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When Stocks Become Bear Markets

The S&P 500 on Monday dropped into its second bear market of the pandemic, crossing a symbolic and worrisome threshold as stocks plunge following a meteoric rise over the last two years.

Bear markets — when stocks decline at least 20 percent from their recent peaks — are relatively rare, and they frequently precede a recession. This sell-off, dragging the S&P down from a peak on Jan. 3 (which reflects the new bear market’s starting point), comes as concerns mount over high inflation, the war in Ukraine, Covid and the Federal Reserve’s attempts to rein in the economy.

just above a bear market in May before recovering, but stocks fell sharply again on Friday following the latest release of government data showing that inflation had accelerated again.

The worry among stock traders is that the Fed could be forced to constrict the economy’s growth in order to bring inflation under control, leading to a recession. While recessions have often followed bear markets, one does not necessarily cause the other.

“It is not that consumer demand is weak yet — spending has held up,” said Paul Ashworth, who is the chief North American economist at Capital Economics. “The fear is that the Fed is going to go very hard, and that leaves us in a recession at some point.”

800,000 of the 22 million jobs lost at the height of coronavirus-related lockdowns. While rising mortgage rates have begun to dampen activity, housing — generally one of the biggest sources of wealth for Americans — remains strong.

target-date funds, which automatically move 401(k) money into bonds and other safer investments as their retirement age approaches. But 401(k) plans can still take a significant hit in market downturns. In 2008, for instance, as the S&P 500 dropped 37 percent, the average 401(k) account balance for those who were in their 50s fell 24 percent.

People with retirement accounts are keeping more of their assets in stocks now, as opposed to bonds or a mix of other investments. “There has been a growing complacency of people keeping most of their nest eggs in stocks,” said Monique Morrissey, who specializes in retirement at the left-leaning think tank Economic Policy Institute. “There has been a fundamental misunderstanding — returns do not always average out.”

The bigger issue, according to Ms. Morrissey, is that many people have gotten used to the stock market going up. That’s not a guarantee — especially in the near term.

“It’s not just the loss from January; it’s what happens going forward,” she said. “If you were counting on the amount that you have in your 401(k) to continually grow, well, then you may never get to what you had planned for.”

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White House Struggles to Talk About Inflation, the ‘Problem From Hell’

WASHINGTON — President Biden was at a private meeting discussing student debt forgiveness this year when, as happens uncomfortably often these days, the conversation came back to inflation.

“He said with everything he does, Republicans are going to attack him and use the word ‘inflation,’” said Representative Tony Cárdenas, Democrat of California, referring to Mr. Biden’s meeting with the Congressional Hispanic Caucus in April. Mr. Cárdenas said Mr. Biden was aware he would be attacked over rising prices “no matter what issue we’re talking about.”

The comment underscored how today’s rapid price increases, the fastest since the 1980s, pose a glaring political liability that looms over every major policy decision the White House makes — leaving Mr. Biden and his colleagues on the defensive as officials discover that there is no good way to talk to voters about inflation.

The administration has at times splintered internally over how to discuss price increases and has revised its inflation-related message several times as talking points fail to resonate and new data comes in. Some Democrats in Congress have urged the White House to strike a different — and more proactive — tone ahead of the November midterm elections.

increased by 8.3 percent in the year through April, and data this week is expected to show inflation at 8.2 percent in May. Inflation averaged 1.6 percent annual gains in the five years leading up to the pandemic, making today’s pace of increase painfully high by comparison. A gallon of gas, one of the most tangible household costs, hit an average of $4.92 this week. Consumer confidence has plummeted as families pay more for everyday purchases and as the Fed raises interest rates to cool the economy, which increases the risk of a recession.

a series of confidential memos sent to Mr. Biden last year by one of his lead pollsters, John Anzalone. Inflation has only continued to fuel frustration among voters, according to a separate memo compiled by Mr. Anzalone’s team last month, which showed the president’s low approval rating on the economy rivaling only his approach to immigration.

wrote in a tweet that went viral this weekend.

The White House knows it is in a tricky position, and the administration’s approach to explaining inflation has evolved over time. Officials spent the early stages of the current price burst largely describing price pressures as temporary.

When it became clear that rising costs were lasting, administration officials began to diverge internally on how to frame that phenomenon. While it was clear that much of the upward pressure on prices came from supply chain shortages exacerbated by continued waves of the coronavirus, some of it also tied back to strong consumer demand. That big spending had been enabled, in part, by the government’s stimulus packages, including direct checks to households, expanded unemployment insurance and other benefits.

Some economists in the White House have begun to emphasize that inflation was a trade-off: To the extent that Mr. Biden’s stimulus spending spurred more inflation, it also aided economic growth and a faster recovery.

have claimed credit for strong economic growth.

“Some have a curious obsession with exaggerating impact of the Rescue Plan while ignoring the degree high inflation is global,” Gene Sperling, a senior White House adviser overseeing the implementation of the stimulus package, wrote on Twitter last week, adding that the law “has had very marginal impact on inflation.”

Brian Deese, the director of the National Economic Council, acknowledged in an interview last week that there were some disagreements among White House economic officials when it came to how to talk about and respond to inflation, but he portrayed that as a positive — and as something that is not leading to any kind of dysfunction.

“If there wasn’t healthy disagreement, debate and people feeling comfortable bringing issues and ideas to the table, then I think we would be not serving the president and the public interest well,” he said.

He also pushed back on the idea that the administration was deeply divided on the March 2021 package’s aftereffects, saying in a separate emailed comment that “there is agreement across the administration that many factors contributed to inflation, and that inflation has been driven by elevated demand and constrained supply across the globe.”

How to portray the Biden administration’s stimulus spending is far from the only challenge the White House faces. As price increases last, Democrats have grappled with how to discuss their plans to combat them.

deficit reduction as a way to lower inflation and arguing that Republicans have a bad plan to deal with rising costs. Mr. Biden regularly acknowledges the pain that higher prices are causing and has emphasized that the problem of taming inflation rests largely with the Fed, an independent entity whose work he has promised not to interfere with.

The administration has also highlighted that inflation is widespread globally, and that the United States is better off than many other nations.

The renewed messaging comes as Mr. Biden and his top aides have grown increasingly concerned about the public’s negative views of the economy, according to an administration official. Economists within the administration are more sidelined when it comes to setting the tone on issues like inflation than in previous White Houses, another person familiar with the discussions said.

So far, the talking points have done little to change public perception or to mollify concerns on Capitol Hill, where some Democrats are pushing for the White House to find a more compelling story.

“There has to be more of a laser focus on the economy, a bolder message, a clearer story,” said Representative Ro Khanna, a California Democrat who wrote a New York Times opinion piece last week saying that Democrats need a more ambitious plan for fighting inflation. He added that “rhetoric about ‘Well, we’re doing really well’ does not capture the profound sense of anxiety that Americans feel.”

Part of the difficulty is that there is only so much politicians can do to fight price increases.

suspended a ban on summertime sales of higher-ethanol gasoline blends to try to temper price increases at the pump, spurring frustration among climate activists still angry over the collapse of the president’s climate and social-spending package.

Talks over whether to roll back Trump-era tariffs on Chinese goods have also gotten caught in the inflation maw. Ms. Yellen has said she supports relaxing tariffs to help ease prices, but other Democrats are wary that removing them would make Mr. Biden look weak on China.

Inflation is also influencing conversations about whether to forgive student loan debt, one of Mr. Biden’s key campaign promises. Economists in the administration think that loan forgiveness would, at most, push inflation up a little bit by giving people with outstanding student debt more financial wiggle room. But some economists in the administration’s orbit have expressed concern about the possibility of doing something that could stimulate demand — even slightly — at a moment when it is already hot.

To help mute the inflationary effect, forgiveness would most likely be accompanied by a resumption of interest payments on all student loans that have been paused since the pandemic.

For now, the administration is considering forgiving at least $10,000 for borrowers in a certain income range, according to people familiar with the matter. Mr. Cárdenas said that Mr. Biden knew he would be attacked over inflation but that he did not think the issue would prevent the president from canceling at least $10,000 worth of debt.

“Will it affect him going beyond that? It may,” he said.

Jonathan Martin contributed reporting.

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Global Growth Will Be Choked Amid Inflation and War, World Bank Says

For large and small nations around the globe, the prospect of averting a recession is fading.

That grim prognosis came in a report Tuesday from the World Bank, which warned that the grinding war in Ukraine, supply chain chokeholds, Covid-related lockdowns in China, and dizzying rises in energy and food prices are exacting a growing toll on economies all along the income ladder. This suite of problems is “hammering growth,” David Malpass, the bank’s president, said in a statement. “For many countries, recession will be hard to avoid.”

World growth is expected to slow to 2.9 percent this year from 5.7 percent in 2021. The outlook, delivered in the bank’s Global Economic Prospects report, is not only darker than one produced six months ago, before Russia’s invasion of Ukraine, but also below the 3.6 percent forecast in April by the International Monetary Fund.

Growth is expected to remain muted next year. And for the remainder of this decade, it is forecast to fall below the average achieved in the previous decade.

poorer, hungrier and less secure.

Roughly 75 million more people will face extreme poverty than were expected to before the pandemic.

Per capita income in developing economies is also expected to fall 5 percent below where it was headed before the pandemic hit, the World Bank report said. At the same time, government debt loads are getting heavier, a burden that will grow as interest rates increase and raise the cost of borrowing.

“In Egypt more than half of the population is eligible for subsidized bread,” said Beata Javorcik, chief economist at the European Bank for Reconstruction and Development. “Now, that’s going to be much more expensive for government coffers, and it’s happening where countries are already more indebted than before.”

stock market’s woes. The conflict has caused​​ dizzying spikes in gas prices and product shortages, and is pushing Europe to reconsider its reliance on Russian energy sources.

“Insecurity and violence continue to weigh on the outlook” for many low-income countries, the World Bank said, while “more rapid increases in living costs risk further escalating social unrest.” Several studies have pointed to rising food prices as an important trigger for the Arab Spring uprisings in 2011.

In Latin American and the Caribbean, growth is expected to slow to 2.5 percent from 6.7 percent last year. India’s total output is forecast to drop to 7.5 percent from 8.7 percent, while Japan’s is expected to remain flat at 1.7 percent.

The World Bank, founded in the shadow of World War II to help rebuild ravaged economies, provides financial support to low- and middle-income nations. It reiterated its familiar basket of remedies, which include limiting government spending, using interest rates to dampen inflation and avoiding trade restrictions, price controls and subsidies.

Managing to tame inflation without sending the economy into a tailspin is a difficult task no matter what the policy choices are — which is why the risks of stagflation are so high.

At the same time, the United States, the European Union and allies are struggling to isolate Russia, starving it of resources to wage war, without crippling their own economies. Many countries in Europe, including Germany and Hungary, are heavily dependent on either Russian oil or gas.

The string of disasters — the pandemic, droughts and war — is injecting a large dose of uncertainty and draining confidence.

Among its economic prescriptions, the World Bank underscored that leaders should make it a priority to use public spending to shield the most vulnerable people.

That protection includes blunting the impact of rising food and energy prices as well as ensuring that low-income countries have sufficient supplies of Covid vaccines. So far, only 14 percent of people in low-income countries have been fully vaccinated.

“Renewed outbreaks of Covid-19 remain a risk in all regions, particularly those with lower vaccination coverage,” the report said.

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The Potential Dark Side of a White-Hot Labor Market

Ms. Calvo is hoping to work her way up to the assistant store-manager level, which would put her in a salaried position, and thinks she has made the prudent choice in leaving school, even if her parents disagree.

“They think it’s a bad idea — they think I should have quit working, gone to college,” she said. But she has made enough money to put her name on a lease, which she recently signed along with her boyfriend, who is 19 and works at the restaurant in a local Nordstrom.

“I feel like I have a lot of experience, and I have a lot more to gain,” Ms. Calvo said.

The question, then, is how people like Ms. Calvo will fare in a weaker labor market, because today’s remarkable economic strength is unlikely to continue.

The Fed is raising rates in a bid to slow down consumer demand, which would in turn cool down job and wage growth. Monetary policy is a blunt instrument: There is a risk that the central bank will end up pushing unemployment higher, and even touch off a recession, as it tries to bring today’s rapid inflation under control.

That could be bad news for people without credentials or degrees. Historically, workers with less education and those who have been hired more recently are the ones to lose their jobs when unemployment rises and the economy weakens. At the onset of the pandemic, to consider an extreme example, unemployment for adults with a high school education jumped to 17.6 percent, while that for the college educated peaked at 8.4 percent.

The same people benefiting from unusual opportunities and rapid pay gains today could be the ones to suffer in a downturn. That is one reason economists and educators like Ms. Jackson often urge people to continue their training.

“We worry about their long-term futures, if this derails them from ever going to college, for a $17 to $19 Target job. That’s a loss,” said Alicia Sasser Modestino, an associate professor at Northeastern University who researches labor economics and youth development.

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Why a Not-So-Hot Economy Might Be Good News

When it comes to the economy, more is usually better.

Bigger job gains, faster wage growth and more consumer spending are all, in normal times, signs of a healthy economy. Growth might not be sufficient to ensure widespread prosperity, but it is necessary — making any loss of momentum a worrying sign that the economy could be losing steam or, worse, headed into a recession.

But these are not normal times. With nearly twice as many open jobs as available workers and companies struggling to meet record demand, many economists and policymakers argue that what the economy needs right now is not more, but less — less hiring, less wage growth and above all less inflation, which is running at its fastest pace in four decades.

Jerome H. Powell, the Federal Reserve chair, has called the labor market “unsustainably hot,” and the central bank is raising interest rates to try to cool it. President Biden, who met with Mr. Powell on Tuesday, wrote in an opinion article this week in The Wall Street Journal that a slowdown in job creation “won’t be a cause for concern” but would rather be “a sign that we are successfully moving into the next phase of recovery.”

“We want a full and sustainable recovery,” said Claudia Sahm, a former Fed economist who has studied the government’s economic policy response to the pandemic. “The reason that we can’t take the victory lap right now on the recovery — the reason it is incomplete — is because inflation is too high.”

undo much of that progress.

“That’s the needle we’re trying to thread right now,” said Harry J. Holzer, a Georgetown University economist. “We want to give up as few of the gains that we’ve made as possible.”

Economists disagree about the best way to strike that balance. Mr. Powell, after playing down inflation last year, now says reining it in is his top priority — and argues that the central bank can do so without cutting the recovery short. Some economists, particularly on the right, want the Fed to be more aggressive, even at the risk of causing a recession. Others, especially on the left, argue that inflation, while a problem, is a lesser evil than unemployment, and that the Fed should therefore pursue a more cautious approach.

But where progressives and conservatives largely agree is that evaluating the economy will be particularly difficult over the next several months. Distinguishing a healthy cool-down from a worrying stall will require looking beyond the indicators that typically make headlines.

“It’s a very difficult time to interpret economic data and to even understand what’s happening with the economy,” said Michael R. Strain, an economist with the American Enterprise Institute. “We’re entering a period where there’s going to be tons of debate over whether we are in a recession right now.”

11.4 million job openings at the end of April, close to a record. But there are roughly half a million fewer people either working or actively looking for work than when the pandemic began, leaving employers scrambling to fill available jobs.

The labor force has grown significantly this year, and forecasters expect more workers to return as the pandemic and the disruptions it caused continue to recede. But the pandemic may also have driven longer-lasting shifts in Americans’ work habits, and economists aren’t sure when or under what circumstances the labor force will make a complete rebound. Even then, there might not be enough workers to meet the extraordinarily high level of employer demand.

Persistently weak pay increases were a bleak hallmark of the long, slow recovery that followed the last recession. But even some economists who bemoaned those sluggish gains at the time say the current rate of wage growth is unsustainable.

“That’s something that we’re used to saying pretty unequivocally is good, but in this case it just raises the risk that the economy is overheating further,” said Adam Ozimek, chief economist of the Economic Innovation Group, a Washington research organization. As long as wages are rising 5 or 6 percent per year, he said, it will be all but impossible to bring inflation down to the Fed’s 2 percent target.

Fed officials are watching closely for signs of a “wage-price spiral,” a self-reinforcing pattern in which workers expect inflation and therefore demand raises, leading employers to increase prices to compensate. Once such a cycle takes hold, it can be difficult to break — a prospect Mr. Powell has cited in explaining why the central bank has become more aggressive in fighting inflation.

“It’s a risk that we simply can’t run,” he said at a news conference last month. “We can’t allow a wage-price spiral to happen. And we can’t allow inflation expectations to become unanchored. It’s just something that we can’t allow to happen, and so we’ll look at it that way.”

speech in Germany this week, Christopher J. Waller, a Fed governor, argued that as demand slows, employers are likely to start posting fewer jobs before they turn to layoffs. That could result in slower wage growth — since with fewer employers trying to hire, there will be less competition for workers — without a big increase in unemployment.

“I think there’s room right now for inflation to come down a significant amount without unemployment coming up,” said Mike Konczal, an economist at the Roosevelt Institute.

The Fed’s efforts to cool off the economy are already bearing fruit, Mr. Konczal said. Mortgage rates have risen sharply, and there are signs that the housing market is slowing as a result. The stock market has lost almost 15 percent of its value since the beginning of the year. That loss of wealth is likely to lead at least some consumers to pull back on their spending, which will lead to a pullback in hiring. Job openings fell in April, though they remained high, and wage growth has eased.

“There’s a lot of evidence to suggest the economy has already slowed down,” Mr. Konczal said. He said he was optimistic that the United States was on a path toward “normalizing to a regular good economy” instead of the boomlike one it has experienced over the past year.

But the thing about such a “soft landing,” as Fed officials call it, is that it is still a landing. Wage growth will be slower. Job opportunities will be fewer. Workers will have less leverage to demand flexible schedules or other perks. For the Fed, achieving that outcome without causing a recession would be a victory — but it might not feel like one to workers.

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Japan’s Economy Shrank 1 Percent as Consumers Fled Covid

TOKYO — Last December, after two years of stop-and-go growth, Japan’s economic engine seemed like it might finally be revving up. Covid cases were practically nonexistent. Consumers were back on the town, shopping, eating out, traveling. The year 2021 ended on a high note, with the country’s economy expanding on an annual basis for the first time in three years.

But the Omicron variant of the coronavirus, geopolitical turmoil and supply chain snarls have once again set back Japan’s fragile economic recovery. In the first three months of the year, the country’s economy, the world’s third largest after the United States and China, shrank at an annualized rate of 1 percent, government data showed on Wednesday.

A combination of factors contributed to the decline in growth. In January, Japan had put into place new emergency measures as coronavirus case numbers, driven up by Omicron, moved toward the highest levels of the pandemic. In February, Russia invaded Ukraine, spiking energy prices. And that was before China, Japan’s largest export market and a key supplier of parts and labor to its manufacturers, imposed new lockdowns in Shanghai, throwing supply chains into chaos.

The contraction has not been as “extreme” as previous economic setbacks thanks to high levels of vaccine uptake and less wide-ranging emergency measures than during previous waves of the coronavirus, according to Shinichiro Kobayashi, principal economist at the Mitsubishi UFJ Research Institute.

traced to the outbreak of Covid-19, which triggered an economic slowdown, mass layoffs and a halt to production. Here’s what happened next:

Consumer spending “will recover from the downward pressure, but because there are these negative factors, the question is how broad will that recovery be?” said Yoshiki Shinke, a senior economist at Dai-ichi Life Research Institute.

Japan’s prime minister, Fumio Kishida, has tried to offset the effects of price increases with large government subsidies for fuel and cash handouts for families with children. But Japanese consumers, wary of the pandemic’s economic effects, have largely been putting rounds of stimulus money into savings.

Japan’s growth is facing diverse challenges, but ultimately its recovery will depend on Covid, analysts said, a common refrain over the last two years.

While Japan has high vaccination rates and has performed better than most other wealthy countries at keeping the pandemic in check, the virus’s protean nature has made it difficult to predict its path. And that has made experts hesitant to commit to any forecasts about its future impact on global economies.

“The big risk is that corona starts to spread again,” said Naoyuki Shiraishi, an economist at the Japan Research Institute. “If a new variant appears, there will be new restrictions on activity, and that will suppress consumption.”

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Bitcoin Is Increasingly Acting Like Just Another Tech Stock

SAN FRANCISCO — Bitcoin was conceived more than a decade ago as “digital gold,” a long-term store of value that would resist broader economic trends and provide a hedge against inflation.

But Bitcoin’s crashing price over the last month shows that vision is a long way from reality. Instead, traders are increasingly treating the cryptocurrency like just another speculative tech investment.

Since the start of this year, Bitcoin’s price movement has closely mirrored that of the Nasdaq, a benchmark that’s heavily weighted toward technology stocks, according to an analysis by the data firm Arcane Research. That means that as Bitcoin’s price dropped more than 25 percent over the last month, to under $30,000 on Wednesday — less than half its November peak — the plunge came in near lock step with a broader collapse of tech stocks as investors grappled with higher interest rates and the war in Ukraine.

The growing correlation helps explain why those who bought the cryptocurrency last year, hoping it would grow more valuable, have seen their investment crater. And while Bitcoin has always been volatile, its increasing resemblance to risky tech stocks starkly shows that its promise as a transformative asset remains unfulfilled.

institutional investors like hedge funds, endowments and family offices that have poured money into the cryptocurrency market.

declining revenue and a loss of $430 million in the first quarter. The company’s stock has fallen more than 75 percent overall this year.

The Nasdaq is already in bear-market territory, having ended Wednesday down 29 percent from its mid-November record. November was also when Bitcoin’s price hit a peak of nearly $70,000. The crash has been a reality check for Bitcoin evangelists.

Ukrainian counteroffensive near Kharkiv appears to have contributed to sharply reduced Russian shelling in the eastern city. But Moscow’s forces are making advances along other parts of the front line.

Bitcoin has rebounded from major losses before, and its long-term growth remains impressive. Before the pandemic boom in crypto prices, its value hovered well below $10,000. True believers, who call themselves Bitcoin maximalists, remain adamant that the cryptocurrency will eventually break from its correlation with risk assets.

Michael Saylor, the chief executive of the business-intelligence company MicroStrategy, has spent billions of his firm’s money on Bitcoin, building up a stockpile of more than 125,000 coins. As the price of Bitcoin has cratered, the company’s stock has dropped roughly 75 percent since November.

In an email, Mr. Saylor blamed the crash on “traders and technocrats” who don’t appreciate Bitcoin’s long-term potential to transform the global financial system.

“In the near term, the market will be dominated by those with less appreciation of the virtues of Bitcoin,” he said. “Over the long term, the maximalists will be proven correct, because billions of people need this solution, and awareness is spreading to millions more each month.”

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Fed Confronts Why It May Have Acted Too Slowly on Inflation

Some Federal Reserve officials have begun to acknowledge that they were too slow to respond to rapid inflation last year, a delay that is forcing them to constrain the economy more abruptly now — and one that could hold lessons for the policy path ahead.

Inflation began to accelerate last spring, but Fed policymakers and most private-sector forecasters initially thought price gains would quickly fade. It became clear in early fall that fast inflation was proving to be more lasting — but the Fed pivoted toward rapidly removing policy support only in late November and did not raise rates until March.

Several current and former Fed officials have suggested in recent days that, in hindsight, the central bank should have reacted more quickly and forcefully last fall, but that both profound uncertainty about the future and the Fed’s approach to setting policy slowed it down.

Officials had spent years dealing with tepid inflation, which made some hesitant to believe that rapidly rising prices would last. Even as they became more concerned, it took the Fed’s large group of policymakers time to come to an agreement on how to respond. Another complicating factor was that the Fed had made clear promises to markets about how it would remove support for the economy, which made adjusting quickly more difficult.

8.5 percent from a year earlier, the fastest rate since 1981. Consumer price increases are expected to remain rapid when fresh data are released Wednesday.

And as high prices have lingered, inflation expectations have been creeping up, threatening to change household and business behavior in ways that perpetuate the problem.

Because inflation is eating away at paychecks and making it more difficult for families to afford groceries and cars, it has emerged as a major political issue for President Biden, whose approval ratings have fallen over concerns about his handling of the economy. During remarks at the White House on Tuesday, Mr. Biden called inflation his “top domestic priority” and said his administration was taking steps to contain it. He also sought to push back on Republicans, who have spent months blaming him for stoking inflation, saying their policy ideas were “extreme” and would hurt working families.

biggest increase since 2000, while broadcasting that two more large adjustments could be coming. They are also going to start shrinking their $9 trillion balance sheet of bond holdings next month.

If the Fed continues to rapidly adjust policy this year as it tries to catch up, policymakers risk slamming the brakes on a speeding economy. Such hard stops can hurt, pushing up unemployment and possibly tipping off a recession. Officials typically prefer to apply their policy brakes gradually, increasing the chances that the economy can slow down painlessly.

Still, several Fed officials pointed out that it was easier to say what the Fed should have done in 2021 after the fact — that in the moment, it was difficult to know price increases would last. Inflation initially came mainly from a few big products that were in short supply amid supply chain snarls, like semiconductors and cars. Only later in the year did it become obvious that price pressures were broadening to food, rent and other areas.

“I try to give some grace, and say: In a very uncertain time, with an unprecedented setting, with no real models to guide us, people are going to do the best they can,” Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said in an interview Monday. Mr. Bostic was an early voice suggesting that the Fed should stop buying bonds and think about raising interest rates.

Officials have said it was the acceleration in inflation data in September, followed by rising employment costs, that convinced them that price gains might last and that the central bank needed to act decisively. The Fed chair, Jerome H. Powell, pivoted on policy in late November as those data points added up.

a complicating factor: Mr. Powell was waiting to see if he would be reappointed by the Biden administration, which did not announce its decision to renominate him until mid-November.

“Banking With Interest” podcast episode last week, said reacting to the data was “hard to do until there was clarity as to what the leadership going forward of the Fed was going to be.”

Plus, the Fed had promised to withdraw policy in a certain way, which prevented a rapid reorientation once officials began to fret that inflation might last. Policymakers had pledged to keep interest rates at rock bottom and continue to buy huge sums of bonds until the job market had healed substantially. They had also clearly laid out how they would remove support when the time came: Bond purchases would slow first, then stop, and only then would rates rise.

The point was to convince investors that the Fed would not stop helping the economy too early and to avoid roiling markets, but that so-called forward guidance meant that pulling back support was a drawn-out process.

“Forward guidance, like everything in economics, has benefits and costs,” Richard H. Clarida, who was vice chair of the Fed in 2021 and recently left the central bank, said at a conference last week. “If there’s guidance that the committee feels bound to honor,” he added, it can be complicated for the Fed to move through a sequence of policy moves.

Christopher Waller, a governor at the Fed, noted the central bank wasn’t just sitting still. Markets began to adjust as the Fed sped up its plans to remove policy support throughout the fall, which is making money more expensive to borrow and starting to slow down economic conditions. Mortgage rates, one window into how Fed policy is playing out into the economy, began to move up notably in January 2021 and are now at the highest level since the 2008 housing crisis.

Mr. Waller also pointed out that it was hard to get the Fed’s large policy-setting committee into agreement rapidly.

“Policy is set by a large committee of up to 12 voting members and a total of 19 participants in our discussions,” he said during a speech last week. “This process may lead to more gradual changes in policy as members have to compromise in order to reach a consensus.”

Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said in an interview on Tuesday that different people on the committee “looked at the same data with different lenses, and that’s just the nature of the beast.”

But the Fed seems to be learning lessons from its 2021 experience.

Policymakers are avoiding giving clear guidance about what will come next for policy: Officials have said they want to quickly get rates up to the point that they start to weigh on the economy, then go from there. While Mr. Powell said the Fed was thinking about half-point increases at its next two meetings, he gave no clear guidance about what would follow.

“It’s a very difficult environment to try to give forward guidance, 60, 90 days in advance — there are just so many things that can happen in the economy and around the world,” Mr. Powell said at a news conference last week. “So we’re leaving ourselves room to look at the data and make a decision as we get there.”

The war in Ukraine is the latest surprise that is changing the outlook for the economy and inflation in ways that are hard to predict, Mr. Bostic from Atlanta said.

“I have been humbled, chastened — whatever — to think that I know the range of possible things that can happen in the future,” he said. “I’ve really tried to back off of leaning into one kind of story or path.”

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The Stock and Bond Markets Don’t Yet Know How to Cope With the Fed

On Wednesday, the S&P 500 stock index jumped 3 percent, as though all was right with the world. On Thursday, stocks collapsed, with the tech-heavy Nasdaq index plunging 5 percent as though the end of times was in sight.

Things on Friday were only slightly better. The S&P fell again, but only by 0.6 percent, and the Nasdaq lost a mere 1.4 percent. It was the fifth consecutive weekly decline in the S&P 500, its longest streak of losses since June 2011.

If you are looking for patterns in the market’s wild swings, the answer is simple: The financial markets are coming to grips with a stunning policy change by the Federal Reserve.

Over the last two decades, financial markets may have become so accustomed to encouragement from the Fed that they just don’t know how to react, now that the central bank is doing its best to slow down the economy.

news conference on Wednesday that the central bank was really and truly committed to driving down inflation. A transcript of Mr. Powell’s words is available on the Fed site. So is the text of the Fed’s latest policy statement. Check for yourself.

The Fed is willing to increase unemployment in the United States if that is what’s required to get the job done. And while they would much prefer that the United States doesn’t fall into a recession, Fed policymakers are willing to take the heat if the economy falters.

This may be hard to accept, and for a good reason.

millions of casualties worldwide, and it’s not over. From the narrow viewpoint of economics, the pandemic threw supply and demand for a vast variety of goods and services out of whack, and that has baffled policymakers. How much of the current bout of inflation has been caused by Covid, and what can the Fed possibly do about it?

Then there are the continuing lockdowns in China, which have reduced the supply of Chinese exports and dampened Chinese demand for imports, both of which are altering global economic patterns. On top of all that is the oil price shock caused by Russia’s war in Ukraine and by the sanctions against Russia.

Until late last year, the Fed said the inflation problem was “transitory.” Its response to an array of global challenges was to flood the U.S. economy and the world with money. It helped to reduce the impact of the 2020 recession in the United States — and it contributed to great wealth-creating rallies in the stock and bond markets.

But now, the Fed has recognized that inflation has gotten out of control and must be significantly slowed.

This is how Mr. Powell put it on Wednesday. “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” he said. “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”

But its tools for reducing the rate of inflation without causing undue harm to the economy are actually quite crude and limited, he later acknowledged, in response to a reporter’s question. “We have essentially interest rates, the balance sheet and forward guidance, and they’re famously blunt tools,” he said. “They’re not capable of surgical precision.”

As if that were not scary enough, for an operation as delicate as the Fed is attempting, he added: “No one thinks this will be easy. No one thinks it’s straightforward, but there is certainly a plausible path to this, and I do think there, we’ve got a good chance to do that. And, you know, our job is not to rate the chances, it is to try to achieve it. So that’s what we’re doing.”

Well, fine. The Fed needs to make the attempt, but given the precariousness of the situation, the high volatility in financial markets is exactly what I’d expect to see.

The Federal Reserve is committed to continuing to raise the short-term interest rate it controls, the Fed funds rate, to somewhere well above 2.25 percent. Only a few months ago, that rate stood close to zero, and on Wednesday, the Fed raised it to the 0.75 to 1 percent range. The Fed also said it would begin reducing its $9 trillion balance sheet in June by about $1 trillion over the next year, and it continues to issue cautionary “forward guidance” — warnings of the kind that Mr. Powell made on Wednesday.

Watch out, he was essentially saying. Financial conditions are going to get much tougher — as tough as needed to stop inflation from becoming entrenched and deeply destructive. The Fed will be using blunt instruments on the American economy. There will be damage, inevitably. People will lose their jobs when the economy slows. There will be pain, even if it isn’t intended.

In the financial markets, short-term traders are unable to make sense of all this. The day-to-day shifts in the markets are about as informative as the meandering of a squirrel. But for those with long horizons, the outlook is straightforward enough.

A period of wrenching volatility is inescapable. This happens periodically in financial markets, yet those very markets tend to produce wealth for people who are able to ride out this turbulence.

It is important, as always, to make sure you have enough money put aside for an emergency. Then, assess your ability to withstand the impact of nasty headlines and unpleasant financial statements documenting market losses.

Cheap, broadly diversified index funds that track the overall market are being hit hard right now, but I’m still putting money into them. Over the long run, that approach has led to prosperity.

Count on more market craziness until the Fed’s struggle to beat inflation has been resolved. But if history is a guide, the odds are that you will do well if you can get through it.

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