Evelyn Reynolds

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    In an Unequal Economy, the Poor Face Inflation Now and Job Loss Later

    For Theresa Clarke, a retiree in New Canaan, Conn., the rising cost of living means not buying Goldfish crackers for her disabled daughter because a carton costs $11.99 at her local Stop & Shop. It means showering at the YMCA to save on her hot water bill. And it means watching her bank account dwindle to $50 because, as someone on a fixed income who never made much money to start with, there aren’t many other places she can trim her spending as prices rise.“There is nothing to cut back on,” she said.Jordan Trevino, 28, who recently took a better paying job in advertising in Los Angeles with a $100,000 salary, is economizing in little ways — ordering a cheaper entree when out to dinner, for example. But he is still planning a wedding next year and a honeymoon in Italy.And David Schoenfeld, who made about $250,000 in retirement income and consulting fees last year and has about $5 million in savings, hasn’t pared back his spending. He has just returned from a vacation in Greece, with his daughter and two of his grandchildren.“People in our group are not seeing this as a period of sacrifice,” said Mr. Schoenfeld, who lives in Sharon, Mass., and is a member of a group called Responsible Wealth, a network of rich people focused on inequality that pushes for higher taxes, among other stances. “We notice it’s expensive, but it’s kind of like: I don’t really care.”Higher-income households built up savings and wealth during the early stages of the pandemic as they stayed at home and their stocks, houses and other assets rose in value. Between those stockpiles and solid wage growth, many have been able to keep spending even as costs climb. But data and anecdotes suggest that lower-income households, despite the resilient job market, are struggling more profoundly with inflation.That divergence poses a challenge for the Federal Reserve, which is hoping that higher interest rates will slow consumer spending and ease pressure on prices across the economy. Already, there are signs that poorer families are cutting back. If richer families don’t pull back as much — if they keep going on vacations, dining out and buying new cars and second homes — many prices could keep rising. The Fed might need to raise interest rates even more to bring inflation under control, and that could cause a sharper slowdown.In that case, poorer families will almost certainly bear the brunt again, because low-wage workers are often the first to lose hours and jobs. The bifurcated economy, and the policy decisions that stem from it, could become a double whammy for them, inflicting higher costs today and unemployment tomorrow.“That’s the perfect storm, if unemployment increases,” said Mark Brown, chief executive of West Houston Assistance Ministries, which provides food, rental assistance and other forms of aid to people in need. “So many folks are so very close to the edge.”America’s poor have spent part of the savings they amassed during coronavirus lockdowns, and their wages are increasingly struggling to keep up with — or falling behind — price increases. Because such a big chunk of their budgets is devoted to food and housing, lower-income families have less room to cut back before they have to stop buying necessities. Some are taking on credit card debt, cutting back on shopping and restaurant meals, putting off replacing their cars or even buying fewer groceries.But while lower-income families spend more of each dollar they earn, the rich and middle classes have so much more money that they account for a much bigger share of spending in the overall economy: The top two-fifths of the income distribution account for about 60 percent of spending in the economy, the bottom two-fifths about 22 percent. That means the rich can continue to fuel the economy even as the poor pull back, a potential difficulty for policymakers.The Federal Reserve has been lifting interest rates rapidly since March to try to slow consumer spending and raise the cost of borrowing for companies, which will in turn lead to fewer business expansions, less hiring and slower wage growth. The goal is to slow the economy enough to lower inflation but not so much that it causes a painful recession.Officials at West Houston Assistance Ministries said its food bank served 200 households on Friday.Meridith Kohut for The New York TimesBut job growth accelerated unexpectedly in July, with wages climbing rapidly. Consumer spending, adjusted for inflation, has cooled, but Americans continue to open their wallets for vacations, restaurant meals and other services. If solid demand and tight labor market conditions continue, they could help to keep inflation rapid and make it more difficult for the Fed to cool the economy without continuing its string of quick rate increases. That could make widespread layoffs more likely.“The one, singular worry is the jobs market — if demand is constrained to the point that companies have to start laying off workers, that’s what hits Main Street,” said Nela Richardson, chief economist at the job market data provider ADP. “That’s what hits low-income workers.”8 Signs That the Economy Is Losing SteamCard 1 of 9Worrying outlook. More

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    Fed Governor Bowman sees 'similarly sized' rate hikes ahead after three-quarter point moves

    Fed Governor Michelle Bowman said she supports the central bank’s recent 0.75 percentage point rate increases and believes they should continue until inflation is subdued.
    “My view is that similarly sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way,” she added in a speech Saturday.
    Markets are anticipating a third straight big increase when the central bank meets again in September.

    Federal Reserve Bank Governor Michelle Bowman gives her first public remarks as a Federal policymaker at an American Bankers Association conference In San Diego, California, February 11 2019.
    Ann Saphir | Reuters

    Federal Reserve Governor Michelle Bowman said Saturday she supports the central bank’s recent big interest rate increases and thinks they are likely to continue until inflation is subdued.
    The Fed, at its last two policy meetings, raised benchmark borrowing rates by 0.75 percentage point, the largest increase since 1994. Those moves were aimed at subduing inflation running at its highest level in more than 40 years.

    In addition to the hikes, the rate-setting Federal Open Market Committee indicated that “ongoing increases … will be appropriate,” a view Bowman said she endorses.
    “My view is that similarly sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way,” she added in prepared remarks in Colorado for the Kansas Bankers Association.
    Bowman’s comments are the first from a member of the Board of Governors since the FOMC last week approved the latest rate increase. Over the past week, multiple regional presidents have said they also expect rates to continue to rise aggressively until inflation falls from its current 9.1% annual rate.

    Following Friday’s jobs report, which showed an addition of 528,000 positions in July and worker pay up 5.2% year over year, both higher than expected, markets were pricing in a 68% chance of a third consecutive 0.75 percentage point move at the next FOMC meeting in September, according to CME Group data.
    Bowman said she will be watching upcoming inflation data closely to gauge precisely how much she thinks rates should be increased. However, she said the recent data is casting doubt on hopes that inflation has peaked.

    “I have seen few, if any, concrete indications that support this expectation, and I will need to see unambiguous evidence of this decline before I incorporate an easing of inflation pressures into my outlook,” she said.
    Moreover, Bowman said she sees “a significant risk of high inflation into next year for necessities including food, housing, fuel, and vehicles.”
    Her comments come following other data showing that U.S. economic growth as measured by GDP contracted for two straight quarters, meeting a common definition of recession. While she said she expects a pickup in second-half growth and “moderate growth in 2023,” inflation remains the biggest threat.
    “The larger threat to the strong labor market is excessive inflation, which if allowed to continue could lead to a further economic softening, risking a prolonged period of economic weakness coupled with high inflation, like we experienced in the 1970s. In any case, we must fulfill our commitment to lowering inflation, and I will remain steadfastly focused on this task,” Bowman said.

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    How a New Corporate Minimum Tax Could Reshape Business Investments

    With a new corporate minimum tax, Democrats would be adding complexity to an already byzantine tax system.WASHINGTON — At the center of the new climate and tax package that Democrats appear to be on the verge of passing is one of the most significant changes to America’s tax code in decades: a new corporate minimum tax that could reshape how the federal government collects revenue and alter how the nation’s most profitable companies invest in their businesses.The proposal is one of the last remaining tax increases in the package that Democrats are aiming to pass along party lines in coming days. After months of intraparty disagreement over whether to raise taxes on the wealthy or roll back some of the 2017 Republican tax cuts to fund their agenda, they have settled on a longstanding political ambition to ensure that large and profitable companies pay more than $0 in federal taxes.To accomplish this, Democrats have recreated a policy that was last employed in the 1980s: trying to capture tax revenue from companies that report a profit to shareholders on their financial statements while bulking up on deductions to whittle down their tax bills.The re-emergence of the corporate minimum tax, which would apply to what’s known as the “book income” that companies report on their financial statements, has prompted confusion and fierce lobbying resistance since it was announced last month.Some initially conflated the measure with the 15 percent global minimum tax that Treasury Secretary Janet L. Yellen has been pushing as part of an international tax deal. However, that is a separate proposal, which in the United States remains stalled in Congress, that would apply to the foreign earnings of American multinational companies.Republicans have also misleadingly tried to seize on the tax increase as evidence that President Biden was ready to break his campaign promises and raise taxes on middle-class workers. And manufacturers have warned that it would impose new costs at a time of rapid inflation.In a sign of the political power of lobbyists in Washington, by Thursday evening the new tax had already been watered down. At the urging of manufacturers, Senator Kyrsten Sinema of Arizona persuaded her Democratic colleagues to preserve a valuable deduction, known as bonus depreciation, that is associated with purchases of machinery and equipment.The new 15 percent minimum tax would apply to corporations that report annual income of more than $1 billion to shareholders on their financial statements but use deductions, credits and other preferential tax treatments to reduce their effective tax rates well below the statutory 21 percent. It was originally projected to raise $313 billion in tax revenue over a decade, though the final tally is likely to be $258 billion once the revised bill is finalized.The new tax could also inject a greater degree of complexity into the tax code, creating challenges in carrying out the law if it is passed.“In terms of implementation and just bandwidth to deal with the complexity, there’s no doubt that this regime is complex,” said Peter Richman, a senior attorney adviser at the Tax Law Center at New York University’s law school. “This is a big change and the revenue number is large.”What’s in the Democrats’ Climate and Tax BillCard 1 of 6A new proposal. More

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    How This Economic Moment Rewrites the Rules

    Jobs aplenty. Sizzling demand. If the United States is headed into a recession, it is taking an unusual route, with many markers of a boom.To understand the strange, conflicting signals being sent by the U.S. economy right now, it helps to look at Williston, N.D., in about 2010.North Dakota was in the midst of an oil boom. Scores of rigs were drilling hundreds of wells, filling up train cars with crude because there hadn’t been time to build a pipeline. Pretty much anyone who wanted a job could find one, even the teenagers who dropped out of high school to work in the oil fields. Wages soared. Fast-food restaurants offered signing bonuses. State coffers filled up with tax revenue.Yet as good as the economy was, it also felt unstable. Restaurants couldn’t hire enough workers. Housing was in short supply, and costly. Local infrastructure couldn’t withstand the sudden surge in demand. Prices for practically everything soared.“It was chaotic,” said David Flynn, an economist at the University of North Dakota who lived through the boom and has studied it. “The economy was doing well, revenues for the local areas were up across the board, but you were still short of workers and businesses were having trouble.”“That sounds a lot like the stories you’ve been hearing at the national level for the past couple years,” he added.Economists and politicians have spent weeks arguing about whether the United States is in a recession. If it is, the recession is unlike any previous one. Employers added more than half a million jobs in July, and the unemployment rate is at a half-century low.Typically, in recessions, the problem is that businesses don’t want to hire and consumers don’t want to spend. Right now, businesses want to hire, but can’t find the workers to fill open jobs. Consumers want to spend, but can’t find cars to buy or flights to book.Recessions, in other words, are about too much supply and too little demand. What the U.S. economy is facing is the opposite. Just like North Dakota in 2010.The underlying causes are different, of course. Williston was hit by a surge in demand as companies and workers flooded into what had been a small city in the Northern Plains. The United States was hit by a pandemic, which caused a shift in demand and disrupted supply chains around the world. And the comparison goes only so far: Williston’s population roughly doubled from 2010 to 2020. No one expects that to happen to the country as a whole.Still, whether local or national, the most obvious consequence is the same: inflation. When demand outstrips supply — whether for steel-toe boots in an oil boomtown or for restaurant seats in the aftermath of a pandemic — prices rise. Mr. Flynn recalled going out to eat during the boom and discovering that hamburgers cost $20, a feeling of sticker shock familiar to practically any American these days.There is also a subtler consequence: uncertainty. No one knows how long the boom will last, or what the economy will look like on the other side of it, which makes it hard for workers, businesses and governments to adapt. In Williston, companies and governments were reluctant to invest in the apartment buildings, elementary schools and sewage-treatment plants that the community suddenly needed — but might not need by the time they were complete.A family at a Williston campground in 2010. The local infrastructure couldn’t withstand the sudden surge in demand.Todd Heisler/The New York TimesThe full parking lot of the El Rancho Motel in Williston in 2010.Todd Heisler/The New York Times“Think of it as a situation of every day, seemingly, was a new shock, so you couldn’t even adjust before a new one was hitting,” Mr. Flynn said. “It’s that constant adjustment. Completely unpredictable.”Businesses have now spent two and a half years in a state of constant adjustment. In early 2020, practically overnight, Americans traded restaurant meals for home-baked bread, and gym memberships for socially distanced bike rides. Those shifts caused huge disruptions, in part because businesses were reluctant to make long-term investments to address short-term spikes in demand.“That was always going to cause its own problems on prices and shortages,” said Adam Ozimek, chief economist for the Economic Innovation Group, a Washington research organization. “Businesses were never going to be like, ‘I’m going to build 10 new bicycle factories right now because we’re in a long-term bicycling boom.’”Some other shifts caused by the pandemic are likely to prove longer lasting. But it is hard for businesses to know which.“I think businesses are correct that the current state of the economy can’t really hold — something has to give,” Mr. Ozimek said.To most people, of course, this doesn’t feel like a boom. Measures of consumer confidence are at record lows, and Americans overwhelmingly say they are dissatisfied with the economy. That perception is grounded in reality: High inflation is eroding — and in some cases erasing — the benefits of a strong job market for many workers. Hourly earnings, adjusted for inflation, are falling at their fastest pace in decades.“I know people will hear today’s extraordinary jobs report and say they don’t see it, they don’t feel it in their own lives,” President Biden said Friday. “I know how hard it is. I know it’s hard to feel good about job creation when you already have a job and you’re dealing with rising prices — food and gas and so much more. I get it.”Tara Sinclair, an economist at George Washington University, said the United States wasn’t experiencing a true boom. That would imply a virtuous circle, in which prosperity begets investment, which begets more prosperity and makes the economy more productive in the long term — a rising tide that lifts all boats.The State of Jobs in the United StatesEmployment gains in July, which far surpassed expectations, show that the labor market is not slowing despite efforts by the Federal Reserve to cool the economy.July Jobs Report: U.S. employers added 528,000 jobs in the seventh month of the year. The unemployment rate was 3.5 percent, down from 3.6 percent in June.Care Worker Shortages: A lack of child care and elder care options is forcing some women to limit their hours or has sidelined them altogether, hurting their career prospects.Downsides of a Hot Market: Students are forgoing degrees in favor of the attractive positions offered by employers desperate to hire. That could come back to haunt them.Slowing Down: Economists and policymakers are beginning to argue that what the economy needs right now is less hiring and less wage growth. Here’s why.Instead, the lingering disruptions of the pandemic, uncertainty over what the post-Covid economy will look like and fears of a recession have made businesses reluctant to make bets on the future. Business investment fell in the most recent quarter. Employers are hiring, but they are leaning heavily on one-time bonuses rather than permanent pay increases.“It’s not an economic boom in the sense of wanting to invest long term,” Ms. Sinclair said. “It’s a boomtown situation where everyone’s just waiting for it to get cut off.”The current economic climate doesn’t feel like a boom to many, with measures of consumer confidence at record lows.Hiroko Masuike/The New York TimesIndeed, the Federal Reserve is trying to cut it off. Jerome H. Powell, the Fed chair, has described the labor market, with twice as many open jobs as unemployed workers, as “unsustainably hot,” and is trying to cool it through aggressive interest rate increases. He and his colleagues have argued repeatedly that a more normal economy — less like a boomtown, with lower inflation — will be better for workers in the long term.“We all want to get back to the kind of labor market we had before the pandemic, where differences between racial and gender differences and that kind of thing were at historic minimums, where participation was high, where inflation was low,” Mr. Powell said last month. “We want to get back to that. But that’s not happening. That’s not going to happen without restoring price stability.”Mr. Biden and his advisers, too, have argued that a cooling economy is inevitable and even necessary as the country resets from its reopening-fueled surge. In an opinion article in The Wall Street Journal in May, Mr. Biden warned that monthly job growth was likely to slow, to around 150,000 a month from more than 500,000, in “a sign that we are successfully moving into the next phase of the recovery.”So far, that transition has been elusive. Forecasters had expected hiring to slow in July, to a gain of about 250,000 jobs. Instead, the figure was above 500,000, the highest in five months, the Labor Department reported on Friday. But the labor force — the number of people who are either working or actively looking for work — shrank and remains stubbornly below its prepandemic level, a sign that the supply constraints that have contributed to high inflation won’t abate quickly.Ms. Sinclair said it shouldn’t be surprising that it was taking time to readjust after the coronavirus disrupted nearly every aspect of life and work. As of July, the U.S. economy, in the aggregate, had recovered all the jobs lost during the early weeks of the pandemic. But beneath the surface, the situation looks drastically different from what it was in February 2020. There are nearly half a million more warehouse workers today, and nearly 90,000 fewer child care workers. Millions of people are still working remotely. Others have changed careers, started businesses or stopped working.“We have to remember that we are still sorting that out,” Ms. Sinclair said. “It was a big economic shock, and the fact that we came out of it as quickly as we did is still incredibly impressive. These residual pains are us just still adjusting to it.”Jim Tankersley More

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    The Carried Interest Loophole Survives Another Political Battle

    The latest effort to narrow the preferential tax treatment used by private equity executives failed after Senator Kyrsten Sinema objected.WASHINGTON — Once again, carried interest carried the day.The last-minute removal by Senate Democrats of a provision in the climate and tax legislation that would narrow what is often referred to as the “carried interest loophole” represents the latest win for the private equity and hedge fund industries. For years, those businesses have successfully lobbied to kill bills that aimed to end or limit a quirk in the tax code that allows executives to pay lower tax rates than many of their salaried employees.In recent weeks, it appeared that the benefit could be scaled back, but a last-minute intervention by Senator Kyrsten Sinema, the Arizona Democrat, eliminated what would have been a $14 billion tax increase targeting private equity.Lawmakers’ inability to address a tax break that Democrats and some Republicans have called unfair underscores the influence of lobbyists for the finance industry and how difficult it can be to change the tax code.In addition to doing away with the carried interest provision, the deal Democratic leaders cut with Ms. Sinema included a 1 percent excise tax on stock buybacks and changes to a minimum corporate tax of 15 percent that favored manufacturers.On Friday, the private equity and hedge fund industries applauded the development, describing it as a win for small business.“The private equity industry directly employs over 11 million Americans, fuels thousands of small businesses and delivers the strongest returns for pensions,” said Drew Maloney, the chief executive of the American Investment Council, a lobbying group. “We encourage Congress to continue to support private capital investment in every state across our country.”Bryan Corbett, the chief executive of the Managed Funds Association, said: “We’re happy to see that there is bipartisan recognition of the role that private capital plays in growing businesses and the economy.”Carried interest is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is about 20 percent.Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent. A tax law passed by Republicans in 2017 largely left the treatment of carried interest intact, after an intense lobbying campaign, but it did narrow the exemption by requiring executives to hold their investments for at least three years in order to enjoy preferential tax treatment.An agreement reached last week by Senator Joe Manchin III, Democrat of West Virginia, and Senator Chuck Schumer of New York, the majority leader, would have extended that holding period to five years from three, while changing the way the period is calculated in hopes of reducing taxpayers’ ability to take advantage of the lower 20 percent tax rate.What’s in the Democrats’ Climate and Tax BillCard 1 of 6A new proposal. More

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    Good News on Jobs May Mean Bad News Later as Hiring Spree Defies Fed

    Employers hired rapidly and paid more in July, suggesting the Federal Reserve may have to remain aggressive in its effort to cool the economy.America’s job market is remarkably strong, a report on Friday made clear, with unemployment at the lowest rate in half a century, wages rising fast and companies hiring at a breakneck pace.But the good news now could become a problem for President Biden later.Mr. Biden and his aides pointed to the hiring spree as evidence that the United States is not in a recession and celebrated the report, which showed that employers added 528,000 jobs in July and that pay picked up by 5.2 percent from a year earlier. But the still-blistering pace of hiring and wage growth means the Federal Reserve may need to act more decisively to restrain the economy as it seeks to wrestle inflation under control.Fed officials have been waiting for signs that the economy, and particularly the job market, is slowing. They hope that employers’ voracious need for workers will come into balance with the supply of available applicants, because that would take pressure off wages, in turn paving the way for businesses like restaurants, hotels and retailers to temper their price increases.The moderation has remained elusive, and that could keep central bankers raising interest rates rapidly in an effort to cool down the economy and restrain the fastest inflation in four decades. As the Fed adjusts policy aggressively, it could increase the risk that the economy tips into a recession, instead of slowing gently into the so-called soft landing that central bankers have been trying to engineer.“We’re very unlikely to be falling into a recession in the near term,” said Michael Gapen, head of U.S. economics research at Bank of America. “But I’d also say that numbers like this raise the risk of a sharper landing farther down the road.”Interest rates are a blunt tool, and historically, big Fed adjustments have often set off recessions. Stock prices fell after Friday’s release, a sign that investors are worried that the new figures increased the odds of a bad economic outcome down the line.Even as investors zeroed in on the risks, the White House greeted the jobs data as good news and a clear sign that the economy is not in a recession even though gross domestic product growth has faltered this year.“From the president’s perspective, a strong jobs report is always extremely welcome,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “And this is a very strong jobs report.”Still, the report appeared to undermine the administration’s view of where the economy is headed. Mr. Biden and White House officials have been making the case for months that job growth would soon slow. They said that deceleration would be a welcome sign of the economy’s transition to more sustainable growth with lower inflation.The lack of such a slowdown could be a sign of more stubborn inflation than administration economists had hoped, though White House officials offered no hint Friday that they were worried about it.“We think it’s good news for the American people,” the White House press secretary, Karine Jean-Pierre, told reporters in a briefing. “We think we’re still heading into a transition to more steady and stable growth.”The State of Jobs in the United StatesEmployment gains in July, which far surpassed expectations, show that the labor market is not slowing despite efforts by the Federal Reserve to cool the economy.July Jobs Report: U.S. employers added 528,000 jobs in the seventh month of the year. The unemployment rate was 3.5 percent, down from 3.6 percent in June.Care Worker Shortages: A lack of child care and elder care options is forcing some women to limit their hours or has sidelined them altogether, hurting their career prospects.Downsides of a Hot Market: Students are forgoing degrees in favor of the attractive positions offered by employers desperate to hire. That could come back to haunt them.Slowing Down: Economists and policymakers are beginning to argue that what the economy needs right now is less hiring and less wage growth. Here’s why.The Fed, too, had been counting on a cool-down. Before July’s employment report, a host of other data points had suggested that the job market was decelerating: Wage growth had been moderating fairly steadily; job openings, while still elevated, had been declining; and unemployment insurance filings, while low, had been edging higher.The Fed had welcomed that development — but the new figures called the moderation into question. Average hourly earnings have steadily risen since April on a monthly basis, and Friday’s report capped a streak of hiring that means the job market has now returned to its prepandemic size.“Reports like this emphasize just how much more the Fed needs to do to bring inflation down,” said Blerina Uruci, a U.S. economist at T. Rowe Price. “The labor market remains very hot.”Central bankers have raised borrowing costs three-quarters of a percentage point at each of their last two meetings, an unusually rapid pace. Officials had suggested that they might slow down at their meeting in September, lifting rates by half a point — but that forecast hinged partly on their expectation that the economy would be cooling markedly.Instead, “I think this report makes three-quarters of a point the base case,” said Omair Sharif, founder of Inflation Insights, a research firm. “The labor market is still firing on all cylinders, so this isn’t the kind of slowdown that the Fed is trying to generate to alleviate price pressures.”Fed policymakers usually embrace strong hiring and robust pay growth, but wages have been climbing so fast lately that they could make it difficult to slow inflation. As employers pay more, they must either charge their customers more, improve their productivity or take a hit to their profits. Raising prices is typically the easiest and most practical route.The blistering pace of hiring means the Federal Reserve may need to act more decisively to tame inflation.Scott McIntyre for The New York TimesPlus, as inflation has soared, even robust wage growth has failed to keep up for most people. While wages have climbed 5.2 percent over the past year, far faster than the 2 percent to 3 percent gains that were normal before the pandemic, consumer prices jumped 9.1 percent over the year through June.Fed officials are trying to steer the economy back to a place where both pay gains and inflation are slower, hoping that once prices start to climb gradually again, workers can eke out wage gains that leave them better off in a sustainable way.“Ultimately, if you think about the medium and longer term, price stability is what makes the whole economy work,” Jerome H. Powell, the Fed chair, said at his July news conference, explaining the rationale.Some prominent Democrats have questioned whether the United States should be relying so heavily on Fed policies — which work by hurting the labor market — to cool inflation. Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, have been among those arguing that there must be a better way.But most of the changes that Congress and the White House can institute to lower inflation would take time to play out. Economists estimate that the Biden administration’s climate and tax bill, the Inflation Reduction Act, would have a minor effect on price increases in the near term, though it may help more with time.While the White House has avoided saying what the Fed should do, Mr. Bernstein from the Council of Economic Advisers suggested that Friday’s report could give the Fed more cushion to raise rates without harming workers.“The depth of strength in this labor market is not just a buffer for working families,” he said. “It also gives the Fed room to do what they need to do while trying to maintain a strong labor market.”Still, the central bank could find itself in an uncomfortable spot in the months ahead.An inflation report scheduled for release on Wednesday is expected to show that consumer price increases moderated in July as gas prices came down. But fuel prices are volatile, and other signs that inflation remains out of control are likely to persist: Rents are climbing swiftly, and many services are growing more expensive.And the still-hot labor market is likely to reinforce the view that conditions are not simmering down quickly enough. That could keep the Fed working to restrain economic activity even as overall inflation shows early, and perhaps temporary, signs of pulling back.“We’re going to get inflation slowing in the next couple of months,” Mr. Sharif said. “The activity part of the equation is not cooperating right now, even if inflation overall does cool off.”Isabella Simonetti More

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    Danger ahead: The U.S. economy has yet to face its biggest recession challenge

    There is no historical precedent to indicate that an economy in recession can produce 528,000 jobs in a month, as the U.S. did during July.
    But that doesn’t mean there isn’t a recession ahead, and, ironically enough, it is the labor market’s phenomenal resiliency that could pose the biggest danger.
    The Federal Reserve’s rate tightening to address inflation poses a recession threat into 2023.

    A person removes the nozel from a pump at a gas station on July 29, 2022 in Arlington, Virginia.
    Olivier Douliery | AFP | Getty Images

    You’d be hard-pressed now to find a recession in the rearview mirror. What’s down the road, though, is another story.
    There is no historical precedent to indicate that an economy in recession can produce 528,000 jobs in a month, as the U.S. did during July. A 3.5% unemployment rate, tied for the lowest since 1969, is not consistent with contraction.

    But that doesn’t mean there isn’t a recession ahead, and, ironically enough, it is the labor market’s phenomenal resiliency that could pose the broader economy’s biggest long-run danger. The Federal Reserve is trying to ease pressures on a historically tight jobs situation and its rapid wage gains in an effort to control inflation running at its highest level in more than 40 years.

    “The fact of the matter is this gives the Fed additional room to continue to tighten, even if it raises the probability of pushing the economy into recession,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “It’s not going to be an easy task to continue to tighten without negative repercussions for the consumer and the economy.”
    Indeed, following the robust job numbers, which included a 5.2% 12-month gain for average hourly earnings, traders accelerated their bets on a more aggressive Fed. As of Friday afternoon, markets were assigning about a 69% chance of the central bank enacting its third straight 0.75 percentage point interest rate hike when it meets again in September, according to CME Group data.
    So while President Joe Biden celebrated the big jobs number on Friday, a much more unpleasant data point could be on the way next week. The consumer price index, the most widely followed inflation measure, comes out Wednesday, and it’s expected to show continued upward pressure even with a sharp drop in gasoline prices in July.
    That will complicate the central bank’s balancing act of using rate increases to temper inflation without tipping the economy into recession. As Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock, said, the challenge is “how to execute a ‘soft landing’ when the economy is coming in hot, and is landing on a runway it has never used before.”

    “Today’s print, coming in much stronger than anticipated, complicates the job of a Federal Reserve that seeks to engineer a more temperate employment environment, in keeping with its attempts to moderate current levels of inflation,” Rieder said in a client note. “The question though now is how much longer (and higher) will rates have to go before inflation can be brought under control?”

    More recession signs

    Financial markets were betting against the Fed in other ways.
    The 2-year Treasury note yield exceeded that of the 10-year note by the highest margin in about 22 years Friday afternoon. That phenomenon, known as an inverted yield curve, has been a telltale recession sign particularly when it goes on for an extended period of time. In the present case, the inversion has been in place since early July.
    But that doesn’t mean a recession is imminent, only that one is likely over the next year or two. While that means the central bank has some time on its side, it also could mean it won’t have the luxury of slow hikes but rather will have to continue to move quickly — a situation that policymakers had hoped to avoid.
    “This is certainly not my base case, but I think that we may start to hear some chatter of an inter-meeting hike, but only if the next batch of inflation reports is hot,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.
    Sonders called the current situation “a unique cycle” in which demand is shifting back to services from goods and posing multiple challenges to the economy, making the debate over whether the U.S. is in a recession less important than what is ahead.
    That’s a widely shared view from economists, who fear the toughest part of the journey is still to come.
    “While economic output contracted for two consecutive quarters in the first half of 2022, a strong labor market means that currently we are likely not in recession,” said Frank Steemers, senior economist at The Conference Board. “However, economic activity is expected to further cool towards the end of the year and it is increasingly likely that the U.S. economy will fall into recession before year end or in early 2023.”

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    With Surge in July, U.S. Recovers the Jobs Lost in the Pandemic

    U.S. job growth accelerated in July across nearly all industries, restoring nationwide employment to its prepandemic level, despite widespread expectations of a slowdown as the Federal Reserve raises interest rates to fight inflation.Employers added 528,000 jobs on a seasonally adjusted basis, the Labor Department said on Friday, more than doubling what forecasters had projected. The unemployment rate ticked down to 3.5 percent, equaling the figure in February 2020, which was a 50-year low.The robust job growth is welcome news for the Biden administration in a year when red-hot inflation and fears of recession have been recurring economic themes. “Today’s jobs report shows we are making significant progress for working families,” President Biden declared.The labor market’s continued strength is all the more striking as gross domestic product, adjusted for inflation, has declined for two consecutive quarters and as consumer sentiment about the economy has fallen sharply — along with the president’s approval ratings.“I’ve never seen a disjunction between the data and the general vibe quite as large as I saw,” said Justin Wolfers, a University of Michigan economist, noting that employment growth is an economic North Star. “It is worth emphasizing that when you try to take the pulse of the overall economy, these data are much more reliable than G.D.P.”But the report could stiffen the Federal Reserve’s resolve to cool the economy. Wage growth sped up, to 5.2 percent over the past year, indicating that labor costs could add fuel to higher prices.The Fed has raised interest rates four times in its battle to curb the steepest inflation in four decades, and policymakers have signaled that more increases are in store. That strategy is likely to lead to a slowdown in hiring later in the year as companies cut payrolls to match expected lower demand.Already, surveys of restaurateurs, home builders and manufacturers have reflected concern that current spending will not continue. Initial claims for unemployment insurance have been creeping up, and job openings have fallen for three consecutive months.“At this stage, things are OK,” said James Knightley, the chief international economist at the bank ING. “Say, December or the early part of next year, that’s where we could see much softer numbers.”Payrolls have fully recovered the jobs lost in the pandemic.Cumulative change in jobs since before the pandemic More