University of Michigan survey has shown sentiment faltering as prices have risen, and the Conference Board’s index ticked down in January.

“You have very high inflation, so people are seeing an erosion of their purchasing power,” said Dana M. Peterson, chief economist at The Conference Board, noting that the resurgent virus is also to blame. “People will have higher confidence once we’re beyond Omicron.”

For now, it is a moment of pronounced economic uncertainty.

Ashley Fahr, the owner of the culinary company and event space La Cuisine in Venice, Calif., said rising grocery costs began to bite at a difficult moment — just before Omicron began to surge, causing people to pull back from activities like the cooking classes and catering events she offers.

She noticed in December that her food bill had gone up by about 15 percent, chipping away at her margins, and passed about 5 percent of that on to customers while absorbing the rest of the increase.

“I didn’t want to quote a number people would balk at,” she said.

Ms. Fahr said she pays her workers — most of whom are independent contractors — competitive wages and that it’s hard to keep up with rising prices and still turn a profit. She is watching to see what other local caterers and cooking classes do with their pricing — and whether they begin to pass on the full increase to customers.

“If everyone else does it, I’ll do it too,” Ms. Fahr said.

That sort of logic is what economic officials worry about. If businesses and consumers begin to expect prices to steadily rise, they may begin to accept instead of resisting them — and when inflation gets baked into expectations, it might spiral upward year after year, economists worry.

“What we’re trying to do is get inflation, keep inflation expectations well anchored at 2 percent,” Mr. Powell, the Fed chair, said at his news conference this week. “That’s always the ultimate goal.”

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Stock Markets Off to Worst Start Since 2016 as Fed Fights Inflation

After falling for a fourth day in a row on Friday, the stock market suffered its worst week in nearly two years, and so far in January the S&P 500 is off to its worst start since 2016. Technology stocks have been hit especially hard, with the Nasdaq Composite Index dropping more than 10 percent from its most recent high, which qualifies as a correction in Wall Street talk.

That’s not all. The bond market is also in disarray, with rates rising sharply and bond prices, which move in the opposite direction, falling. Inflation is red hot, and supply chain disruptions continue.

Until now, the markets looked past such issues during the pandemic, which brought big increases in the value of all kinds of assets.

Yet a crucial factor has changed, which gives some market watchers reason to worry that the recent decline may be consequential. That element is the Federal Reserve.

intervened to save desperately wounded financial markets back in early 2020.

This could be a good thing if it beats back inflation without derailing the economic recovery. But removing this support also inevitably cools the markets as investors move money around, searching for assets that perform better when interest rates are high.

“The Fed’s policies basically got the current bull market started,” said Edward Yardeni, an independent Wall Street economist. “I don’t think they are going to end it all now, but the environment is changing and the Fed is responsible for a lot of this.”

The central bank is tightening monetary policy partly because it has worked. It helped stimulate economic growth by holding short-term interest rates near zero and pumping trillions of dollars into the economy.

This flood of easy money also contributed to the rapid rise in prices of commodities, like food and energy, and financial assets, like stocks, bonds, homes and even cryptocurrency.

said in 1955, the central bank finds itself acting as the adult in the room, “who has ordered the punch bowl removed just when the party was really warming up.”

The mood of the markets shifted on Jan. 5, Mr. Yardeni said, when Fed officials released the minutes of their December policymaking meeting, revealing that they were on the verge of embracing a much tighter monetary policy. A week later, new data showed inflation climbing to its highest level in 40 years.

Putting the two together, it seemed, the Fed would have no choice but to react to curb rapidly rising prices. Stocks began a disorderly decline.

Financial markets now expect the Fed to raise its key interest rate at least three times this year and to start to shrink its balance sheet as soon as this spring. It has reduced the level of its bond buying already. Fed policymakers will meet next week to decide on their next steps, and market strategists will be watching.

Low interest rates made certain sectors especially appealing, foremost among them tech stocks. The S&P 500 information technology sector, which includes Apple and Microsoft, has risen 54 percent on an annualized basis since the market’s pandemic-induced trough in March 2020. One reason for this is that low interest rates amplify the value of the expected future returns of growth-oriented companies like these. If rates rise, this calculus can change abruptly.

The very prospect of higher interest rates has made technology the worst-performing sector in the S&P 500 this year. Since its peak in late December, it has fallen more than 11 percent.

The S&P’s three best-performing sectors in the early days of 2022, on the other hand, are energy, financial services and consumer staples.

like Netflix and Peloton, have begun to flag as people venture out more.

Some astute market analysts foresee bigger problems. Jeremy Grantham, one of the founders of GMO, an asset manager, predicts a catastrophic end to what he calls a “superbubble.”

But the current losses could be beneficial if they let a little air out of a potential bubble, without bursting investor portfolios. This year’s declines erase only a small share of the market’s gains in recent years: The S&P 500 rose nearly 27 percent last year, more than 16 percent in 2020 and nearly 29 percent in 2019.

And the prospects for corporate earnings remain good. Once the Fed starts to act, and the effects are better understood, the stock market party could continue — at a less giddy pace.

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Federal Reserve Signals a Shift Away From Pandemic Support

Federal Reserve officials indicated on Wednesday that they expect to soon slow the asset purchases they have been using to support the economy and predicted they might raise interest rates next year, sending a clear signal that policymakers are preparing to curtail full-blast monetary help as the business environment snaps back from the pandemic shock.

Jerome H. Powell, the Fed’s chair, said during a news conference that the central bank’s bond purchases, which have propped up the economy since the depths of the pandemic downturn, “still have a use, but it’s time for us to begin to taper them.”

That unusual candor came for a reason: Fed officials have been trying to fully prepare markets for their first move away from enormous economic support. Policymakers could announce a slowdown to their monthly government-backed securities purchases as soon as November, the Fed’s next meeting, and the program may come to a complete end by the middle of next year, Mr. Powell later said. He added that there was “very broad support” on the policy-setting Federal Open Market Committee for such a plan.

Nearly 20 months after the coronavirus pandemic first shook America, the Fed is trying to guide an economy in which business has rebounded as consumers spend strongly, helped along by repeated government stimulus checks and other benefits.

markets on edge. In the United States, partisan wrangling could imperil future government spending plans or even cause a destabilizing delay to a needed debt ceiling increase.

Mr. Powell and his colleagues are navigating those crosscurrents at a time when inflation is high and the labor market, while healing, remains far from full strength. They are weighing when and how to reduce their monetary policy support, hoping to prevent economic or financial market overheating while keeping the recovery on track.

“They want to start the exit,” said Priya Misra, global head of rates strategy at T.D. Securities. “They’re putting the markets on notice.”

Investors took the latest update in stride. The S&P 500 ended up 1 percent for the day, slightly higher than it was before the Fed’s policy statement was released, and yields on government bonds ticked lower, suggesting that investors didn’t see a reason to radically change their expectations for interest rates.

The Fed has been holding its policy rate at rock bottom since March 2020 and is buying $120 billion in government-backed bonds each month, policies that work together to keep many types of borrowing cheap. The combination has fueled lending and spending and helped to foster stronger economic growth, while also contributing to record highs in the stock market.

fresh set of economic projections on Wednesday, laying out their predictions for growth, inflation and the funds rate through the end of 2024. Those included the “dot plot” — a set of anonymous individual estimates showing where each of the Fed’s 18 policymakers expect their interest rate to fall at the end of each year.

last released in June. This was the first time the Fed has released 2024 projections, and officials expected rates to stand at 1.8 percent at the end of that year.

sharply higher in recent months, elevated by supply-chain disruptions and other quirks tied to the pandemic. The Fed’s preferred metric, the personal consumption expenditures index, climbed 4.2 percent in July from a year earlier.

Fed officials expected inflation to average 4.2 percent in the final quarter of 2021 before falling to 2.2 percent in 2022, the new forecasts showed.

Central bankers are trying to predict how inflation will evolve in the coming months and years. Some officials worry that it will remain elevated, fueled by strong consumption and newfound corporate pricing power as consumers come to expect and accept higher costs.

Others fret that the same factors pushing prices higher today will lead to uncomfortably low inflation down the road — for instance, used car prices have contributed heavily to the 2021 increase and could fall as demand wanes. Tepid price increases prevailed before the pandemic started, and the same global trends that had been weighing inflation down could once again dominate.

“Inflation expectations are terribly important, we spend a lot of time watching them, and if we did see them moving up in a troubling way” then “we would certainly react to that,” Mr. Powell said. “We don’t really see that now.”

The Fed’s second goal — full employment — also remains elusive. Millions of jobs remain missing compared with before the pandemic, even after months of historically rapid employment gains. Officials want to avoid lifting interest rates to cool off the economy before the labor market has fully healed. It’s difficult to know when that might be, because the economy has never recovered from pandemic-induced lockdowns before.

“The process of reopening the economy is unprecedented, as was the shutdown at the onset of the pandemic,” Mr. Powell said on Wednesday.

Given those uncertainties, the Fed is likely to move cautiously on raising interest rates. And while Mr. Powell teed up a possible November announcement that the Fed would start slowing its bond-buying, even that is subject to change if the economy does not shape up as expected — or if major risks on the horizon materialize.

“The start of tapering would be delayed if the debt ceiling standoff is unresolved and markets are in turmoil,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a research note following the meeting.

Yet Mr. Powell made clear that the Fed was not equipped to ride to the rescue if lawmakers could not resolve their differences.

“It’s just very important that the debt ceiling be raised in a timely fashion,” Mr. Powell said, adding that “no one should assume the Fed or anyone else can protect markets and the economy in the event of a failure” to “make sure that we do pay those, when they’re due.”

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Federal Reserve Expects to Raise Interest Rates in 2023

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.

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Fed Leaves Interest Rates Unchanged as Economy Begins to Heal

“While the level of new cases remains concerning,” he said, “continued vaccinations should allow for a return to more normal economic conditions later this year.”

Fed officials have signaled that they will keep interest rates low and bond purchases going at the current $120 billion-per-month pace until the recovery is more complete. The Fed has said it would like to see “substantial” further progress before dialing back government-backed bond buying, a policy meant to make many kinds of borrowing cheap. The hurdle for raising rates is even higher: Officials want the economy to return to full employment and achieve 2 percent inflation, with expectations that inflation will remain higher for some time.

“A transitory rise in inflation above 2 percent this year would not meet this standard,” Mr. Powell said of the Fed’s criteria for achieving its average inflation target before raising interest rates. When it comes to bond buying, “the economy is a long way from our goals, and it is likely to take some time for substantial further progress to be achieved.”

He later said that “it is not time yet” to talk about scaling back, or “tapering,” bond purchases.

Unemployment, which peaked at 14.8 percent last April, has since declined to 6 percent. Retail spending is strong, supported by repeated government stimulus checks. Consumers have amassed a big savings stockpile over months of stay-at-home orders, so there is reason to expect that things could pick up further as the economy fully reopens.

Yet there is room for improvement. The jobless rate remains well above its 3.5 percent reading coming into the pandemic, with Black workers and those in lower-paying jobs disproportionately out of work. Some businesses have closed forever, and it remains to be seen how post-pandemic changes in daily patterns will affect others, like corporate offices and the companies that service them.

“There’s no playbook here,” said Michelle Meyer, the head of U.S. economics at Bank of America, adding that the Fed needed time to let inflation play out and the labor market heal, and that while the signs were encouraging, central bankers would only “react when they have enough evidence.”

The Fed has repeatedly said it wants to see realized improvement in economic data — not just expected healing — before it reduces its support. Based on their March economic projections, most Fed officials are penciling in interest rates near zero through at least 2023.

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