Evelyn Reynolds

A Belgian financial messaging service is once again at the center of an international sanctions fight.WASHINGTON — President Biden has pledged that if Russia invades Ukraine it will face “severe economic consequences,” with the United States likely to unleash a blistering package of sanctions that would effectively cut the Russian economy off from much of the global financial system.The United States has become increasingly reliant on sanctions in the last decade as a way to address diplomatic problems, but directing such tools at an economy the size of Russia’s would come with little precedent. The Biden administration has said that all options remain on the table, suggesting that it could impose an array of sanctions on Russian financial institutions and new restrictions on the exports of American products. But the biggest question among sanctions experts when it comes to inflicting economic pain on Russia is the fate of a critical financial conduit: Swift.In sanctions circles, a move by the United States and its European allies to cut Russia off from Swift has been characterized as a nuclear option. However, doing so is not as simple as it sounds and could yield unintended consequences because of Russia’s size and position in the world economy.“The Russian economy is a different beast,” said Adam M. Smith, who served as a senior sanctions official in the Obama administration’s Treasury Department. “It is twice the size of any economy the U.S. has ever sanctioned.”A Treasury Department spokeswoman said the Biden administration was assessing potential “spillovers” from any sanctions it imposes on Russia and exploring ways to reduce any unintended negative effects. Last week, Biden administration officials met with representatives from U.S. banks to discuss the risks and potential market impacts of sanctions on Russia, including the possible ramifications of cutting off Swift access for entities that had been hit with sanctions.Understand Russia’s Relationship With the WestThe tension between the regions is growing and Russian President Vladimir Putin is increasingly willing to take geopolitical risks and assert his demands.Competing for Influence: For months, the threat of confrontation has been growing in a stretch of Europe from the Baltic Sea to the Black Sea. Threat of Invasion: As the Russian military builds its presence near Ukraine, Western nations are seeking to avert a worsening of the situation.Energy Politics: Europe is a huge customer of Russia’s fossil fuels. The rising tensions in Ukraine are driving fears of a midwinter cutoff.Migrant Crisis: As people gathered on the eastern border of the European Union, Russia’s uneasy alliance with Belarus triggered additional friction.Militarizing Society: With a “youth army” and initiatives promoting patriotism, the Russian government is pushing the idea that a fight might be coming.What is Swift?Officially the Society for Worldwide Interbank Financial Telecommunications, Swift is a Belgian messaging service that connects more than 11,000 financial institutions as they transfer money around the world. It does not actually hold or transfer funds, but allows banks and other financial firms to alert one another of transactions that are about to take place.Swift is a global cooperative of financial institutions that is based in Belgium. It started in 1973 when 239 banks from 15 countries came together to figure out how to best handle cross-border payments.Despite its best efforts to be an apolitical cog in the international financial system, Swift has at times found itself embroiled in diplomatic disputes.Can Russia be booted from Swift?There have been continuing discussions between the United States and its allies in Europe over whether to block Russia’s access to Swift. However, the Biden administration could take that step unilaterally.If the United States decided to levy sanctions on Russian banks, it could then say that Swift was in violation of those sanctions by continuing to let those banks use its system. The Defending Ukraine Sovereignty Act of 2022, which Senate Democrats unveiled this month, would authorize sanctions on providers of specialized financial messaging services, such as Swift, but the Biden administration could also impose such sanctions without the approval of Congress.Cutting a country’s access to Swift is not without precedent.In 2012, Swift expelled as many as 30 Iranian financial institutions, including its central bank, in order to comply with European Union sanctions that were enacted in response to Iran’s disputed nuclear energy program. Services were reconnected after the 2015 nuclear deal, and then cut again in 2018 after the Trump administration withdrew from the pact and resumed sanctions.How would Russia respond to being removed?Russia has faced such threats before. In 2014, when Russia invaded and annexed Crimea, there were calls in Europe to exclude Russia from Swift. Dmitri A. Medvedev, then Russia’s prime minister, said at the time that such a move would be a “declaration of war.” According to the Carnegie Moscow Center, Russian forecasts at the time projected that being cut off from Swift would shrink the country’s gross domestic product by 5 percent.Last week, Nikolay Zhuravlev, the vice speaker of Russia’s Federation Council, told the government-run news agency TASS that removing Russia from Swift would also have economic consequences for European countries, which he said would not be able to receive imports of Russian oil, gas and metals as a result of Russia’s being unable to receive foreign currency.Mr. Smith, the former Treasury official, said the United States and Europe might look for ways to exempt certain Russian sectors, such as energy, from sanctions. However, moves to cut off Russia’s economy could have unintended consequences, such as Moscow retaliating, that could rattle global markets.“They are not without their own cards to play,” he said.A switch to Swift alternativesThe threat of being cut off from Swift might not be as dire as it was in the past.Several countries including Russia have developed their own financial messaging systems that, while less sophisticated than Swift, could allow Russian financial firms to maintain communications with the world. Russia began developing its system in 2014 amid threats of escalating sanctions from the United States.Mr. Medvedev, who is now the deputy chairman of the Security Council of Russia, said last week that the new system was functional and that financial flows would be able to continue within Russia if the country was cut off from Swift. He acknowledged that international financial transfers could be complicated if that happened.“Yes, they will be more difficult, it is obvious, but it won’t be a catastrophe,” Mr. Medvedev said.Some experts on Russia sanctions agree that Western officials are overplaying the potential effects of disconnecting Russia from Swift.“Cutting Russia off from Swift — it won’t be as painful for Russia as Western officials envision,” said Maria Snegovaya, a visiting scholar at George Washington University and a co-author of an Atlantic Council report on U.S. sanctions on Russia.Edward Wong More

Markets have been in upheaval. The Federal Reserve is taking steps to cool off the economy, as questions loom about the course of the recovery. And headlines are proclaiming that government bond yields are near two-year highs.But the striking thing about bonds isn’t that yields — which influence interest rates throughout the economy — have risen. It’s that they remain so low.In the past year, with consumer prices rising at a pace unseen since the early 1980s, a conventional presumption was that the demand for bonds would slump unless their yields were high enough to substantially offset inflation’s bite on investors’ portfolios.Bond purchases remained near record levels anyway, which pushed yields lower. The yield on the 10-year Treasury note — the key security in the $22 trillion market for U.S. government bonds — is about 1.8 percent. That’s roughly where it was on the eve of the pandemic, or when Donald J. Trump was elected president, or even a decade ago, when inflation was running at a mere 1.7 percent annual rate — compared with the 7 percent year-over-year increase in the Consumer Price Index recorded in December.If you had run that data past market experts last spring, “I think you would have been hard-pressed to find anybody on the Street who’d believe you,” said Scott Pavlak, a fixed-income portfolio manager at MetLife Investment Management.Because the 10-year Treasury yield is a benchmark for many other interest rates, the rates on mortgages and corporate debt have been near historical lows as well. And despite a binge of deficit spending by the U.S. government — which standard theories say should make a nation’s borrowing more expensive — continuing demand for government debt securities has meant that investors are, in inflation-adjusted terms, paying to hold Treasury bonds rather than getting a positive return.The major reasons for this odd phenomenon include long-term expectations about inflation, a large (and unequally distributed) surge in wealth worldwide and the growing ranks of retiring baby boomers who want to protect their nest eggs against the volatility of stocks.And that has potentially huge consequences for public finances.“If governments ever wanted to engage in an aggressive program of spending, now is the time,” said Padhraic Garvey, a head of research at ING, a global bank. “This is a perfect time to issue bonds as long as possible and proceed with long-term investment plans — and as long as the rate of return on those plans is in excess of the funding costs, they pay for themselves.”Weighing the Fed’s RoleBecause the government debt issued by the United States is valued, with few exceptions, as the safest financial asset in the global market — and because this debt is used as the collateral for trillions of dollars of systemically important transactions — the monthly and weekly fluctuations of key U.S. Treasuries, like the 10-year note, are watched closely.There are rancorous debates about the added role that the emergency bond-buying program conducted by the Fed since March 2020 — which included hundreds of billions of dollars in U.S. debt securities — has played in keeping rates down. Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.Some of the central bank’s critics concede that the Fed’s aggressive measures (which officials are dialing back) may have proved necessary at the start of the pandemic to stabilize markets. But they insist its program, another form of economic stimulus, continued far too long, egging on inflation by increasing demand and keeping rates low — an equation that hurt savers who could benefit from higher returns to hedge against the price increases.Still, most mainstream analysts also tend to identify a broader gumbo of coalescing factors beyond monetary policy.Several major market participants attribute these stubbornly low yields in spite of a high-growth, high-inflation economy to a widening sense among investors that a time of slower growth and milder price increases may eventually reassert itself.“While inflation has surged, they do not expect it to be persistent,” said Brett Ryan, the senior U.S. economist at Deutsche Bank. “In other words, over the long run, the post-pandemic world is likely to look very similar to the prepandemic state of the economy.”Long-run inflation expectations are still relatively anchored at an annual rate of about 2.4 percent over the next 10 years. This indicates that markets think the Fed will prevent inflation from spiraling upward, despite the huge increase in debt and the supply of dollars.Lots of Cash in Search of HavensOne potent element driving down rates is that from 2000 to 2020 — a stretch that included a burst dot-com bubble, a breakdown of the world’s banking system and a pandemic that upended business activity — global wealth in terms of net worth more than tripled to $510 trillion. The resulting savings glut has deeply affected the market, particularly for government bonds.The vast majority of wealth has accumulated to borderless corporations and a multinational elite desperate to park that capital somewhere that is safe and allows its money to earn some level of interest, rather than lose value even more quickly as cash. They view lending the money to a national government in its own currency as a prudent investment because, at worst, the debt can be repaid by creating more of that currency.The downside for these investors is that only so many stable, powerful countries have this privilege: This mix of exorbitant levels of wealth and a scarcity of safe havens for it has whetted, at least for now, a deepening appetite for reliable government debt securities — especially U.S. Treasuries.“To have truly risk-free returns and storage of your dollars, where else are you going to put them?” asked Daniel Alpert, a managing partner of the investment bank Westwood Capital.As the principle of supply and demand would suggest, the combination of high demand and low supply has helped keep Treasury bond prices high, which in turn produces lower yields.Demographic changes are affecting bond trends, too. As they approach or reach retirement, hundreds of millions of people across developed economies are looking for safer places than the stock market for their assets.Even in an inflationary environment, “there’s just this huge demand for yield in fixed income from people,” said Ben Carlson, the director of institutional asset management at Ritholtz Wealth Management. “You have all these boomer retirees who have money in the stock market and they’re doing great, but they know soon they’re not going to have a paycheck anymore and they need some portion of their portfolio to provide yield and stability.”Running Room for Federal SpendingThe U.S. Treasury market has grown to roughly $23 trillion, from $3 trillion two decades ago — directly in step with the national debt, which has grown to over 120 percent of gross domestic product, from 55 percent.But borrowing costs for the American government have trended lower, not higher. Congress issued roughly $5 trillion in Treasury debt securities to finance pandemic fiscal relief, “and we had, effectively, zero cost of capital for most of it,” said Yesha Yadav, a law professor at Vanderbilt University whose scholarship covers the Treasury market’s structure and regulations.Since the 1980s, the federal debt has skyrocketed.Total public debt as a percentage of gross domestic product

Note: Data through the third quarter of 2021Source: Federal Reserve Board of St. LouisBy The New York TimesBut the cost of paying investors back is at its lowest in years.Interest payments on U.S. debt as a percentage of gross domestic product.

Note: Data through 2020. Federal interest payments are still projected to be low in 2022.Source: Federal Reserve Economic DataBy The New York TimesThe cost of the interest payments that the U.S. government owes on its debt peaked in 1991 at 3.2 percent of gross domestic product, when the national debt was only 44 percent of G.D.P. By that measure, interest costs now are about half what they were back then.Inflation F.A.Q.Card 1 of 6What is inflation? More

The boldest measures that President Biden is threatening to deter an invasion of Ukraine could roil the entire Russian economy — but also those of other nations.WASHINGTON — The most punishing sanctions that U.S. officials have threatened to impose on Russia could cause severe inflation, a stock market crash and other forms of financial panic that would inflict pain on its people — from billionaires to government officials to middle-class families.U.S. officials vow to unleash searing economic measures if Russia invades Ukraine, including sanctions on its largest banks and financial institutions, in ways that would inevitably affect daily life in Russia.But the strategy comes with political and economic risks. No nation has ever tried to enact broad sanctions against such large financial institutions and on an economy the size of Russia’s. And the “swift and severe” response that U.S. officials have promised could roil major economies, particularly those in Europe, and even threaten the stability of the global financial system, analysts say.Some analysts also warn of a potential escalatory spiral. Russia might retaliate against an economic gut punch by cutting off natural gas shipments to Europe or by mounting cyberattacks against American and European infrastructure.The pain caused by the sanctions could foment popular anger against Russia’s president, Vladimir V. Putin. But history shows that the country does not capitulate easily, and resilience is an important part of its national identity. U.S. officials are also sensitive to the notion that they could be viewed as punishing the Russian people — a perception that might fuel anti-Americanism and Mr. Putin’s narrative that his country is being persecuted by the West.From Cuba to North Korea to Iran, U.S. sanctions have a mixed record at best of forcing a change in behavior. And while the Biden administration and its European allies are trying to deter Mr. Putin with tough talk, some experts question whether they would follow through on the most drastic economic measures if Russian troops breached the border and moved toward Kyiv, Ukraine’s capital.President Biden has said he will not send American troops to defend Ukraine. Instead, U.S. officials are trying to devise a sanctions response that would land a damaging blow against Russia while limiting the economic shock waves around the world — including in the United States. Officials say that for now, the Biden administration does not plan to target Russia’s enormous oil and gas export industry; doing so could drive up gasoline prices for Americans already grappling with inflation and create a schism with European allies.But many experts on sanctions believe that the boldest sanctions against Russia’s financial industry, if enacted, could take a meaningful toll.“If the Biden administration follows through on its threat to sanction major Russian banks, that will reverberate across the entire Russian economy,” said Edward Fishman, who served as the top official for Russia and Europe in the State Department’s Office of Economic Sanctions Policy and Implementation during the Obama administration. “It will definitely affect everyday Russians.”Mr. Fishman added: “How are you going to change Putin’s calculus? By creating domestic disturbances. People will be unhappy: ‘Look what you did — all of a sudden my bank account is a fraction of what it was? Thanks, Putin.’”Understand Russia’s Relationship With the WestThe tension between the regions is growing and Russian President Vladimir Putin is increasingly willing to take geopolitical risks and assert his demands.Competing for Influence: For months, the threat of confrontation has been growing in a stretch of Europe from the Baltic Sea to the Black Sea. Threat of Invasion: As the Russian military builds its presence near Ukraine, Western nations are seeking to avert a worsening of the situation.Energy Politics: Europe is a huge customer of Russia’s fossil fuels. The rising tensions in Ukraine are driving fears of a midwinter cutoff.Migrant Crisis: As people gathered on the eastern border of the European Union, Russia’s uneasy alliance with Belarus triggered additional friction.Militarizing Society: With a “youth army” and initiatives promoting patriotism, the Russian government is pushing the idea that a fight might be coming.Sanctions imposed after Mr. Putin annexed Ukraine’s Crimean Peninsula in 2014 and gave military support to an insurgency in the country’s east created a modest drag on Russia’s economy. Those penalties and later ones took a surgical approach, heavily targeting Mr. Putin’s circle of elites as well as officials and institutions involved in aggression against Ukraine, in part to avoid making ordinary Russians suffer.U.S. officials say the impact of sanctions now would be categorically different.Washington is looking to take a sledgehammer to pillars of Russia’s financial system. The new sanctions that American officials are preparing would cut off foreign lending, sales of sovereign bonds, technologies for critical industries and the assets of elite citizens close to Mr. Putin.Previous sanctions heavily targeted Mr. Putin’s circle of elites as well as officials and institutions involved in aggression against Ukraine, in part to avoid making ordinary Russians suffer.Alexander Zemlianichenko/Associated PressBut the real damage to Russia’s $1.5 trillion economy would come from hitting the biggest state banks as well as the government’s Russian Direct Investment Fund, which has prominent Western executives on its advisory board. The Treasury Department would draw from its experience targeting Iranian banks under President Donald J. Trump, though Iran’s banks are much smaller and less integrated into the global economy than Russian banks.Once the department puts the Russian banks on what officials call its “game over” sanctions list, known as the S.D.N. list, foreign entities around the world would stop doing business with the banks, which would have a big effect on Russian companies.The United States would also enact sanctions to cut lending to Russia by foreign creditors by potentially $100 billion or more, according to Anders Aslund, an economist and an author of an Atlantic Council report on U.S. sanctions on Russia. Though Russia has taken steps since 2014 to rely less on foreign debt for expenses, such a loss could still devalue the ruble, shake the stock market and freeze bond trading, Mr. Aslund added.His report estimated that the 2014 sanctions reduced Russia’s annual economic growth by up to 3 percent, and new sanctions could bite much harder.For an average Russian, the harshest U.S. measures could mean higher prices for food and clothing, or, more dramatically, they could cause pensions and savings accounts to be severely devalued by a crash in the ruble or Russian markets.“It would be a disaster, a nightmare for the domestic financial market,” said Sergey Aleksashenko, a former first deputy chairman of the Central Bank of Russia and former chairman of Merrill Lynch Russia. He noted that the ruble had already fallen more than 10 percent from its October value against the dollar, amid increasing talk of Western sanctions.In a sign of the growing seriousness, officials from the National Security Council have been talking with executives from some of Wall Street’s largest banks, including Goldman Sachs, Citigroup, JPMorgan Chase and Bank of America, about the stability of the global financial system in the wake of potential sanctions.The European Central Bank has also warned bank lenders to Russia about risks if the United States imposes sanctions and has asked about the sizes of their loans.For now, though, American officials are not considering any immediate sanctions on the foundation of Russia’s economy: its oil and gas exports.​​European nations rely on natural gas from Russia, and several U.S. allies, notably Germany, prefer that Washington refrain from disrupting the Russian energy industry. Analysts say sanctions that limit Russia’s ability to export oil and gas would be by far the most powerful weapon against the Russian economy, and perhaps the most effective economic deterrent against an invasion of Ukraine, but they would also cause pain in Europe and the United States.“At some point, the West will have to sacrifice a little bit of its well-being if the goal is to deter Putin,” said Maria Snegovaya, a visiting scholar at George Washington University and an author of the Atlantic Council report.“U.S. inflation further constrains the administration’s actions,” she added. “Inflation is already unprecedented for the last 30 years. Any action against Russia that is dramatic will lead to changes in oil and gas prices.”Understand the Escalating Tensions Over UkraineCard 1 of 5A brewing conflict. More

The core personal consumption expenditures price index, a closely watched inflation gauge at the Federal Reserve, rose 4.9% from a year ago in December.
That was the fastest gain since September 1983 and a touch above the Wall Street estimate.
Employment costs increased 4% from a year ago, the fastest in the 20-year data history, though the quarterly rise of 1% was less than expected.

A gauge the Federal Reserve prefers to measure inflation rose 4.9% from a year ago, the biggest gain going back to September 1983, the Commerce Department reported Friday.
The core personal consumption expenditures price index excluding food and energy was slightly more than the 4.8% Dow Jones estimate and ahead of the 4.7% pace in November. The monthly gain of 0.5% was in line with expectations.

Along with the inflation numbers, personal income rose 0.3% for the month, a touch lower than the 0.4% estimate. Consumer spending declined 0.6%, less than the 0.7% estimate.
A separate Labor Department data point that Fed officials also watch closely showed that total compensation costs for civilian workers increased 4% over the past 12 months. That is the fastest pace in history for the employment cost index, a data set that goes back to the beginning of 2002.
However, the seasonally adjusted quarterly increase of 1% was less than the 1.2% forecast, putting some balm on fears of a wage price inflationary spiral.
The numbers come as rampant inflation is pushing the Fed into an aggressive pace of policy tightening.
Earlier this week, central bank officials indicated they are likely to begin raising interest rates as soon as March. Market pricing is pointing to five quarter-percentage point increases this year for benchmark short-term borrowing rates, which have been anchored near zero since the beginning of the Covid pandemic in early 2020.

Headline inflation rose at a 5.8% pace as measured by the PCE index, tied for the fastest pace since June 1982.
Markets viewed the data releases as positive, with stock market futures well off their morning lows.
Fed officials are worried about inflation pressures they had characterized through much of last year as “transitory.” While factors tied to the supply chain bottlenecks and powerful demand for goods over services have been a core cause of price increases, inflation has proven stronger and longer lasting than policymakers had figured.
One area of specific concern is wages and the possibility of a spiral where increases in pay push up prices and in turn drive inflation expectations higher.
“One quarter’s data prove nothing, but with labor participation creeping higher, and measures of excess demand flattening in recent months, it is reasonable to think that wage growth is unlikely to re-accelerate dramatically,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “In the meantime, this report eases the immediate pressure on the [Federal Open Market Committee] to act aggressively; the sighs of relief from Fed Towers should be audible on Wall Street.”
The 4% employment cost index annual increase, though missing estimates for the quarter and below the 1.3% gain from the previous quarter, still represented a sharp gain from the 2.5% rise from a year ago. Compensation for private industry workers jumped 4.4%, which included a 5% increase in wages and salaries. Benefits costs rose 2.9%.
Compensation grew fastest for service occupations, which saw a 6.1% surge in 2021. Nursing and residential care compensation increased 5.7%.
Despite the gain in wages, consumer spending tailed off, falling 0.6% after gaining 0.4% in November.
The decline in spending came despite a 6.9% increase in gross domestic product in the fourth quarter, which closed out a year in which the economy accelerated at its fastest pace since 1984.

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Gross domestic product accelerated at a 6.9% annualized pace in the fourth quarter, well ahead of the 5.5% estimate.
Consumer activity and business spending led the gains, which propelled the U.S. economy to its strongest full year since 1984.
Jobless claims remained elevated at 260,000 while orders for long-lasting goods hit their lowest point since April 2020, signaling an end-of-year slowdown.

The U.S. economy grew at a much better-than-expected pace to end 2021 from sizeable boosts in inventories and consumer spending, and despite signs that the acceleration likely tailed off toward the end of the year.
Gross domestic product, the sum of all goods and services produced during the October-through-December period, increased at a 6.9% annualized pace, the Commerce Department reported Thursday. Economists surveyed by Dow Jones had been looking for a gain of 5.5%.

The increase was well above the unrevised 2.3% growth in the third quarter and came despite a surge in Covid omicron cases that likely slowed hiring and output as businesses dealt with large numbers of sick workers.

Gains came from increases in private inventory investment, strong consumer activity as reflected in personal consumption expenditures, exports, and business spending as measured by nonresidential fixed investment.
Across-the-board decreases in the pace of government spending subtracted from GDP, as did imports, which are measured as a drag on output.
The quarter brought an end to a 2021 that saw a 5.7% increase in annualized GDP, the strongest pace since 1984 as the U.S. tried to pull away from the unprecedented drop in activity during the early days of the coronavirus pandemic.
Markets reacted positively to the news, with stock futures posting gains while government bond yields were mixed.

“The strength of the economy last year stood in stark contrast to the collapse in activity in early 2020, but also speaks to the success of both the public and private sector in quickly adapting to the unprecedented challenges created by the pandemic,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “That being said, potential headwinds still exist, as the global risks associated with the COVID-19 pandemic persist.”
In other economic news Thursday, jobless claims totaled 260,000 for the week ended Jan. 22, slightly less than the 265,000 estimate and a decline of 30,000 from the previous week.

As far as the eye can see cargo trucks wait in long lines to enter The Port of Los Angeles as the port is set to begin operating around the clock on Wednesday, Oct. 13, 2021 in San Pedro, CA.
Jason Armond | Los Angeles Times | Getty Images

Also, orders for long-lasting goods declined 0.9% for December, worse than the estimate for a 0.6% drop. Orders for durables hit their lowest point since April 2020, reflecting an end-of-year slowdown as omicron cases skyrocketed. The decline was driven largely by a 3.9% slump in transportation orders.
The GDP report, though, reflected an overall solid period for the economy after output had slowed considerably over the summer. Supply chain issues tied to the pandemic coupled with robust demand spurred by unprecedented stimulus from Congress and the Federal Reserve led to imbalances across the economic spectrum.
Consumer activity, which accounts for more than two-thirds of GDP, rose 3.3% for the quarter. Gross private domestic investment, a gauge of business spending and inventory build, soared 32%.
Inventories added 4.9 percentage points to the headline growth, boosted in particular by motor vehicle dealers, the Bureau of Economic Analysis said.

Impact on policy

Economic growth came as inflation surged in 2021, particularly in the second half of the year, as supply couldn’t keep up with strong demand, particularly for goods over services.
The U.S. heads into 2022 on uncertain footing, with Fed Chairman Jerome Powell warning Wednesday that growth in the early part of the year is slowing, though he views the economy overall as strong.
To that measure, the Fed telegraphed a March interest rate hike, the first since 2018. Central bankers also expect to end their monthly asset purchases the same month and to start unwinding their bond holdings shortly after.

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Those tightening moves come in response to inflation running at its highest pace in nearly 40 years. Data on the Fed’s preferred inflation gauge, the personal consumption expenditures price index, will be released Friday morning.
The fourth-quarter data reflected those price pressures as well, with the price index for gross domestic purchases up 6.9% in the fourth quarter and 3.9% for the full year. The Fed considers 2% a healthy level for inflation, though a new policy approach adopted in 2020 allows for higher levels over a short period of time in the interest of generating full employment.
Powell said Wednesday that Fed officials believe they have largely achieved both ends of their employment/inflation mandate and are ready to start raising rates and otherwise tightening monetary policy.

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President Biden is suffering in the polls as high inflation saps confidence in the economy, even as growth comes in strong.President Biden is contending with an uncomfortable disconnect: The economy grew at the fastest pace since 1984 last year, but voters are downright pessimistic about economic conditions and their own financial prospects.The divide traces back to the lingering pandemic and high prices, economists said. Inflation is running at its fastest pace since 1982, eroding gains and eating away at paychecks as even robust wage increases struggle to keep pace. And despite vaccines, life has yet to return to normal in the way many people once expected.The disparity poses a significant challenge for Mr. Biden and his party ahead of the November midterm elections. Faltering consumer confidence in the economy — and in Mr. Biden’s handling of it — could be a liability as Democrats battle to keep control of both the House and Senate.Mr. Biden and his top advisers are trying to turn attention toward the positives: emphasizing how rapidly the economy has recovered and that wages are rising, and hailing efforts to fix snarled supply chains and rebuild domestic manufacturing.“We are finally building an American economy for the 21st century, with the fastest economic growth in nearly four decades, along with the greatest year of job growth in American history,” Mr. Biden said in a statement after the release of gross domestic product data on Thursday.But inflation has complicated that narrative.The new G.D.P. figures show that the economy has more than fully recovered from its pandemic hit, but a big chunk of that progress evaporates when you factor in recent price gains. In fact, growth is still falling short of its prepandemic trend after it’s adjusted for inflation. More

Here’s a notable fact about the U.S. economic recovery: Inflation-adjusted output last quarter was just 1 percent below where it would have been if the pandemic had never happened.Here’s another one: Ignoring inflation, output is 1.7 percent above where it would have been absent the coronavirus.Those two facts help explain the confusing, contradictory nature of the late-pandemic economy. On the one hand, the recovery has been remarkably swift by both historical standards and compared with what forecasters expected when the crisis began. On the other hand, a surprising surge in inflation is preventing the economy from rebounding more quickly, or feeling more normal. And to some extent, the same forces — the remarkable levels of aid provided by the government, and the unusual nature of the pandemic recession itself — are responsible for both trends.The chart below helps tell the story. Inflation-adjusted gross domestic product (the dark blue line) has rebounded sharply since the early months of the crisis, but has yet to return to its prepandemic trend. That might not seem too surprising; businesses have mostly reopened, but the pandemic is still restraining daily activities, at least for many people.But the second line on the chart, in light blue, shows that the story is a bit more complicated than that. In non-inflation-adjusted terms, gross domestic product — in simple terms, everything we make and spend in a given three-month period — has surged significantly beyond its pre-Covid trend. In dollar terms, we are producing and spending as much as ever. But because of inflation, those dollars are worth less than before. More

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 3.72% from 3.64%.
Refinance applications fell 13% for the week and were 53% lower year over year.
Mortgage applications to purchase a home dropped just 2% for the week and were 11% lower than a year ago.

A home for sale in Susanville, CA.
Gary Coronado | Los Angeles Times | Getty Images

Rising interest rates are causing big headaches for mortgage lenders, especially those who depend most on refinance business. Demand is simply drying up.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647,200 or less) increased to 3.72% from 3.64%, with points decreasing to 0.43 from 0.45 (including the origination fee) for loans with a 20% down payment. That rate was 77 basis points lower the same week one year ago.

As a result mortgage refinance applications, which are highly sensitive to daily rate moves, fell 13% for the week and were 53% lower year over year, according to the Mortgage Bankers Association’s seasonally adjusted index. Rates have now been moving higher for five straight weeks.
“After almost two years of lower rates, there are not many borrowers left who have an incentive to refinance,” wrote Joel Kan, an MBA economist, in a release. “Of those who are still in the market for a refinance, these higher rates are proving much less attractive to them.”

Mortgage applications to purchase a home fell just 2% for the week and were 11% lower than a year ago. Buyers are actually more active now than usual, as some are hoping to get a jump on the popular spring market. With mortgage rates rising, and home prices still soaring, some are concerned they will no longer be able to afford the home they want.
At an open house last Sunday in Waldorf, Maryland, there were already three offers before potential buyers were even let in the door to have a look.
“We thought that because of the winter months that it would slack off a little bit, prices would start to come back down to normal, but that’s not happening. It’s anguish, it’s pain, it’s agony,” said Rondie Robinson, who was house hunting with his wife and daughter.

That house was priced right around the national median, at $375,000, which is where supply is lean. Most of the buying activity is happening on the higher end, which is why the average purchase loan size set yet another record at $433,500.
Between rising rates and rising prices, “I’m caught between a rock and a hard place,” added Robinson.

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