Evelyn Reynolds

A potential agreement on steel trade provides the clearest look yet at how the Biden administration plans to implement a trade policy that is both protectionist and progressiveWASHINGTON — President Biden has promised to use trade policy as a tool to mitigate climate change. This weekend, the administration provided its first look at how it plans to mesh those policy goals, saying the United States and the European Union would try to curb carbon emissions as part of a trade deal covering steel and aluminum.The arrangement, which American and European leaders aim to introduce by 2024, would use tariffs or other tools to encourage the production and trade of metals made with fewer carbon emissions in places including the United States and European Union, and block dirtier steel and aluminum produced in countries including China.If finalized, it would be the first time a U.S. trade agreement includes specific targets on carbon emissions, said Ben Beachy, the director of the Sierra Club’s Living Economy program.“No U.S. trade deal to date has even mentioned climate change, much less included binding climate standards,” said Mr. Beachy.The announcement was short on details, and negotiations with European leaders are likely to face multiple roadblocks. But it provided an outline for how the Biden administration hopes to knit together its concerns about trade and climate and work with allies to take on a recalcitrant China, at a time when progress on multicountry trade negotiations at the World Trade Organization has stalled.“The U.S. leads the world in our clean steel technology,” Gina Raimondo, the secretary of commerce, said in an interview on Monday. She said the United States would work with allies “to preference cleaner steel, which will create an incentive to make more investments in technology,” resulting in fewer carbon emissions and more jobs.In the same interview, Katherine Tai, the United States Trade Representative, said the potential agreement would restrict market access for countries that don’t meet certain carbon standards, or that engage in nonmarket practices and contribute to global overcapacity in the steel sector — accusations that are often levied at China.The effort would seek to build “a global arrangement that promotes not just fair trade in steel but also pro-climate and responsible trade in steel,” Ms. Tai said.Kevin Dempsey, the president of the American Iron and Steel Institute, said at an industry forum in Washington on Tuesday that the arrangement would be “positive for the U.S. industry,” which has the lowest carbon intensity per ton of steel of the major steel-producing countries.China accounts for nearly 60 percent of global steel production. Its use of a common steel-production method causes more than twice as much climate pollution as does the same technology in the United States, according to estimates by Global Efficiency Intelligence.In its announcement on Saturday, the Biden administration also said it had reached a deal to ease the tariffs that former President Donald J. Trump had imposed on European metals while the governments work toward the carbon accord.The United States would replace the 25 percent tariff on European steel and a 10 percent tariff on European aluminum with a so-called tariff-rate quota. In return, the European Union would drop the retaliatory tariffs it imposed on other American products, like bourbon and motorcycles.Under the new terms, 3.3 million metric tons of European steel would be allowed to enter the United States duty-free each year, with any steel above that volume subject to a 25 percent tariff.European producers would be allowed to ship 18,000 metric tons of unwrought aluminum, which often comes in the form of ingots, and 366,000 metric tons of wrought or semifinished aluminum into the United States each year, while volumes above that would be charged a 10 percent tariff, the commerce department said.To qualify for zero tariffs, the steel must be entirely made in the European Union — a provision designed to keep cheaper steel from countries including China and Russia from finding a backdoor into the United States via Europe.Supporters of free trade have criticized the Biden administration for relying on the same protectionist trade measures used by the Trump administration, which deployed both tariffs and quotas to protect domestic metal makers.Jake Colvin, the president of the National Foreign Trade Council, said the announcement would ratchet down trade tensions between the United States and Europe. But he called the trade barriers “an unwelcome form of managed trade” that would add costs and undermine American competitiveness.Ms. Tai said the administration had made a deliberate choice not to heed calls “for the president to just undo everything that the Trump administration had done on trade.”Mr. Biden’s plan, she said, “is that we formulate a worker-centered trade policy. And that means not actually going back to the way things were in 2015 and 2016, challenging us to do trade in a different way from how we’ve done it earlier, but also, critically, to challenge us to do trade in a way different from how the Trump administration did.”A factory in southern China that makes steel parts. The trade proposal would block dirtier steel and aluminum produced in countries including China.The New York TimesThe focus on carbon emissions differs from that of the Trump administration, which rejected any attempts to negotiate on carbon mitigation and withdrew the United States from the Paris Agreement on climate change.But negotiations with Europe will face challenges, among them developing a common methodology for measuring how much carbon is emitted as certain products are made. Still, the announcement suggests that the United States and Europe might be ready to work toward a collaborative approach on lowering carbon emissions, despite past differences on how the problem should be addressed.European leaders have long advocated an explicit price on the carbon dioxide that companies emit while making their products. In July, the European Union proposed a carbon border adjustment mechanism that would require companies to pay for carbon emissions produced outside Europe, to discourage manufacturers from evading Europe’s restrictions on pollution by moving abroad.An explicit tax on carbon has met with more resistance in the United States, where some politicians want to update regulatory requirements or put the onus on companies to invest in cleaner production technology.Todd Tucker, the director of governance studies at the Roosevelt Institute, said the latest announcement suggested that the European Union may be “a little bit more flexible” on how the United States and other partners would go about lowering emissions. Mr. Biden’s reconciliation bill, for example, contains a proposal for a “green bank” that could provide financing for firms to transition to cleaner technologies, he said.“If the U.S. ends up achieving decarbonization through more of an investments and industrial-policy approach, it seems like they’re OK with that,” Mr. Tucker said.Though the earliest negotiations over carbon emissions in the steel sector involve the European Union, the Biden administration says it wants to quickly extend the partnership to other countries.In twin announcements on Sunday, the Department of Commerce said it had begun close consultations with Japan and the United Kingdom “on bilateral and multilateral issues related to steel and aluminum,” with a focus on “the need for like-minded countries to take collective action.”Both Japan and the United Kingdom still face a 25 percent tariff on steel exports to the United States imposed by Mr. Trump.The talks suggest a template for how the Biden administration will try to engage allies to counter China’s growing economic heft and make progress on goals like climate and workers rights.The administration has rejected Mr. Trump’s “America First” approach to trade, saying the United States needs to work with like-minded countries. But they have also acknowledged that the inefficiency of negotiations at the World Trade Organization, and distanced themselves from broader, multicountry trade deals, like the Trans-Pacific Partnership.The announcements suggest that the Biden administration may not see comprehensive trade deals as the most effective way to accomplish many of its goals, but rather, industry-specific agreements among a limited number of democratic, free-market countries. That approach is similar to the cooperation the United States announced with the European Union for the civil aircraft industry in June.Ms. Raimondo said the agreement to ease the tariffs on the European Union was a “very significant achievement” that would help to alleviate supply chain problems and lower prices for companies that use steel and aluminum to make other products.“It’s all kind of a table setter to a global arrangement, whereby we work with our allies all over the world over the next couple of years,” she said. More

Companies added 571,000 jobs for the month, beating the 395,000 Dow Jones estimate.
Leisure and hospitality led the way with 185,000 new positions.
Large businesses were by far the biggest creators, adding 458,000.

A company advertises a help wanted sign on April 09, 2021 in Pawtucket, Rhode Island.
Spencer Platt | Getty Images

Private sector job creation popped higher in October thanks to a burst in hiring in the hospitality sector, payroll processing firm ADP reported Wednesday.
Companies added 571,000 for the month, beating the 395,000 Dow Jones estimate and just ahead of September’s downwardly revised 523,000. It was the best month for jobs since June.

Leisure and hospitality, a category that includes bars, restaurants, hotels and the like, saw a gain of 185,000 for a sector that remains well below its pre-pandemic employment level. The sector is seen as a proxy for an economic recovery that stalled over the summer due to a rise in the Covid delta variant and a massive clog in supply lines.
“The job market is revving back up as the delta wave of the pandemic winds down,” said Mark Zandi, chief economist at Moody’s Analytics, which aids ADP in compiling the report. “Job gains are accelerating across all industries, and especially among large companies. As long as the pandemic remains contained, more big job gains are likely in coming months.”
Growth in the sector helped fuel an overall 458,000 gain in services jobs.
Professional and business services also contributed 88,000 hires, trade transportation and utilities added 78,000, and education and health services jobs were up 56,000.
On the goods-producing side, which added 113,000 positions, construction was up 54,000 and manufacturing contributed 53,000.

From a size standpoint, businesses with more than 500 employees by far led the way with 342,000 new hires. Businesses with fewer than 50 workers added 115,000 and medium-sized firms increased by 114,000.
The ADP report comes two days before the Labor Department’s more closely watched nonfarm payrolls count, which is projected to show an increase of 450,000, according to Dow Jones.
While ADP can serve as a precursor to the government’s count, the two can differ widely.
In September, ADP’s tally of private payroll creation – initially at 568,000 before being revised lower by 45,000 – was well above the Labor Department’s 317,000. The total nonfarm payrolls count for September was just 194,000, well below estimates and held back by a loss of 123,000 government jobs.

WATCH LIVEWATCH IN THE APP More

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) decreased to 3.24% from 3.30%.
Refinance demand was down 33% from the same week one year ago.
Mortgage applications to purchase a home fell 2% for the week and were 9% lower than the same week one year ago.

People wait to visit a house for sale in Floral Park, Nassau County, New York.
Wang Ying | Xinhua News Agency | Getty Images

A slight reprieve from rising mortgage rates did nothing to invigorate mortgage demand. Total mortgage application volume fell 3.3% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index.
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($548,250 or less) dropped to 3.24% from 3.30%, with points remaining unchanged at 0.34 (including the origination fee) for loans with a 20% down payment.

“Mortgage rates decreased for the first time since August, as concerns about supply-chain bottlenecks, waning consumer confidence, weaker economic growth, and rising inflation pushed Treasury yields lower,” said Joel Kan, an MBA economist.
Refinance demand, which usually reacts to weekly rate moves, continued to slide, down 4% from the previous week and down 33% from the same week one year ago. That was the slowest pace since January 2020. Rates did not decline until later in the week, which may have been why refinances failed to react. The refinance share of mortgage activity decreased to 61.9% of total applications from 62.2% the previous week.
Mortgage applications to purchase a home fell 2% for the week and were 9% lower than the same week one year ago.
“Purchase activity continues to be held back by high prices and low for-sale inventory, but current applications levels still point to healthy housing demand,” said Kan, noting that while refinance volume has dropped dramatically this year, the MBA is forecasting for a record $1.6 billion in purchase mortgage originations this year and sustained demand leading to another record year in 2022.
Mortgage rates remained lower to start this week, but all bets are off later Wednesday, as the Federal Reserve holds its scheduled policy meeting. The Fed is expected to make an announcement on tapering its purchases of mortgage-backed bonds. That would have a direct effect on mortgage rates.
“Traders know this and have prepared for it, but there could still be big movement in the bond market in the afternoon,” said Matthew Graham, COO of Mortgage News Daily.

WATCH LIVEWATCH IN THE APP More

Lawmakers are coalescing around a deal to suspend a $10,000 cap on state and local tax deductions that was imposed during the Trump administration.WASHINGTON — Democrats were readying an agreement on Tuesday that would repeal a cap on the amount of state and local taxes that homeowners can deduct as part of a broader $1.85 trillion spending bill, a move that could amount to a significant tax cut for wealthy Americans in liberal states.But some liberals quickly balked at the emerging agreement, which would suspend a $10,000 cap on the so-called SALT deduction for five years, removing a limit that Republicans included in their 2017 tax package as a way to pay for cuts for corporations and the rich. The suspension would kick in for deductions related to property taxes and state and local income taxes accrued in 2021 and would run through 2025.If it passes, the deal would be a major concession to a handful of Democrats from high-income states like New York and New Jersey who have insisted on lifting the cap, in order to win their votes for President Biden’s social policy and climate change package.But liberal Democrats have scoffed at the push to include the costly proposal in the domestic policy package, particularly as party leaders have curtailed or eliminated other spending priorities as they pare down a $3.5 trillion blueprint to appease moderate and conservative-leaning Democrats.Senator Bernie Sanders of Vermont, the chairman of the Budget Committee, blasted the repeal on Tuesday as a giveaway to the rich that went against the Democrats’ priorities.“I think there is a compromise to be reached here, a middle ground, which says that for families earning less than $400,000, they can take a complete exemption, but not families earning more than that,” said Mr. Sanders, who had released a blistering statement criticizing the agreement. “What exists is unacceptable, and one way or another it will be dealt with.”It remains unclear whether the agreement would apply broadly or if Democrats planned to impose an income cap to prevent the wealthiest Americans from receiving what amounts to a tax cut.A straight repeal of the cap for every household that claims the deduction would siphon huge amounts of revenue from the federal government: about $90 billion per year, according to budget experts.To get around that, the five-year suspension assumes that the cap is reinstated in 2026 for another five years, allowing Democrats to use a budget sleight of hand to show its removal as revenue neutral in the traditional 10-year window that lawmakers look to when considering a bill’s impact on the federal deficit.Three people with knowledge of the emerging agreement described it on the condition of anonymity and cautioned that discussions were continuing. Details of the talks were first reported by Punchbowl News.With Republicans opposed to Mr. Biden’s domestic policy plan, Democrats must win the support of all 50 senators who caucus with the party and all but three House lawmakers for the plan to become law. That effort is further complicated because Democrats are using an arcane process known as budget reconciliation, which shields fiscal legislation from the 60-vote filibuster threshold in the Senate.Those restrictions mean that any lawmaker, particularly in the Senate, could effectively tank the legislation over his or her priorities, including insisting that the bill repeal SALT. Democrats from the high-income states that have been most affected by the limit have spent the past five years searching for an opportunity to roll it back for their constituents, despite complaints that it would largely benefit the wealthy.House Democrats including Representatives Tom Suozzi of New York, Mikie Sherrill of New Jersey and Josh Gottheimer of New Jersey have made clear that they will not support the broader spending package without a SALT repeal. Mr. Gottheimer wore a large button emblazoned with the words “no SALT, no dice” to votes on Capitol Hill on Tuesday. Senator Chuck Schumer of New York, the majority leader, has also voiced support for getting rid of the cap.“We’ve been fighting for this for years,” Mr. Gottheimer said on Tuesday, adding that reinstating the full deduction would amount to giving “tax relief to families that deserve it and who got hosed in 2017.”Delaying the cap for five years in a 10-year window could effectively allow lawmakers to claim that the proposal would not have an impact on the package’s cost. Yet some Democrats appeared confident that lawmakers would act again in five years to prevent the cap from going back into effect.“It’ll be pretty clear when they get tax relief, it’s going to be hard to take that back,” Mr. Gottheimer said, referring to families in his district.The SALT limit resulted in tax increases for wealthier Americans beginning in 2018, particularly higher earners from high-tax states, and helped Democrats capture some House seats that Republicans previously held in New Jersey, California and elsewhere.The deduction is largely used by wealthy homeowners who itemize their deductions and live in states and cities with high taxes, which tend to be led by Democrats. Democrats accused Republicans of using the cap to pay for other tax cuts for the rich and to penalize liberal states.“My guess is the majority of Americans with a net worth of $50 to $300 million would get a tax cut under the Build Back Better plan with a full repeal of SALT,” Jason Furman, an economist at Harvard who was the chairman of the White House Council of Economic Advisers under President Barack Obama, said on Twitter on Tuesday. “The bill would do more for the super-rich than it does for climate change, childcare or preschool. That’s obscene.”But several lawmakers in the New York and New Jersey delegations have warned that their votes for the domestic policy package hinged on the inclusion of the provision, and Democrats have haggled for months over a possible solution.“We’re still going at it over it,” said Representative Richard E. Neal of Massachusetts, the Democratic chairman of the Ways and Means Committee, who joked on Tuesday that he had earned “a Ph.D. in the SALT deduction because it’s been argued from every perspective I can think of.”The Committee for a Responsible Federal Budget described the repeal of the SALT cap as a “regressive” tax cut, estimating that it would cost $90 billion a year in lost government revenue. The wealthiest would make out the best, with a SALT cap repeal distributing more than $300,000 per household in the top 0.1 percent of earners and only $40 for a middle-income family over the first two years.“With the SALT cap repealed and current tax rates retained, in fact, the reconciliation package might actually offer a net tax cut for most high-income households,” the group said.The right-leaning Tax Foundation estimated that repealing the cap would increase after-tax income of the top 1 percent of earners by 2.8 percent, while the bottom 80 percent would get minimal benefit.Republicans seized on the agreement on Tuesday, accusing Democrats of hypocrisy for backing an “anti-progressive” handout.“First Democrats cut out paid leave,” J.P. Freire, a spokesman for Republicans on the House Ways and Means Committee, said on Twitter. “Now they’re shoveling money to the rich.” More

The Federal Reserve is expected to announce a plan to taper off its bond buying. With inflation surging, economists’ eyes are already turning to rates.Jerome H. Powell, the Federal Reserve chair, is on the cusp of accomplishing something that would have seemed like a victory a year ago: Central bankers are expected to announce a plan to wean the economy off their asset-buying program on Wednesday without roiling markets, a delicate maneuver that was in no way assured.Instead, Mr. Powell and his colleagues face pressing questions about their next steps.Inflation is running at its fastest pace in roughly three decades, and hopes that the jump in prices will quickly fade have dimmed as supply chain snarls deepen and fuel costs rise. Wages are increasing swiftly, and consumers and businesses are coming to expect faster price increases, pumping up the risk that high inflation will become a fixture as employers and workers adjust their behavior.Though the Fed is expected to announce this week that it will slow the $120 billion in asset purchases it has been carrying out each month to support the economy, Wall Street economists have already turned their attention to how worried the central bank is about brisk inflation and whether — and when — it might start raising interest rates in response.“The question in the mind of the market is 100 percent what comes next,” said Roberto Perli, a former Fed economist who is now head of global policy at Cornerstone Macro.Slowing bond buying could lead to slightly higher long-term borrowing costs and take pressure off the economy at the margin. But raising interest rates would likely have a more powerful effect when it comes to cooling off the economy. A higher federal funds rate would cause the cost of buying a car, a house or a piece of equipment to rise and would slow consumer and business demand. That could tamp down price gains by allowing supply to catch up to spending, but it would slow growth and weigh on hiring in the process.The Fed has signaled that bond buying could wrap up completely by the middle of next year. Economists increasingly expect the Fed to move its policy rate up from near-zero, where it has been since March 2020, as soon as next summer.Goldman Sachs economists now expect a rate increase to come in July 2022, a full year earlier than they had previously anticipated. Deutsche Bank recently pulled its forecast forward to December 2022. Investors as a whole now put better than 50 percent odds on a rate increase by the Fed’s June 2022 meeting, based on a CME Group tool that tracks market pricing.But raising rates poses a risky trade-off for Fed policymakers. If inflation moderates as the economy gets back to normal and pandemic-related disruptions smooth out, higher borrowing costs could leave fewer people employed for little reason. And with a smaller number of paychecks going out each month, demand would likely weaken over the longer run, which could drag inflation back to the uncomfortably low levels that prevailed before the start of the pandemic.“The risk is not really about the Fed beginning its rate hikes behind the curve,” said Skanda Amarnath, executive director of Employ America, a group focused on encouraging policies that help the work force. “The risk is that the Fed overreacts to this.”That markets are penciling in rate increases more quickly could suggest that they are optimistic about the economy’s chances, said Neil Dutta, head of U.S. economics at Renaissance Macro. The Fed has said that before lifting rates, it wants to see the economy return to full employment and inflation that exceeds its 2 percent target and is on track to average it over time. Investors might think those targets will be met by the middle of next year.“If it was a problem, why aren’t stocks falling?” Mr. Dutta said of the earlier rate increase expectations. “The economy has done better than anticipated.”Still, millions of jobs remain missing from the labor market, and employment growth has slowed sharply. Payrolls expanded by just 194,000 jobs in September, and while fresh hiring data due on Friday is expected to show that companies added 450,000 workers in October, the trajectory is anything but certain.If workers take a long time to come back to the job market, either because they lack child care or fear contracting the coronavirus, it could be the case that the Fed finds itself in a conundrum where inflation is high but full employment remains elusive. Mr. Powell has signaled that such a situation, in which the Fed’s goals are in conflict, is a risk. But he has also said the economy is not there yet.The future of Jerome H. Powell as the Fed chair is being debated within the Biden administration, complicating the decision on rates.Stefani Reynolds for The New York Times“I do think it’s time to taper,” Mr. Powell said at a recent virtual conference. “I don’t think it’s time to raise rates.”Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More

CNBC Fed Survey

The CNBC Fed Survey indicates the Fed will announce a taper Wednesday and begin hiking rates sooner than previously forecast.
Sixty percent believe inflation is a big enough concern that the Fed should halt all asset purchases now.
On stocks, the survey shows a 48% chance of a 10% downside move and a 39% chance of a 10% upside move.

Amid heightened concerns about inflation, respondents to the CNBC Fed Survey believe the Federal Reserve will announce a decision to taper Wednesday and begin hiking interest rates considerably sooner than previously forecast.
Respondents to the survey overwhelmingly forecast that the Fed will announce a decision to reduce its monthly asset purchases in the statement Wednesday and begin tapering in November. The Fed is expected to reduce its $120 billion in monthly purchases of Treasurys and mortgage-backed securities by $15 billion a month, which would bring purchases to an end by May.

Arrows pointing outwards

Respondents also moved forward their forecast for the first rate hike to September 2022 from December in the last survey.
But the September average masks a more aggressive outlook: 44% of the 25 respondents believe the Fed will raise rates by July, meaning rate hikes will follow the end of taper by just a few months.
Expectations for a modest pace of both tapering and hiking rates from the Fed were a source of criticism from many respondents: 60% believe inflation is a big enough concern that the central bank should halt all asset purchases now.
“The Fed’s current idea of dealing with inflation is to take their balance sheet from $8.5 trillion to about $9 trillion by next July and still have rates at zero,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group, noting that the Fed will still be adding to its balance sheet while it tapers. “Inflation and the bond market response are about to run over the Fed.”
That criticism extends to the Fed’s go-slow approach on rate hikes.

“At some point, the Fed is going to have to accelerate its timetable for rate hikes or risk losing credibility,” said John Ryding, chief economic advisor at Brean Capital.

Arrows pointing outwards

Fed funds futures markets have a 58% probability of the first rate hike in June and a 73% chance of a second increase by December.
Calls for faster tightening come as concern about inflation has risen to the No. 1 risk facing the economy, according to respondents, eclipsing Covid.
Forecasts for the consumer price index in 2021 rose for the seventh straight survey, standing now at 4.8% year over year, up from 4.4% in September. For 2022, the CPI is forecast to rise 3.5%, up from 3% in the September survey, a sign that inflation is believed to be moving further away from the Fed’s 2% target.
While 64% continue to say the recent increase in inflation is temporary, many still continue to sound the alarm bells. In fact, 40% want the Fed to address the problem with rate increases now. Just 26% say inflation has peaked, with expectations that the rate of price increases will continue to rise through January.
“The correct question to ask is, ‘Will inflation come back down to the Fed’s 2% target without a recession?’ I don’t think it will. I’d characterize the recent increase in inflation as ultimately temporary but very persistent,” said Robert Fry, chief economist at Robert Fry Economics.
Spending bills in Congress are adding to inflation concerns and prompting calls for more aggressive Fed tightening.
Forty percent say new spending by Congress will be inflationary if it is not offset by higher taxes and 36% say it will be inflationary even if it is offset. Twenty-four percent say it’s not inflationary and none of the respondents agreed with the administration’s claim that the spending would result in disinflation.
Nearly two-thirds believe the Fed should offset new spending by quickening the pace of its taper, and 40% prefer faster rate hikes in response compared with 56% who opposed such measures.
Respondents are sharply divided over the impact the spending bills will have on growth: 33% say they will add to GDP, 29% say they will reduce growth and 38% believe they will have no impact. On employment, 38% believe the new spending will add to jobs, 29% say it will reduce job growth and 33% expect it to have no effect.
On overall growth, the outlook continues to decline, with GDP forecast around 5% this year, down from 6.6% in the July survey and 3.6% forecast for next year.
On the outlook for stocks, CNBC launched a new question in the survey, the Risk/Reward Index, where it asked respondents to gauge the probability of a 10% upside and downside move in stocks over the next six months.
The first results show a 48% chance of a 10% downside move and a 39% chance of a 10% upside move, yielding an index of -9. Along similar lines, 72% believe that stocks are overvalued relative to their outlook for growth and earnings, up from 56% in the prior survey, but not as high as it was in the summer when it neared 90%.
Respondents believe the S&P 500 will actually fall half a percentage point between now and year-end and rise just 3% next year. Stocks are forecast to face a rising 10-year Treasury yield that hits 2.2% in 2022.

Become a smarter investor with CNBC Pro.Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.Sign up to start a free trial today. More

On Wednesday, the Federal Reserve is expected to announce it will start unwinding its $120 billion monthly bond purchases – a program it started to support the economy during the pandemic.
Fed Chairman Jerome Powell is likely to stress the end of the bond program and the start of rate hikes are not connected, but the market is already aggressively pricing in two to three hikes next year.
Powell’s comments on inflation could be the most important message from the Fed, since that may help investors get a sense of the central bank’s thinking around interest rate policy.

Federal Reserve Chairman Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs Committee hearing on the CARES Act, at the Hart Senate Office Building in Washington, DC, U.S., September 28, 2021.
Kevin Dietsch | Reuters

This week, the Federal Reserve is widely expected to announce the unwinding of its monthly bond-buying program – a measure it started to support the economy during the pandemic. However, the bigger story for markets is how the central bank will discuss inflation.
That’s because report after report of hotter-than-anticipated inflation has ramped up expectations that the Fed will fight the trend of higher prices by beginning to raise interest rates next year, about six months sooner than the last Federal Reserve forecast.

Economists expect the central bank to say after its 2-day meeting concludes Wednesday that it will begin winding down its $120 billion in monthly bond purchases by mid-November or December and end the program entirely by the middle of next year.
Fed Chairman Jerome Powell has made an effort to emphasize that the end of the program does not signal the start of a new rate hike cycle, and he is expected to repeat that message at his post-meeting briefing Wednesday.
But already traders are pricing in more than two interest rate hikes for next year, while the majority of Fed officials do not even see one in 2022 in their most recent forecast. That’s because inflation, now at a 30-year high, has become hotter and seems to be lingering longer than the “transitory,” or temporary, description the Fed had included in its recent policy statements.
“My sense is the word ‘transitory’ has left the station. I would be shocked if we heard that word come up again,” said Rick Rieder, chief investment officer of global fixed income at BlackRock. He said it will be important to watch how the Fed addresses employment, the other half of its dual mandate.

Rising inflation and wages

Inflation, as measured by the personal consumption expenditures price index, rose 0.3% for September, driving the year-over-year gain to 4.4%, the fastest since January 1991.

Companies, struggling to find workers, are also raising wages to keep and attract employees.
“I think it’s the hottest job market since World War I,” Rieder said. “We had the highest [employment cost index] print since 2004. The wages are accelerating dramatically, and I think the Fed is behind the curve. I think they need to open the window to raise rates.”
Rieder said he does not expect the Fed or Powell, in his post-meeting briefing, to discuss raising the federal funds rates from the current zero level. The federal funds rate, which is set by the central bank, is the interest rate at which banks borrow and lend to one another overnight.
“There’s clearly movement toward the Fed recognizing that inflation is stickier than they thought it would be,” said Rieder. “I think [Powell] will lay out data … that they anticipate some of these inflation numbers are coming down, and I think he’s right.”
But Rieder said the Fed needs to show it would be willing to raise interest rates if it had to. According to the CME’s FedWatch Tool, traders see a 65% chance the Fed begins to raise interest rates by a quarter point in June and a 50% chance for a second hike in September, with a third also possible.

Unwinding is the first step

The Fed took unprecedented moves to rapidly ease policy when the pandemic hit in early 2020. The Fed quickly cut rates to zero, and the bond-buying program was instituted to rapidly provide liquidity to markets.
Tapering bond purchases, or quantitative easing, will be the first unwind of a major program. The Fed is widely expected to detail that it will slow down its buying of Treasurys by $10 billion a month and mortgage securities by $5 billion a month.
A wild card for the Fed has been Covid itself, and the outbreak of the delta variant is widely blamed for the abrupt slowdown in growth in the third quarter. Gross domestic product grew at just a 2% pace, just a quarter of what some economists expected for the period earlier in the year. While the Fed is likely to acknowledge slower growth, economists already see it picking up again in the current quarter.
Mark Cabana, head of U.S. short rates strategy at Bank of America, said there’s a chance that the Fed could say it may speed up or slow down its tapering process as needed.
If the central bank does talk about increasing the pace, as some Fed members had favored a more rapid rollback at the last meeting, that could affect the market. “That just raises the risk that the Fed ends up sounding hawkish,” said Cabana.

Interest rates

Powell is not likely to talk about raising interest rates, but he’s not likely to discourage the market’s pricing in of rate hikes either.
“The first rate hike is priced in for July…. It’s too soon for the Fed to push back on hikes. He’s not going to tell the market that it’s wrong,” said Cabana. “There’s upside inflation risk. They don’t know for sure how inflation is going to evolve.”
Rieder said he doubts Powell would talk about the potential to taper faster. “My gut is that’s not being considered today, but if he did say we could taper faster, then markets would interpret that as they are considering raising rates sooner and/or more aggressively,” he said.
But no matter what Powell says about the link between the tapering and bond buying, the market’s chief interest is inflation and the interest rate moves it could trigger.
Diane Swonk, chief economist at Grant Thornton, said she expects the Fed will be forced to raise rates next year.
“Our own forecast has core PCE… peaking above 4% by year-end and slowing to 3.5% by mid-2022. The unemployment rate is expected to dip below 4% in the first half of 2022,” Swonk noted. “Those shifts would prompt more rapid tapering and faster rate hikes than the Federal Reserve laid out in its September forecasts. Market participants are now expecting three rate hikes next year; we could see more.”

WATCH LIVEWATCH IN THE APP More

President Joe Biden temporarily expanded the earned income tax credit — a write-off for low- to moderate-income families — through the American Rescue Plan in March.
The latest version of the Democrats’ $1.75 trillion social and climate spending plan includes an extension of the enhanced benefit through 2022.
However, the boost may still create a marriage penalty for some couples, critics say.

President Joe Biden delivers remarks on his Build Back Better agenda from the East Room of the White House after meeting with members of the House Democratic Caucus at the U.S. Capitol earlier in the day on Thursday, Oct. 28, 2021 in Washington, DC.
Kent Nishimura | Los Angeles Times | Getty Images

The latest version of the Democrats’ $1.75 trillion social and climate spending package proposes a one-year extension of an enhanced tax break for millions of Americans. 
President Joe Biden temporarily boosted the earned income tax credit — a write-off for low- and moderate-income working families — through the American Rescue Plan by widening eligibility and increasing the benefit for 2021.

Now, Democrats are pushing to extend these extra perks through 2022, according to an outline from the House Rules Committee.
If enacted, the plan may affect 17 million low-wage employees, such as hospitality workers and childcare providers, a framework from the White House says.
“These are people who work important jobs but receive low pay,” said Kris Cox, deputy director of federal tax policy at the Center on Budget and Policy Priorities.
“And they previously received such a small earned income tax credit, that nearly six million people were actually taxed into or taxed deeper into poverty,” she said.
More from Personal Finance:Here are the 3 big ways Democrats’ social plan would expand health coverageDemocrats still weighing changes to limit on state and local taxes deductionThe enhanced child tax credit will continue for 1 more year, per Democrats’ plan

The credit is a percentage of earnings and is refundable, meaning it may reduce a tax bill or offer a refund, even if it’s more than what they owe. (The Internal Revenue Service has a tool to see who qualifies.)
Prior to the American Rescue Plan, workers without children received little benefit from the earned income tax credit.
However, the March law boosted the write-off for 2021 up to $1,502 for these individuals, nearly three times the former amount. The plan expanded eligibility for childless workers by raising the income limit to $21,430 ($27,380 for married couples).
“Raising the income cap is such an important way to acknowledge the power of the earned income tax credit for people who are receiving low wages,” said Cox.

Raising the income cap is such an important way to acknowledge the power of the earned income tax credit for people who are receiving low wages.

Deputy director of federal tax policy at the Center on Budget and Policy Priorities

The measure also widened the age ranges to include more workers, reducing the eligibility to 19 and removing the upper age limit. 
In addition to the enhanced earned income tax credit, a growing number of states have added or improved the write-off in response to the pandemic. The state-level tax break is typically a percentage of the federal credit, following the same eligibility requirements.

Marriage penalty

While some applaud the one-year extension, others say there is still room for improvement as the enhanced earned income tax credit may cause a marriage penalty for some couples.
For example, if someone earns $20,000 and their spouse makes $10,000, they may lose some of the tax break. Moreover, a childless worker marrying someone with a kid may eliminate the benefit entirely.
Several Republican senators have written a letter to Senate Majority Leader Chuck Schumer, D-N.Y., and Senate Finance Committee Chairman Ron Wyden, D-Ore., objecting to this issue.
“Unfortunately, despite its original rollout as part of the American Families Plan, the current draft of the reconciliation bill takes an existing marriage penalty in the earned income tax credit and makes it significantly worse,” the Senators wrote.

WATCH LIVEWATCH IN THE APP More