Federal Reserve Cuts Interest Rates for the First Time in Four Years
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Fed Officials Fretted Bank Turmoil Could Have Serious Economic Consequences
Minutes from the Federal Reserve’s March 21-22 meeting showed that officials were grappling with how much more to lift borrowing costs.WASHINGTON — Federal Reserve officials wanted to remain flexible about the path ahead for interest rates, minutes from their March meeting showed, as they weighed a strong labor market and stubbornly high inflation against the risks that recent bank turmoil posed to the economy.Central bankers have spent more than a year waging a battle against the most painful burst of price increases in decades, raising interest rates to slow the economy and to wrestle price increases under control. After lifting their main rate to nearly 5 percent over the past 12 months, policymakers are contemplating when to stop those moves. But that choice has been complicated by recent high-profile bank blowups.Before Silicon Valley Bank failed on March 10 and Signature Bank failed on March 12, sending jitters across the global banking system, Fed officials had been contemplating making several more rate moves in 2023 to bring stubbornly inflation back under control. “Some” had even thought a large half-point rate move might be appropriate at the March 21-22 gathering, the minutes from the meeting showed.But officials adjusted their views after the shock to the banking system, the minutes released on Wednesday made clear. The Fed lifted rates at the March meeting, but only by a quarter point, and officials forecast just one more rate increase this year. Jerome H. Powell, the Fed chair, made it clear during his news conference after the meeting that whether and how much officials adjusted policy going forward would hinge on what happened both to credit conditions and to incoming economic data.At the meeting, “several participants emphasized the need to retain flexibility and optionality in determining the appropriate stance of monetary policy given the highly uncertain economic outlook,” the minutes showed.Officials on the policy-setting Federal Open Market Committee thought that “inflation remained much too high and that the labor market remained tight,” on one hand, but that they would also need to watch for signs that the bank issues had curbed bank lending and business and consumer confidence enough to meaningfully slow the economy.They said it would be “particularly important” to watch data on credit and financial conditions, which signal how difficult and expensive it is to borrow or raise money, the minutes showed.In the weeks since the meeting, early signs that lenders are becoming more cautious have begun to surface, but it is still too soon to tell exactly how much credit rates and availability will adjust in response to the turmoil.Fed staff projected that the bank tumult would even spur a “mild” recession later this year. “Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year with a recovery over the subsequent two years,” the minutes showed.At the same time, the latest data have suggested that inflation is slowing — though it remains abnormally rapid. A closely watched measure of consumer prices climbed 5 percent in March, down from 6 percent the previous month, as cheaper gas and flat food prices brought relief to consumers. But after stripping out food and fuel costs to get a sense of underlying trends, the “core” inflation index ticked up slightly on an annual basis to 5.6 percent.The current inflation rate is slower than the roughly 9 percent peak reached last summer, but it remains far faster than the rate that was normal before the pandemic and is still notably too quick for comfort. The Fed aims for 2 percent inflation on average over time, defining that goal using a separate inflation measure that is released at more of a delay.Financial markets barely budged in the immediate aftermath of the minutes’ release. From stocks to bonds to the U.S. dollar, the earlier inflation data had proved more consequential, suggesting that the minutes presented few surprises that notably moved the needle for investors.Fed officials — including Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, and Thomas Barkin, president of the Federal Reserve Bank of Richmond — suggested on Wednesday that the latest consumer price figures were encouraging but not decisive.“It was pretty much as expected,” Mr. Barkin said on CNBC. Ms. Daly said during an event in Salt Lake City that the report was “good news,” but noted that inflation was still elevated.The Fed’s next rate decision is set for release on May 3.Joe Rennison More
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Fed Meets as Bank Chaos Collides With Inflation
The Federal Reserve will decide whether and by how much to raise interest rates this week at a moment when its path ahead is newly fraught.The Federal Reserve entered 2023 focused on a central goal: wrestling down the rapid inflation that has plagued American consumers since 2021. But over the past two weeks, that job has become a lot more complicated.Many economists expect central bankers to raise interest rates a quarter-point, to just above 4.75 percent, on Wednesday, continuing their fight against rapid price increases. A range of investors and analysts had expected the Fed to make an even bigger rate move until a series of high-profile bank closures and government rescues raised concerns about both the economic outlook and financial stability.On Sunday, the Fed pumped up its program that keeps dollar financing flowing around the world, its second move in a week to shore up the financial system. The previous Sunday, it unveiled an emergency lending program meant to serve as a relief valve for banks that need to raise cash.Jerome H. Powell, the Fed chair, and his colleagues must now decide how to react to bank turmoil when it comes to interest rate policy, which guides the speed of the economy. And they must do so quickly. In addition to announcing a rate decision this week, Fed officials will also release a set of quarterly economic projections that will indicate how high they expect borrowing costs to climb this year. Central bankers had expected to lift them to roughly 5 percent in 2023 and, before the market volatility, had hinted that they might adjust that anticipated peak even higher in their new projections.But now, Fed officials will have to make their next move against a backdrop of banking system instability. They could try to balance the risk of lasting inflation against the risk of causing financial turmoil — raising rates more slowly and stopping earlier to avoid fueling more tumult. Or they could try to separate their inflation fight from the financial stability question altogether. Under that scenario, when it came to setting the level of interest rates, the Fed would pay attention to banking problems only inasmuch as they seemed likely to slow down the real economy.That’s the approach the European Central Bank took last week, when it followed through with plans to raise rates by half a point even as one of Europe’s biggest banks, Credit Suisse, was swept up in the market mayhem.The range of possibilities make this the most uncertain central bank gathering in years: During Mr. Powell’s tenure, officials have mostly hinted at what they are going to do with interest rates ahead of their meeting so that they do not catch financial markets by surprise and prompt a bigger-than-warranted reaction with their policy adjustment. But there is little clarity as this week begins. Investors were putting 60 percent odds on a quarter-point increase and 40 percent odds on no move at all.Some Wall Street economists thought the Fed would hit pause, and at least one or two anticipated an outright rate cut in response to the upheaval, though many expected a quarter-point increase.“You lose time on the fight against inflation if you wait,” said Michael Feroli, the chief U.S. economist at J.P. Morgan. Still, Mr. Feroli had expected the Fed to raise its forecast for how high it would nudge rates this year, and he now expects them to leave their peak rate estimate unchanged at about 5 percent.The bout of banking unrest is likely to weigh on the economy, meaning that the central bank itself does not need to do as much to restrain economic growth. Torsten Slok, the chief economist at Apollo, estimated that tightening lending standards and other fallout from the past week was roughly equivalent to a 1.5 percentage point increase in the Fed’s main policy rate.“In other words, over the past week, monetary conditions have tightened to a degree where the risks of a sharper slowdown in the economy have increased,” Mr. Slok wrote in an analysis over the weekend.But it is unclear how long any pullback in banks’ willingness to lend money will last, or if it will stabilize or worsen. Given the vast uncertainty, Diane Swonk, the chief economist at KPMG, said officials might scrap their economic projections altogether, as they did at the outset of the coronavirus pandemic.Releasing them would “add more confusion than clarity, given that we just don’t know,” Ms. Swonk said.Mr. Powell will hold a news conference on Wednesday after the release of the Fed’s post-meeting statement, one that could be tense for a number of reasons: Mr. Powell will most likely face questions about what went wrong with the oversight of Silicon Valley Bank. The Fed was its primary regulator, and was aware of issues at the bank for more than a year before its crash.And Mr. Powell will have to explain how officials are thinking about their policy path at a complicated juncture, when the Fed will have to weigh economic momentum against blowups in the banking sector.Hiring has stayed very strong in recent months: Employers added more than 300,000 jobs in February, after more than half a million in January. Officials had expected hiring to slow substantially after a year when rapid interest rate increases pushed borrowing costs to above 4.5 percent in February, from near zero last March, the fastest pace of adjustment since the 1980s.Inflation, too, has showed unexpected stickiness. While the Consumer Price Index has been slowing on an annual basis for months, it remained unusually rapid at 6 percent in February. And a closely watched monthly consumer price measure that strips out food and fuel, the prices of which bounce around, picked back up.Economists at Barclays suggested that the incoming data would probably have prodded the Fed to opt for a larger half-point rate increase, all else equal. But given the continuing bank problems — and the fact that Silicon Valley Bank’s distress was partly tied to higher interest rates — they expected the Fed to move by a quarter-point at this meeting to avoid further unsettling banks.“The link between the rising funds rate and risks of further bank distress presents a clear tension for the F.OM.C.,” the economist Marc Giannoni and his colleagues wrote, referring to the Fed’s policy-setting Federal Open Market Committee. “Risk management considerations will warrant a less aggressive policy hike in March.”The economists noted that if the situation in the American banking system were not so closely tied to rising rates, Fed officials would most likely prefer to separate financial stability concerns from their fight against inflation.That is essentially what the European Central Bank chose to do last week. Officials there are also battling rapid inflation, and they are behind the Fed when it comes to raising interest rates, having started later. Their decision to raise rates a half-point came even as Credit Suisse fought for its life, prompting the Swiss government to arrange on Sunday a sale of the bank to UBS.“This is not going to stop our fight against inflation,” Christine Lagarde, the president of the European Central Bank, said in a news conference on March 16. She added that officials “don’t see any trade-off” between pushing for price stability and financial stability, and that central bankers had separate tools to achieve each.That sort of message could be one the Fed wants to emulate, Mr. Feroli, of J.P. Morgan, said. Yet there are key differences in the United States, where there have been outright bank failures and where Fed rate moves have been part of the stress causing the turmoil.Ms. Swonk, of KPMG, said that she did not think the E.C.B.’s actions would serve as a road map for the Fed “given that the road is shifting as we speak,” and that she expected policymakers to hold off on a rate move this week.“At this point in time, for the Fed, a pregnant pause is warranted,” she said. “It’s a marathon, not a sprint — hold back now, promise to do more later if needed.” More
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Fed Officials Fretted That Markets Would Misread Rate Slowdown
Central bankers remained committed to wrestling inflation lower, and wanted to make sure investors understood that message, minutes from the Federal Reserve’s December meeting showed.Federal Reserve officials worried that inflation could remain uncomfortably fast, minutes from their December meeting showed, and some policymakers fretted that financial markets might incorrectly interpret their decision to raise interest rates more slowly as a sign that they were giving up the fight against America’s rapid price gains.Inflation is beginning to slow down but remains abnormally quick: The Personal Consumption Expenditures price index climbed by 5.5 percent over the year through November, down from a 7 percent peak in June but still nearly triple the Fed’s 2 percent inflation goal. Fed officials still saw inflation as unacceptably high at their meeting last month — and worried that rapid price gains might have staying power.“The risks to the inflation outlook remained tilted to the upside,” Fed officials warned during their December policy meeting, minutes released on Wednesday showed. “Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated.”Such risks set up a challenging year for Fed policymakers, who will need to decide how much more they need to raise interest rates — and how long they need to hold them at elevated levels — to bring inflation firmly under control. The Fed wants to avoid pulling back too early, which could allow inflation to become entrenched in the economy. But officials are also conscious that high rates come at a cost: As they slow growth and weaken the labor market, workers are likely to earn less and may even lose their jobs.That’s why the Fed wants to tread carefully, bringing price increases under control without inflicting more damage than necessary. Officials slowed their rate increases last month, lifting their main policy rate by half a point after several three-quarter-point moves in 2022. Officials forecast that they would raise rates by more in 2023, but their estimates suggested that they were nearing the level at which they might pause: They saw rates climbing to about 5.1 percent in 2023, from about 4.4 percent now.Inflation F.A.Q.Card 1 of 5What is inflation? More
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Stock Markets Off to Worst Start Since 2016 as Fed Fights Inflation
Stocks are off to their worst start of a year since 2016 as the central bank pulls back the enormous stimulus programs it began in the early months of the pandemic.After falling for a fourth day in a row on Friday, the stock market suffered its worst week in nearly two years, and so far in January the S&P 500 is off to its worst start since 2016. Technology stocks have been hit especially hard, with the Nasdaq Composite Index dropping more than 10 percent from its most recent high, which qualifies as a correction in Wall Street talk.That’s not all. The bond market is also in disarray, with rates rising sharply and bond prices, which move in the opposite direction, falling. Inflation is red hot, and supply chain disruptions continue.Until now, the markets looked past such issues during the pandemic, which brought big increases in the value of all kinds of assets.Yet a crucial factor has changed, which gives some market watchers reason to worry that the recent decline may be consequential. That element is the Federal Reserve.As the worst economic ravages of the pandemic appear to be waning, at least for now, the Fed is ushering in a return to higher interest rates. It is also beginning to withdraw some of the other forms of support that have kept stocks flying since it intervened to save desperately wounded financial markets back in early 2020.This could be a good thing if it beats back inflation without derailing the economic recovery. But removing this support also inevitably cools the markets as investors move money around, searching for assets that perform better when interest rates are high.“The Fed’s policies basically got the current bull market started,” said Edward Yardeni, an independent Wall Street economist. “I don’t think they are going to end it all now, but the environment is changing and the Fed is responsible for a lot of this.”The central bank is tightening monetary policy partly because it has worked. It helped stimulate economic growth by holding short-term interest rates near zero and pumping trillions of dollars into the economy.This flood of easy money also contributed to the rapid rise in prices of commodities, like food and energy, and financial assets, like stocks, bonds, homes and even cryptocurrency.What happens next comes from an established playbook. As William McChesney Martin, a former Fed chairman, said in 1955, the central bank finds itself acting as the adult in the room, “who has ordered the punch bowl removed just when the party was really warming up.”The mood of the markets shifted on Jan. 5, Mr. Yardeni said, when Fed officials released the minutes of their December policymaking meeting, revealing that they were on the verge of embracing a much tighter monetary policy. A week later, new data showed inflation climbing to its highest level in 40 years.Putting the two together, it seemed, the Fed would have no choice but to react to curb rapidly rising prices. Stocks began a disorderly decline.Financial markets now expect the Fed to raise its key interest rate at least three times this year and to start to shrink its balance sheet as soon as this spring. It has reduced the level of its bond buying already. Fed policymakers will meet next week to decide on their next steps, and market strategists will be watching.Low interest rates made certain sectors especially appealing, foremost among them tech stocks. The S&P 500 information technology sector, which includes Apple and Microsoft, has risen 54 percent on an annualized basis since the market’s pandemic-induced trough in March 2020. One reason for this is that low interest rates amplify the value of the expected future returns of growth-oriented companies like these. If rates rise, this calculus can change abruptly.Inflation F.A.Q.Card 1 of 6What is inflation? More
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A Top Official Says the Fed Will ‘Grapple’ With a Faster Bond-Buying Taper
The president of the New York Federal Reserve said Omicron could prolong supply and demand mismatches, causing some inflation pressures to last.John C. Williams, president of the Federal Reserve Bank of New York, said the latest variant of the coronavirus could prolong the bottlenecks and shortages that have caused inflation to run hotter than expected, and is a risk Fed officials will assess as they “grapple” with how quickly to remove economic support.It is still too soon to know how the Omicron variant, which public health officials in southern Africa identified just last week, will affect the economy, Mr. Williams said Tuesday in an interview with The New York Times. But if the new version of the virus leads to another wave of infections, it could exacerbate the disruptions that have caused prices to rise at their fastest pace in three decades.“Clearly, it adds a lot of uncertainty to the outlook,” Mr. Williams said of the new variant. He later added that a risk with the new variant is that it “will continue that excess demand in the areas that don’t have capacity, and will stall the recovery in the areas where we actually have the capacity.”That, he said, would “mean a somewhat slower rebound overall” and “also does increase those inflationary pressures, in those areas that are in high demand.”Mr. Williams’s comments are the latest indication that policymakers are growing more concerned about inflation and are weighing how to respond. Jerome H. Powell, the Fed chair, signaled on Tuesday that the central bank could move to withdraw economic support more quickly than it initially expected and suggested that such a decision could come as soon as the Fed’s December meeting.The Fed had been buying $120 billion in government-backed securities each month throughout much of the pandemic to bolster the economy by keeping money flowing in financial markets. In November, officials announced plans to wind down that program gradually through the end of the year and the first half of 2022, a process known as “tapering.” But Mr. Powell indicated on Tuesday that the central bank could wrap up its bond-buying more quickly.Mr. Williams, who is vice chair of the Fed’s policymaking Open Market Committee and is a top adviser to Mr. Powell, did not explicitly endorse a faster tapering process, saying that “there’s a lot to learn and digest and think about coming up to the next meeting.”.css-1xzcza9{list-style-type:disc;padding-inline-start:1em;}.css-3btd0c{font-family:nyt-franklin,helvetica,arial,sans-serif;font-size:1rem;line-height:1.375rem;color:#333;margin-bottom:0.78125rem;}@media (min-width:740px){.css-3btd0c{font-size:1.0625rem;line-height:1.5rem;margin-bottom:0.9375rem;}}.css-3btd0c strong{font-weight:600;}.css-3btd0c em{font-style:italic;}.css-1kpebx{margin:0 auto;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-family:nyt-cheltenham,georgia,’times new roman’,times,serif;font-weight:700;font-size:1.375rem;line-height:1.625rem;}@media (min-width:740px){#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-size:1.6875rem;line-height:1.875rem;}}@media (min-width:740px){.css-1kpebx{font-size:1.25rem;line-height:1.4375rem;}}.css-1gtxqqv{margin-bottom:0;}.css-19zsuqr{display:block;margin-bottom:0.9375rem;}.css-12vbvwq{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;}@media (min-width:740px){.css-12vbvwq{padding:20px;width:100%;}}.css-12vbvwq:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-12vbvwq{border:none;padding:10px 0 0;border-top:2px solid #121212;}.css-12vbvwq[data-truncated] .css-rdoyk0{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-12vbvwq[data-truncated] .css-eb027h{max-height:300px;overflow:hidden;-webkit-transition:none;transition:none;}.css-12vbvwq[data-truncated] .css-5gimkt:after{content:’See more’;}.css-12vbvwq[data-truncated] .css-6mllg9{opacity:1;}.css-qjk116{margin:0 auto;overflow:hidden;}.css-qjk116 strong{font-weight:700;}.css-qjk116 em{font-style:italic;}.css-qjk116 a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;text-underline-offset:1px;-webkit-text-decoration-thickness:1px;text-decoration-thickness:1px;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:visited{color:#326891;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:hover{-webkit-text-decoration:none;text-decoration:none;}But he emphasized that the economy had rebounded more strongly this year than he and other officials had been expecting, and said the unemployment rate had fallen quickly. That economic strengthening at a moment of high inflation may warrant less Fed support, he said.“The question is: Would it make sense to end those purchases somewhat earlier, by maybe a few months, given how strong the economy is?” he said. “That’s a decision, discussion, I expect we’ll have to grapple with.”Inflation has proved a thornier problem than the Fed and most private-sector economists predicted earlier this year. In March, Fed officials said they expected their preferred inflation measure to show consumer prices rising at 2.4 percent at the end of 2021; by September, they had revised that forecast to 4.2 percent.That’s likely to increase further. The central bank’s preferred inflation gauge climbed 5 percent in its most recent reading. Policymakers are closely watching to see what happens in a Consumer Price Index report set for release on Dec. 10, just before the Fed’s meeting on Dec. 14 and 15.Mr. Williams acknowledged that inflation had proved stronger and more lasting than he initially expected. But he said the error wasn’t the result of a misunderstanding of how the economy works; rather, it was his failure to anticipate the resurgence of the pandemic itself. Mr. Powell made similar comments in his testimony before the Senate on Tuesday.The spread of the Delta variant over the summer delayed the return of workers to the labor force by disrupting child care and making some people nervous to return to in-person work. It also contributed to supply-chain issues by causing a new round of factory shutdowns in some parts of the world and by extending the pandemic-era shift in consumer spending away from services and toward goods.Empty office space in New York this summer when the Delta variant wave delayed the return of workers. A new wave of cases could lead to more and longer-lasting inflation.Gabriela Bhaskar/The New York Times“These are all things that are driven — I think in large part, not totally, but in large part — to Covid, and the ability so far for us to get control of that,” he said. “This is just lasting a lot longer than expected.”The new variant, Mr. Williams added, “has that potential to just extend this process we’ve been going through.”If the Omicron variant further delays the return of workers and the easing of supply shortages, that could lead to more and longer-lasting inflation. But a new wave of virus cases could also hurt the demand side of the economy, leading people to spend less at restaurants and movie theaters and provoking a new wave of layoffs.Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More
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Kaplan and Rosengren, Fed Presidents Under Fire for Trades, Will Step Down
Robert S. Kaplan will exit his role as head of the Federal Reserve Bank of Dallas next month. Eric S. Rosengren, the head of the Federal Reserve Bank of Boston, is also retiring earlier than planned.Eric S. RosengrenSteven Senne/Associated PressRobert S. KaplanAnn Saphir/ReutersTwo Federal Reserve officials embroiled in controversy for trading securities that could have benefited from the central bank’s 2020 intervention in financial markets announced on Monday that they would leave their positions.Robert S. Kaplan, who heads the Federal Reserve Bank of Dallas, will retire on Oct. 8, according to a statement released Monday afternoon. Mr. Kaplan’s statement acknowledged the controversy as the reason for his departure. Eric S. Rosengren, the president of the Boston Fed, will retire this Thursday, accelerating his planned retirement by nine months. Mr. Rosengren cited health reasons for his early departure.The resignations followed the Fed’s announcement this month that Chair Jerome H. Powell had ordered a review of the central bank’s ethics rules in light of the concern surrounding the trades. When asked about his confidence in Mr. Kaplan and Mr. Rosengren during a news conference last week, Mr. Powell expressed displeasure with what had happened.“No one on the F.O.M.C. is happy to be in this situation, to be having these questions raised,” Mr. Powell said, referring to the policy-setting Federal Open Market Committee. He added, “This is an important moment for the Fed and I’m determined that we will rise to the moment.”Mr. Kaplan noted in his statement that it was his decision to leave the Fed, and that “the recent focus on my financial disclosure risks becoming a distraction” to the central bank’s economic work.Mr. Kaplan drew scrutiny for buying and selling millions of dollars in individual stocks, among other investments, last year — trading first reported on by The Wall Street Journal on Sept. 7. He has maintained that his trades were consistent with Fed ethics rules.Mr. Rosengren announced on Monday morning that he was retiring earlier than planned to try to prevent a kidney condition from worsening, in the hopes of staving off dialysis. The Boston Fed president came under criticism because he held stakes in real estate investment trusts, which invest in and sometimes manage properties, and listed purchases and sales in those in 2020. He spent last year warning publicly about risks in the commercial real estate market, and was helping to set Fed policy on mortgage-backed security purchases, which can help the housing market by improving financing conditions.Both presidents had previously announced that they would convert their financial holdings into broad-based indexes and cash by Sept. 30.Mr. Powell offered statements of support for both of the retiring officials in the news releases announcing their exit.But the controversy has pushed him into a delicate position. His own term as Fed chair expires early next year, and the White House is actively considering whether to reappoint him. A scandal at his central bank is sure to draw questions from senators when he testifies this week, and could even hurt his reappointment chances.As chair, Mr. Powell has also focused on shoring up public support in the central bank and explaining its role. He holds frequent news conferences, aims to speak in simpler language, and championed a series of “Fed Listens” events where top central bank officials meet and hear from community members whom they might not otherwise interact with — from community college students to local food pantry staff.The 2020 trading disclosures, which are shaping up to be the most headline-grabbing scandal the central bank has faced in years, risk chipping away at the widespread trust he has been working to build.Responses to Mr. Kaplan and Mr. Rosengren’s trading disclosures have been swift, and scathing. The group Better Markets had been calling for the Fed to fire both presidents if they did not resign. Other progressive groups had called for at least one of them to be ousted, and ethics watchdogs have said that the rules that had enabled their trades needed to be revisited.After the resignation announcements on Monday, Wall Street promptly began to assess what the departures would mean for monetary policy. Both officials have tended to worry about financial stability, and for that reason were likely to favor removing monetary policy support sooner than some of their colleagues — a stance often referred to as being hawkish.“Their exit will take out two of the nine more hawkish Fed officials who saw a 2022 rate hike as of the September F.O.M.C. meeting last week and remove important voices on financial stability issues in particular,” Krishna Guha at Evercore ISI wrote in a note to clients shortly after the announcement.Mr. Rosengren has been president of the Boston Fed since 2007, and his retirement was previously planned for June. The Fed’s 12 regional members rotate in and out of voting seats, and Mr. Rosengren would have had a vote on monetary policy next year. Mr. Kaplan would have voted in 2023.Kenneth C. Montgomery, the Boston Fed’s first vice president, will serve as interim president at that bank. The Boston Fed’s board members — excluding bank representatives — will need to select a permanent pick for president, subject to approval from the Fed’s Board of Governors in Washington.A longtime Fed employee who worked in research and bank supervision before becoming president, Mr. Rosengren played a key role in the 2020 crisis response. His regional Fed ran both the money market mutual fund and Main Street lending backstop programs that the Fed rolled out last year.The Boston Fed noted in the release that Mr. Rosengren hoped that his health condition would improve, and that he would be able to “explore areas of professional interest” in the future.Mr. Kaplan has been at the head of the Dallas Fed since late 2015, before which he taught at Harvard University and had a long career at Goldman Sachs. Meredith Black, that bank’s first vice president who had planned to retire, will serve as interim president until a successor is named, the Dallas Fed said. More
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Fed Minutes July 2021: Officials Debated Timing of Taper
Federal Reserve officials are preparing to slow the central bank’s large purchases of government-backed bonds, the first step toward a more normal monetary policy setting as the economy heals from the pandemic — but when they met last month, they remained starkly divided over just when the pullback should happen.Minutes from the central bank’s July 27-28 gathering showed that Fed officials generally thought they would soon meet their standard for slowing bond purchases, which they had previously established as “substantial further progress” toward the central bank’s maximum employment and inflation goals.“Most” of the officials “judged that the standard set out in the committee’s guidance regarding asset purchases could be reached this year,” the release showed. But precisely when to begin remained a matter of active debate.Some officials wanted to slow bond purchases soon to guard against the risk of higher inflation, and “a few” were worried that continued big purchases could lead to financial system risks, the account of the meeting released Wednesday showed.But a few others argued for a slower process, stressing that rising Delta variant coronavirus cases posed risks to the economic outlook, and several worried that in coming years inflation — though high today — could dip to uncomfortably low levels again. Several of the officials also pointed to big lingering uncertainties, like when workers would return to jobs.The snapshot of Federal Open Market Committee deliberations comes ahead of the central bank’s most closely watched annual gathering, an economic symposium in Jackson Hole in Wyoming that will take place next week. Jerome H. Powell, the Fed’s chair, will deliver a speech at the event, and many investors expect he could provide hints or details about the central bank’s coming policy move.Mr. Powell and his colleagues are working against a complicated backdrop as the economy grows rapidly and as inflation and asset prices pop, but the labor market recovery remains incomplete, with nearly 7 million jobs still missing compared with employment levels at the start of the pandemic.The Fed is still holding interest rates near zero and plans to do so until the labor market is more fully healed, which means monetary policy will continue to support the economy even once the bond buying begins to slow. Fed officials have suggested that they may favor raising interest rates by late 2022 or — more popularly — 2023.Some officials who are eager to start to slow bond purchases soon have emphasized that moving early and quickly would allow the Fed to be more flexible when it comes to raising borrowing costs. The Fed is buying $120 billion in Treasury and mortgage-backed debt each month, and officials have said they would prefer to bring that policy to a close before lifting the federal funds rate.The debate over timing was still unresolved in July.“Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” the minutes released on Wednesday said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”How quickly the slowdown in buying will happen was also up for discussion, and participants expressed “a range of views on the appropriate pace of tapering asset purchases.”The last Fed meeting came before the Labor Department reported that hiring in July was strong, creating a sunnier snapshot of the job market’s recovery.“Since the July F.O.M.C. meeting, the probability of a September announcement and an October or November start date to tapering those purchases has increased considerably, in our view,” Bob Miller, the head of fundamental fixed income in the Americas for BlackRock, wrote following the release.But the minutes also came before infections from the Delta variant of the coronavirus surged so drastically.“The uncertainty created by Delta, as well as the uncertainty over the post-summer labor market and the path of inflation, all reinforce our view that a tapering announcement is not imminent,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a research note. “We think it will come in November, and even that is contingent on the Delta wave clearly subsiding before then.”The Fed meets next on Sept. 21-22. More
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Inflation Likely to Remain High in Coming Months, Fed Chair Powell Says
Price gains are up “notably,” Jerome Powell told House lawmakers. That’s because of several temporary factors.Jerome H. Powell told House lawmakers that inflation had increased “notably” in the country’s reopening from the pandemic and would most likely stay higher in the next months before moderating.Pool photo by Graeme JenningsJerome H. Powell, the Federal Reserve chair, told House lawmakers on Wednesday that inflation had increased “notably” and was poised to remain higher in coming months before moderating — but he gave no indication that the recent jump in prices will spur central bankers to rush to change policy.The Fed chair attributed rapid price gains to factors tied to the economy’s reopening from the pandemic, and indicated in response to questioning that Fed officials expected inflation to begin calming in six months or so.Mr. Powell testified before the Financial Services Committee at a fraught moment both politically and economically, given the recent spike in inflation. The Consumer Price Index jumped 5.4 percent in June from a year earlier, the biggest increase since 2008 and a larger move than economists had expected. Price pressures appear poised to last longer than policymakers at the White House or Fed anticipated.“Inflation has increased notably and will likely remain elevated in coming months before moderating,” Mr. Powell said in his opening remarks.He later acknowledged that “the incoming inflation data have been higher than expected and hoped for,” but he said the gains were coming from a “small group” of goods and services directly tied to reopening.Mr. Powell attributed the continuing pop in prices to a series of factors: temporary data quirks, supply constraints that ought to “partially reverse” and a surge in demand for services that were hit hard by the pandemic.He said longer-run inflation expectations remained under control — which matters because inflation outlooks help shape the future path for prices. And he made it clear that if the situation got out of hand, the Fed would be prepared to react.“We are monitoring the situation very carefully, and we are committed to price stability,” Mr. Powell said. He added that “if we were to see that inflation were remaining high and remaining materially higher above our target for a period of time — and that it was threatening to uproot inflation expectations and create a risk of a longer period of inflation — then we would absolutely change our policy as appropriate.”For now, the Fed chair voiced comfort with the central bank’s relatively patient policy path even in light of the hotter-than-expected price data. He said that the labor market was improving but that “there is still a long way to go.” He also said the Fed’s goal of achieving “substantial further progress” toward its economic goals before taking the first steps toward a more normal policy setting “is still a ways off.”Fed officials are debating when and how to slow their $120 billion of monthly government-backed bond purchases, which would be the first step in moving policy away from an emergency mode. Those discussions will continue “in coming meetings,” Mr. Powell said.The central bank is also keeping its policy interest rate near zero, which helps borrowing remain cheap for consumers and businesses. Officials have set out a higher standard for lifting that rate from rock bottom: They want the economy to return to full employment and inflation to be on track to average 2 percent over time.The Fed’s guidance states that officials want to see inflation “moderately” above 2 percent for a time, and Mr. Powell was asked on Wednesday what that standard meant when price pressures were so strong.“Inflation is not moderately above 2 percent — it’s well above 2 percent,” Mr. Powell said of the current data. “The question will be where does this leave us in six months or so — when inflation, as we expect, does move down — how will the guidance work? And it will depend on the path of the economy.”Raising rates is not yet up for discussion, officials have said publicly and privately. The bulk of the Fed’s policy-setting committee does not expect to lift borrowing costs until 2023, based on its latest economic projections.Given Mr. Powell’s comments, that watchful stance is unlikely to shift, economists said.“We still don’t think higher inflation will result in a quicker policy tightening,” Andrew Hunter, senior U.S. economist at Capital Economics, wrote in response to Mr. Powell’s prepared testimony. “Asset purchases probably won’t start to be tapered until next year, with interest rates not raised until the first half of 2023.”The Fed is weighing the risks of higher inflation against the huge number of people who remain out of work. Congress has tasked the central bank with fostering both stable prices and maximum employment. While price pressures have picked up markedly, there are still 6.8 million fewer jobs than there were in February 2020, the month before pandemic layoffs started in earnest.That so many people remain out of work is something of a surprise, because employers report widespread labor shortages, and wage increases and signing bonuses abound as they try to lure talent.“Labor shortages were often cited as a reason firms could not staff at desired levels,” according to the Fed’s latest “Beige Book” of anecdotal economic reports from business contacts across its 12 districts. “All districts noted an increased use of nonwage cash incentives to attract and retain workers.”Mr. Powell said he expected people to return to work as health concerns abated and other issues keeping people sidelined faded, and he predicted that “job gains should be strong in coming months.” More
