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    June Jobs Report Delivers Good News and Big Questions for Washington

    Payrolls surged and wages climbed, both positives for President Biden and the Federal Reserve. But stagnant labor market participation highlights a key risk.Employers are hiring and wages are rising but the number of people actively working or looking for jobs remains stagnant, a phenomenon that is making it difficult for the Federal Reserve and White House to determine how much the labor market has recovered and how long the U.S. economy will continue to need hefty support.Employers added 850,000 workers to payrolls in June, a strong number that was buttressed by rising wages as employers scramble to hire to meet surging customer demand. The report gives the Biden administration encouraging talking points, and the Fed a sign that the economy is making progress toward the central bank’s full employment goal.But the fact that workers aren’t rushing back to the job market injects a note of caution into an otherwise sunny outlook. The labor force participation rate, a measure of people working or looking for jobs, has barely budged in recent months and was unchanged at 61.6 percent in June. It remains sharply down from 63.3 percent before the crisis started.The labor force participation rate did not budge.Share of the working-age population who are in the labor force (employed, unemployed but looking for work or on temporary layoff) More

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    Fed Unity Cracks as Inflation Rises and Officials Debate Future

    Federal Reserve officials are debating what to do as price risks loom, even as its leaders and the White House say today’s surge will most likely cool.Federal Reserve officials spoke with one voice throughout the pandemic downturn, promising that monetary policy would be set to full-stimulus mode until the crisis was well and truly behind America. Suddenly, they are less in sync.Central bankers are increasingly divided over how to think about and respond to emerging risks after months of rising asset values and faster-than-expected price increases. While their political counterparts in the White House have been more unified in maintaining that the recent jump in price gains will fade as the economy gets past a reopening burst, Washington as a whole is wrestling with how to approach policy at a moment of intense uncertainty.The Fed’s top officials, including Chair Jerome H. Powell, acknowledge that a lasting period of uncomfortably high inflation is a possibility. But they have said it is more likely that recent price increases, which have come as the economy reopens from its coronavirus slumber, will fade.Other officials, like James Bullard, president of the Federal Reserve Bank of St. Louis, have voiced more pointed concern that the pickup in prices might persist and have suggested that the Fed may need to slow its support for the economy more quickly as a result.Unwanted and persistent inflation seemed like a fringe possibility earlier this year, but it is becoming a central feature of economic policy debates as prices rise for used cars, airline tickets and restaurant meals. For the Fed, the risk that some of the current jump could last is helping to drive the discussion about how soon and how quickly officials should slow down their enormous government-backed bond-buying program — the first step in the central bank’s plan to reduce its emergency support for the economy.Fed officials have said for months that they want to achieve “substantial further progress” toward their goals of full employment and stable inflation before slowing the purchases, and they are just beginning to discuss a plan for that so-called taper. They are now wrestling with the reality that the nation is still missing 7.6 million jobs while the housing market is booming and prices have moved up faster than expected, prompting a range of views to surface in public and private.The bubbling debate reinforces that the central bank’s easy money policies won’t last forever, and sends a signal to markets that officials are closely attuned to inflationary pressures.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” said Jerome Powell, the Fed chair.Al Drago/The New York Times“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, who is president of the Federal Reserve Bank of Dallas and is one of the people pushing for the Fed to soon begin to pull back support. “In a situation this complex and this dynamic, if I weren’t seeing debate and disagreement, and there were unanimity, it would make me nervous.”The central bank’s 18 policy officials roundly say that the economy’s path is extremely hard to predict as it reopens from a once-in-a-century pandemic. But how they think about inflation after a string of strong recent price reports — and how they feel the Fed should react — varies.Inflation has spiked because of statistical quirks, but also because consumer demand is outstripping supply as the economy reopens and families open their wallets for dinners out and long-delayed vacations. Bottlenecks that have held up computer chip production and home-building should eventually fade. Some prices that had previously shot up, like those for lumber, are already starting to moderate.But if the reopening weirdness lasts long enough, it could cause businesses and consumers to anticipate higher inflation permanently, and act accordingly. Should that happen, or if workers begin to negotiate higher wages to cover the pop in living costs, faster price gains could stick around.“A new risk is that inflation may surprise still further to the upside as the reopening process continues, beyond the level necessary to simply make up for past misses to the low side,” Mr. Bullard said in a presentation last week. The Fed aims for 2 percent inflation as an average goal over time, without specifying the time frame.Other Fed officials have said today’s price pressures are likely to ease with time, but have not sounded confident that they will entirely disappear.“These upward price pressures may ease as the bottlenecks are worked out, but it could take some time,” Michelle Bowman, one of the Fed’s Washington-based governors, said in a recent speech.The Fed’s top leadership has offered a less alarmed take on the price trajectory. Mr. Powell and John C. Williams, president of the Federal Reserve Bank of New York, have said it is possible that prices could stay higher, but they have also said there’s little evidence so far to suggest that they will.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” Mr. Powell said during congressional testimony on June 22.Mr. Williams has said there is even a risk that inflation could slow. The one-off factors pushing up prices now, like a surge in car prices, could reverse once supply recovers, dragging down future price gains.“You could see inflation coming in lower than expected,” he said last week.Which take on inflation prevails — risk-focused, watchful, or less fretful — will have implications for the economy. Officials are beginning to talk about when and how to slow down their $120 billion in monthly bond-buying, which is split between $80 billion in Treasury securities and $40 billion in government-backed mortgage debt.The Fed has held a discussion about slowing bond-buying before, after the global financial crisis, but that came during the rebound from a deep but otherwise more standard downturn: Demand was weak and the labor market climbed slowly back. This time, conditions are much more volatile since the recession was an anomaly, driven by a pandemic instead of a financial or business shock.In the current setting, officials who are more worried about prices getting out of hand may feel more urgency to dial back their economic stimulus, which stokes demand.“This is a volatile environment; we’ve got upside inflation risk here,” Mr. Bullard said at a separate event last week. “Creating some optionality for the committee might be really useful here, and that will be part of the taper debate going forward.”Mr. Kaplan said he had been vocal about his preferences on when tapering should start during private Fed discussions, though publicly he will say only that he would prefer to start cutting policy support “sooner rather than later.”“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, a Fed official who is pushing to start easing support.Edgard Garrido/ReutersHe thinks moving more quickly to slow bond purchases would take a “risk management” approach to both price gains and asset market excess: reducing the chances of a bad outcome now, which might mean the Fed doesn’t have to raise interest rates as early down the road.Several officials, including Mr. Kaplan and Mr. Bullard, have said it might be wise for the Fed to slow its purchases of mortgage debt more rapidly than they slow bond-buying overall, concerned that the Fed’s buying might be contributing to a hot housing market.But even that conclusion isn’t uniform. Lael Brainard, a Fed governor, and Mary C. Daly, president of the Federal Reserve Bank of San Francisco, have suggested that the mortgage-backed purchases affect financial conditions as a whole — suggesting they may be less keen on cutting them back faster.The price outlook will also inform when the Fed first raises interest rates. The Fed has said that it wants to achieve 2 percent inflation on average over time and maximum employment before lifting borrowing costs away from rock bottom.Rate increases are not yet up for discussion, but Fed officials’ published forecasts show that the policy-setting committee is increasingly divided on when that liftoff will happen. While five expect rates to remain unchanged through late 2023, opinions are otherwise all over the place. Two officials see one increase by the end of that year, three see two, three see three and another three see four. Two think the Fed will have raised rates six times.Both Fed policy debates will affect financial markets. Bond-buying and low rates tend to pump up prices on houses, stocks and other assets, so the Fed’s pullback could cause them to cool off. And they matter for the economy: If the Fed removes support too late and inflation gets out of control, it could take a recession to rein it in again. If it removes its help prematurely, the slowdown in demand could leave output and the labor market weak.The Fed will be working against a changing backdrop as it tries to decide what full employment and stable prices mean in a post-pandemic world. More money from President Biden’s $1.9 trillion economic aid bill will soon begin to flow into the economy. For example, the Treasury Department in July will begin depositing direct monthly payments into the accounts of millions of parents who qualify for an expanded child tax credit.But expanded unemployment insurance benefits are ending in many states. That could leave consumers with less money and slow down demand if it takes would-be workers time to find new jobs.As the trends play out, White House officials will also be watching to see whether the economy is hot or not. The administration is trying to pass a follow-up fiscal package that would focus on longer-term investments, and Republican opposition has centered partly on inflation risks.For Mr. Kaplan at the Fed, the point is to be watchful. He said it was important to learn from the lessons of the post-2008 crisis recovery, when monetary policy support was removed before inflation had meaningfully accelerated — but also to understand that this rebound is unique.“Realizing that this is a different situation is a wise thing,” Mr. Kaplan said. More

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    The Pandemic Stimulus Was Front-Loaded. That Could Mean a Bumpy Year.

    When government support fades away, there’s a risk that the affluent will sit on their cash rather than spend it.Waiting in line to file for unemployment benefits in Fort Smith, Ark., last April. Nick Oxford/ReutersThe U.S. economy is about to face a new challenge that has its roots in the arithmetic of growth: That which fiscal stimulus giveth, fiscal stimulus taketh away.The $1.9 trillion American Rescue Plan enacted in March, as well as a $900 billion pandemic aid package passed in December, are heavily front-loaded. They were set up to get money out the door fast. But one consequence of that strategy is that fiscal policy in the quarters ahead will subtract from economic growth.Economists mostly project that the economy, with strong momentum in the labor market and huge pools of pent-up savings by households, will be strong enough to keep growing despite the fading of the fiscal boost. To avoid an economic downturn, a huge handoff must occur from government-driven demand to the private sector.The mainstream view is that this will be successful. But there are aspects of this unusual economic moment that could make the road ahead bumpy.There is no modern precedent for such huge swings in sums the government is pumping into the economy. And there is a risk — recently acknowledged by a top Federal Reserve official — that if pandemic-era savings are disproportionately held by the affluent, they will sit on that cash rather than spend it.“We’re definitely going to see a huge drop-off in fiscal stimulus,” said Nancy Vanden Houten, lead economist at Oxford Economics. “The question then is how well positioned is the economy to deal with that, and we don’t really know for sure, which applies to so much about this period we’re going through.”Most Americans who were to receive stimulus checks of a combined $2,000 per person have already gotten them. The Treasury Department said this month that $395 billion of that cash is now shipped, which is slightly more than the payments in the American Rescue Plan were projected to cost when it was passed.While unemployment insurance payments remain elevated, that spending is also tapering as people return to work — and supplements to those payments are scheduled to expire in September. Much of the other spending was either near-term, focused on things like vaccine rollout, or will be spent very gradually, such as on an expanded child tax credit and grants to state and local governments.Overall, government spending added 8.5 percentage points to the economic growth rate in the first quarter, according to calculations by the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. But that so-called fiscal impact is forecast to turn slightly negative in the second and third quarters — and then act as a meaningful drag on growth in the fourth quarter of 2021 and in 2022.By the second quarter of 2022, fiscal policy is on track to subtract 3.3 percentage points from the growth rate, considerably more than the 2.2-percentage-point subtraction in the third quarter of 2011, which was the most extreme quarter in the last post-stimulus hangover of the previous recession.That could change depending on where negotiations on infrastructure and family support policies lead, but those policies would be expected to influence fiscal policy over many years — they are backloaded rather than front-loaded — so they shouldn’t radically change the near-term future.The case for staying calm even as federal spending plummets rests on the rapid growth of the private sector in recent months.Employers are adding to their payrolls at a breakneck pace, so rising compensation ought to prop up consumer spending even as government support goes away. Businesses report being in an expansionary mood, which bodes well for investment spending. And overseas economies should start to surge ahead as other countries achieve more widespread vaccination, which would be good news for American exports.“I think the basic story is that the economy is reopening, so it can take the fact that this stimulus is coming off,” said Louise Sheiner, a senior fellow at Brookings.Moreover, Americans are sitting on a vast pool of savings from money they didn’t spend on things like travel and restaurants during the pandemic. Households have saved an average of $282 billion per month since March 2020, compared with $103 billion a month in 2019.So a big question for the economy in the second half of 2021 and 2022 is what happens to that cumulative additional savings of $2.5 trillion. Will it prop up near-term spending enough to keep growth on a strong track, or will Americans instead prefer the comfort of having a beefed-up balance sheet?That’s where the distributional concern arises. To the degree that money is held by people who are financially well-off, they may be less likely to spend it and help propel the economy.“Today’s fiscal tailwinds are projected to shift to headwinds next year,” said Lael Brainard, a Fed governor, in a speech this month. “So an important question is how much household spending will continue to support growth into next year, as opposed to settling back to prepandemic trends.”On the other hand, the rapidly shrinking fiscal surge could help moderate the inflation pressures that have been building in the economy. Whatever you think of the decision to send $2,000 to people, there won’t be any more checks that might push demand still higher and risk fueling a cycle of inflation.Ultimately, this is another example of the ways the pandemic-driven economy is an unusual one. The only real historical comparisons to the kinds of surges in government spending of the last five quarters involve the beginnings and ends of wars, which have their own economic dynamics.Which means it’s worth watching exactly what happens as the federal government pulls back, and whether American consumers and businesses and importers from around the world step up the way forecasters expect. More

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    Biden Administration Moves to Unkink Supply Chain Bottlenecks

    A swath of recommendations calls for more investments, new supply chains and less reliance on other countries for crucial goods.WASHINGTON — The Biden administration on Tuesday planned to issue a swath of actions and recommendations meant to address supply chain disruptions caused by the coronavirus pandemic and decrease reliance on other countries for crucial goods by increasing domestic production capacity. More

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    Yellen Won a Global Tax Deal. Now She Must Sell It to Congress.

    The Treasury secretary worked with finance ministers from the G7 to win support for a global minimum tax. But selling the idea to Republican lawmakers will not be easy.Treasury Secretary Janet L. Yellen secured a landmark international tax agreement over the weekend, one that has eluded the United States for nearly a decade. But with a narrowly divided Congress and resistance from Republicans and business groups mounting, closing the deal at home may be an even bigger challenge.The Biden administration is counting on more than $3 trillion in tax increases on corporations and wealthy Americans to help pay for its ambitious jobs and infrastructure proposals. Republicans have expressed opposition to any rise in taxes and have warned that President Biden’s big spending plans are fueling inflation and will deter business investment. Business groups have complained that higher taxes pose a threat to the economic recovery and will put American companies at a competitive disadvantage.Persuading members of the Group of 7 advanced economies to agree on Saturday to a global minimum tax of at least 15 percent was intended to help the Biden administration win support for its U.S. tax increases. If enacted, the global minimum tax would require that companies pay at least a 15 percent tax on income, regardless of where they are based, making it less advantageous to relocate operations to countries with lower tax rates.In an interview on Sunday, Ms. Yellen acknowledged the legislative challenge ahead and defended the Biden administration’s plans to raise taxes on corporations. She stood behind Mr. Biden’s proposal to raise the corporate tax rate in the United States to 28 percent from 21 percent.“We think it’s a fair way to collect revenues,” Ms. Yellen said on her flight back to the United States from London after attending two days of meetings with G7 finance ministers. “I honestly don’t think there’s going to be a significant impact on corporate investment.”Ms. Yellen played down the relationship between tax rates and business spending, arguing that the $1.5 trillion tax cuts that Republicans passed in 2017 did little to lift American investment. She said that the changes to the international tax code would ultimately be beneficial to U.S. firms and that even those who face higher taxes, such as Amazon, Facebook and Google, would gain from the additional certainty about their tax bills.But the fate of Mr. Biden’s proposals is not certain, and Ms. Yellen now faces the task of convincing lawmakers that large tax and spending increases will not hinder the economic recovery.Mr. Biden has been negotiating with Republican lawmakers and has expressed a willingness to narrow the scope of his tax and spending plans to rebuild the nation’s roads and bridges. The president has offered to drop his proposal to raise the corporate rate to 28 percent to secure bipartisan support, though White House officials expect to try to push that higher rate through in a separate legislative vehicle that can pass without any Republican support.Ms. Yellen acknowledged that compromise on the corporate tax rate might be necessary and said that she hoped for a bipartisan infrastructure agreement. Republicans are resisting any changes to the 2017 tax law, which cut the corporate tax rate to 21 percent.It is unclear if Republicans will support the international tax agreement, particularly a decision to impose a new tax on big, multinational corporations — even if they have no physical presence in the countries where they sell those services. That part of the agreement was offered by the United States to put to rest a fight with European countries over their digital services taxes that would hit large American technology companies.Some lawmakers have already criticized the idea as ceding taxing authority to other governments, and many business groups were still absorbing the agreement over the weekend. Ms. Yellen believes that the concept will not cost the United States much in terms of lost tax revenue. However, the fact that European countries are not dropping their digital services taxes until a deal is fully enacted has already been criticized by top Republicans in the House and Senate given it could take four years for the agreement to be put in place.If the Biden administration cannot shepherd the tax legislation through Congress, the agreement on the global minimum tax — and a separate deal that was reached on Saturday on a system for taxing large companies based on where their goods and services are sold — will be for naught. Negotiators are hoping to broaden the agreement to more countries at the Group of 20 meetings in Italy next month and then finalize a pact in October. Then countries, including the United States, will have to change their laws accordingly.The G7 summit was Ms. Yellen’s first trip abroad as Mr. Biden’s top economic diplomat. In London, Ms. Yellen received praise from her counterparts for restoring American leadership and for the Biden administration’s embrace of multilateralism after four years of President Donald J. Trump’s “America First” policies.The Treasury secretary described the job as more grueling than her previous role as chair of the Federal Reserve, pointing to the scale of the relief programs that she is overseeing and the department’s vast portfolio. An economist who has focused for years on monetary policy, Ms. Yellen is now in charge of sanctions policy, tax policy, overseeing regulators and dealing regularly with Congress.Beyond the tax negotiations, Ms. Yellen is grappling with the sensitive question of inflation and whether the president’s policies are going to stoke higher prices for a sustained period. Businesses in the United States have expressed growing concern about rising prices, along with a shortage of commodities, and a lack of available workers.Ms. Yellen maintained that she believed rising prices were a short-term issue related to the reopening of the economy and snarled supply chains. Still, the chance of a sustained jump in prices remains a concern that she is tracking closely.To determine if inflation is more than a temporary matter, Ms. Yellen is monitoring two key metrics: inflation expectations and wage increases for low-paid workers. Rising pay for the lowest-wage workers could potentially lead to “an inflationary trend” if there is broad excess demand for workers in the labor market, she warned.“We don’t want a situation of prolonged excess demand in the economy that leads to wage and price pressures that build and become endemic,” Ms. Yellen said. “Looking at wage increases, you can have a wage price spiral, so you need to be careful.”She added: “I do not see that happening now.”At the G7 meeting, Ms. Yellen raised eyebrows when she said that inflation could remain higher for the rest of the year, with rates around 3 percent. However, in the interview, she said that the comment was misinterpreted. She said that she expected inflation rates to be elevated for the next few months but then settle down to be consistent with the 2 percent rate that is the Federal Reserve’s long-term target.“I don’t see any evidence that inflation expectations are getting out of control,” Ms. Yellen said.Critics have suggested that the Biden administration’s extension of pandemic unemployment insurance is fueling the labor shortage by encouraging workers to stay at home and collect generous benefits. At least 20 states have moved to cut off benefits early to encourage people to go back to work.Ms. Yellen said the difference in how states were handling jobless benefits could shed new light on the dynamic, but that she still saw no evidence that the supplement was slowing job creation. She pointed to a lack of child care and positions that were permanently lost because of the pandemic as the more probable reason that employers in some sectors were struggling to find staff.“We wanted to support people,” Ms. Yellen said. “This isn’t something that should be in place forever.”Although the economy is improving, Ms. Yellen said that seven million jobs that were lost since the pandemic still had not been restored. Some of them might never come back.“We’re not in a tight labor market at this point,” she said. More

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    Biden’s Budget Sees Low Inflation, Rising Debt and Slow Economic Growth

    The proposal sheds new light on President Biden’s economic agenda and underscores the administration’s belief that the country’s fiscal situation is manageable.WASHINGTON — President Biden’s $6 trillion budget proposal represents the largest increase in federal spending since World War II and offers the most detailed look to date of the White House’s economic priorities. More

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    Republicans Promise Counteroffer as Infrastructure Talks Falter

    President Biden and Democrats are facing difficult decisions about how to move their infrastructure plan through Congress as bipartisan momentum flags.WASHINGTON — With bipartisan negotiations faltering, President Biden and Senate Democrats are facing difficult decisions about how to salvage their hopes of enacting a major new infrastructure package this year, and waning time to decide whether to continue pursuing compromise with Republicans or try to act on their own. More

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    Republicans Push Biden to Divert Federal Aid for Infrastructure

    Unexpected receipts, driven in part by taxes on high earners riding a hot stock market, have prompted Republicans to push the president to spend on infrastructure instead.WASHINGTON — From California to Virginia, many states that faced devastating shortfalls in the depths of the pandemic recession now find themselves flush with tax revenues because of a rebounding economy and a soaring stock market. Lawmakers who worried about budget cuts are now proposing lucrative increases in school spending, tax cuts and direct payments to their residents. More