers have sounded patient, with John Williams, the New York Fed president, saying that “we’re not near the substantial further progress marker,” in a June 3 Yahoo Finance interview.
Mr. Powell said on Wednesday that officials had begun “talking about talking about” slowing those bond purchases but that the central bank was not preparing to start tapering anytime soon.
“I expect that we’ll be able to say more about timing as we start to see more data,” Mr. Powell said.
Some Republican politicians have questioned whether emergency monetary policy settings remain necessary as the economy reopens and growth rebounds, the Fed has signaled over that the United States is in for a long period of central bank support.
preferred inflation gauge came in at 3.6 percent in April compared to the previous year and is likely to jump even higher in May. The more up-to-date Consumer Price Index was up 5 percent in the year through last month, partly as the figures were compared to very low readings last year.
Officials expect the current price pop to prove temporary, the product of one-off data quirks and the fact that demand is recovering faster than supply chains coming out of the pandemic. Markets seem to broadly share that view: While they have penciled in slightly higher inflation, that recent increase in expectations appears to be stabilizing at a level that is probably more or less consistent with the Fed’s goals.
Still, Wall Street strategists and politicians in Washington alike are watching for any sign that Fed officials have become more concerned about lasting price pressures as some stickier prices in the real economy — such as shelter costs — stabilize and increase.
If inflation does take off in a lasting way and the Fed has to lift interest rates to slow the economy and tame price pressures, that could be bad news. Rapid rate adjustments have a track record of causing recessions, which throw vulnerable workers out of jobs.
But the Fed tries to balance risks when setting policy, and so far, it has seen the risk of pulling back support early as the one to avoid. Millions of jobs are still missing since the start of the pandemic, and monetary policy could help to keep the economy recovering briskly so that displaced employees have a better chance of finding new work.
Alan Rappeport and Matt Phillips contributed reporting.
>>> Don’t Miss Today’s BEST Amazon Deals! <<<<
The discussion could shape the path ahead for economic policy, helping to determine how much support President Biden has for infrastructure spending proposals and how patient the Fed can be in removing emergency monetary policy supports.
“This is the largest year-over-year increase in prices since the Great Recession, and massive stimulus spending is a contributing factor,” Senator Mike Crapo, Republican of Idaho, wrote on Twitter. “Proposals for further federal spending, coupled with job-killing tax hikes, are not the remedy for economic recovery.”
The White House has been focused on alleviating bottlenecks where it can, reviewing the supply chain for semiconductors and critical minerals used in all sorts of products. But controlling inflation falls largely to the Fed.
The data comes less than a week before the central bank’s June meeting, which will give the Fed chair, Jerome H. Powell, another opportunity to address how he and his colleagues plan to achieve their two key goals — stable prices and full employment — in the tricky post-pandemic economic environment.
“The Fed has never said how big a reopening spike it expected, but we’re guessing that policymakers have been surprised by the past two months’ numbers,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note following the release.
The big policy question facing the Fed is when, and how quickly, it will begin to slow its $120 billion in monthly government-backed bond purchases. That policy is meant to keep borrowing of all kinds cheap and stoke demand, and because it bolsters stock prices, markets are very attuned to when central bankers will taper it.
Mr. Powell and his colleagues have repeatedly said that they need to see “substantial” further progress toward maximum employment and stable inflation that averages 2 percent over time before they pull back from that policy.
>>> Don’t Miss Today’s BEST Amazon Deals! <<<<
The central fact of the American economy in mid-2021 is that demand for all sorts of goods and services has surged. But supplies are coming back slowly, with the economy acting like a creaky machine that was turned off for a year and has some rusty parts.
The result, as underlined in new government data this week, is shortages and price inflation across many parts of the economy. That is putting the Biden administration and the Federal Reserve in a jam that is only partly of their own making.
Higher prices and the other problems that result from an economy that reboots itself are frustrating, but should be temporary. Still, the longer that the surges in prices continue and the more parts of the economy that they encompass, the greater the chances that Americans’ psychology about prices and inflation could shift in ways that become self-sustaining.
For the last few decades, companies have resisted raising prices or paying higher wages because they felt that doing so would cost them too much business. That put a damper on inflation across the economy. The question is whether current circumstances are evolving in a way that could change that.
shortage of limes, their prices spike and people use more lemons.
after a cyberattack shut down a major pipeline, are truly random events that tell us virtually nothing about underlying supply and demand or future inflation.
Some other sectors seem poised to experience price rises. Restaurants, for example, are complaining of severe labor shortages that are forcing them to curtail service or sharply raise pay for line cooks and dishwashers. If they try to reflect those higher costs in their prices, it will cause the price of food away from home to start rising faster than the (already fairly high) 3.8 percent figure over the last year.
Professional inflation-watchers are on close watch for signs that these forces might be unleashing a form of thinking about price dynamics unseen since the early 1980s, when prices rose in part because everyone expected them to.
The Fed is betting that won’t happen — that even if there are several months of surging prices, it will be at worst a one-time adjustment, and potentially something that reverses as old spending patterns return and workers return to their jobs.
“If past experience is any guide, production will rise to meet the level of goods demand before too long,” the Fed governor Lael Brainard said in a speech this week. “A limited period of pandemic-related price increases is unlikely to durably change inflation dynamics.”
For now, movements in key financial markets mostly align with the Fed view.
Futures contracts for major commodities like oil and copper, for example, suggest that traders expect prices to fall slightly in the years ahead, not rise further.
And in the bond market, even after a surge in longer-term interest rates following the high inflation reading Wednesday, most signs point to future inflation consistent with the 2 percent the Fed aims for.
Still, the level of future inflation implied by those bond prices has risen significantly in the last few weeks, meaning further moves are likely to increase worries that the inflation issues will be not-so-transitory after all. And the pattern could change abruptly if more evidence starts to arrive that the outlook for inflation is becoming unmoored.
“We aren’t obviously on the way to a very high and persistent inflation outcome,” said Brian Sack, director of global economics at the hedge fund D.E. Shaw and a former senior Federal Reserve official. “But we’re at an inflection point, in that the rise in inflation expectations to date has been a policy success, but a rise from here could become a policy problem.”
The Fed may believe that the evidence emerging in various corners of the economy is a one-time occurrence that will fade into memory before too long. The Biden administration is betting its agenda on the same idea.
Ultimately, what matters more than whatever the bond market does is how ordinary Americans who make everyday economic decisions — demanding raises or not, paying more for a car or not — view things. Can they wait for the complex machinery of the American economy to fully crank into gear?
Consumer prices jumped at the fastest pace in more than a decade in April, surprising economists and intensifying a debate on Wall Street and in Washington over whether inflation might reach levels that would squeeze households and ultimately undermine the recovery.
Investors and politicians are worried that prices will keep climbing — potentially causing the Federal Reserve to lift interest rates sharply. That could slow economic growth and send stock prices plummeting. But some economists and central bank officials said the jump in the Consumer Price Index reflected pandemic-driven trends that would most likely prove temporary.
Stocks slumped more than 2 percent on Wednesday, their biggest decline since late February.
Hanging over the debate is America’s inflationary experience in the 1960s and 1970s, when big government spending, an oil crisis, a slow-moving Fed and the final end of the gold standard converged to send price gains to double-digit heights. The central bank got things under control only by lifting interest rates to punishing levels, at a grave cost to the housing market and ultimately the job market.
Few analysts expect a return to such huge price gains, in part because the Fed has pledged to act to keep inflation under control. But if officials are prodded to withdraw economic support quickly in order to prevent another “Great Inflation,” it could spur a downturn, as sudden Fed changes have done in the past.
showed that job gains slowed sharply in April, vastly disappointing economists’ expectations.
“We have not made substantial further progress toward our labor market objective,” Mr. Clarida said Wednesday, speaking to business economists on a webcast.
Fed last year redefined its 2 percent inflation target to make it clear that it will aim for periods of slightly faster price gains to make up for months of slow ones.
Fed officials have been clear in recent weeks that as inflation pops, they need to focus on both risks: that it might take off, but also that it might sink back down after a 2021 reopening jump.
“The Fed has a fundamentally different framework. I mean, we cannot apply the playbook of the Fed in the previous recovery to what’s happening now,” said Jean Boivin, head of the BlackRock Investment Institute. “I think each time we get a number that surprises in the upside, we get an extrapolation, too much extrapolation, into a Fed tightening coming sooner.”
Matt Phillips, Jim Tankersley and Ella Koeze contributed reporting.
Consumer prices are expected to jump sharply in April data that will be released on Wednesday, a move resulting mainly from a technical quirk — but one that investors will be watching carefully as they try to determine if inflation could alter Federal Reserve policy.
The Consumer Price Index probably climbed by 3.6 percent in the year through April, economists surveyed by Bloomberg expect. The increase in prices from March to April is expected to be more muted, at 0.2 percent. The Labor Department will release the figures at 8:30 a.m.
The annual jump would be the fastest increase since 2011, and a sign that prices are shooting higher as inflation figures lap extremely weak readings from 2020 and, to a lesser extent, as supply chain disruptions begin to bite and demand climbs.
Central bankers think the jump in prices will be short-lived, and have made it clear that they plan to look past a temporary increase when setting policy. The technical quirks at work in April will last only a few months, officials point out, and while it is less clear when shortages will be resolved, they are expected to eventually work their way through the system as businesses ramp up production to meet demand.
uncomfortably low levels, where they have been mired for much of the past decade.
said during a speech on Tuesday that “remaining patient through the transitory surge associated with reopening will help ensure” the economic momentum to “reach our goals.”