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Companies Push Prices Higher, Protecting Profits but Adding to Inflation

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Corporate profits have been bolstered by higher prices even as some of the costs of doing business have fallen in recent months.The prices of oil, transportation, food ingredients and other raw materials have fallen in recent months as the shocks stemming from the pandemic and the war in Ukraine have faded. Yet many big businesses have continued raising prices at a rapid clip.Some of the world’s biggest companies have said they do not plan to change course and will continue increasing prices or keep them at elevated levels for the foreseeable future.That strategy has cushioned corporate profits. And it could keep inflation robust, contributing to the very pressures used to justify surging prices.As a result, some economists warn, policymakers at the Federal Reserve may feel compelled to keep raising interest rates, or at least not lower them, increasing the likelihood and severity of an economic downturn.“Companies are not just maintaining margins, not just passing on cost increases, they have used it as a cover to expand margins,” Albert Edwards, a global strategist at Société Générale, said, referring to profit margins, a measure of how much businesses earn from every dollar of sales.PepsiCo, the snacks and beverage maker, has become a prime example of how large corporations have countered increased costs, and then some.Hugh Johnston, the company’s chief financial officer, said in February that PepsiCo had raised its prices by enough to buffer further cost pressures in 2023. At the end of April, the company reported that it had raised the average price across its products by 16 percent in the first three months of the year. That added to a similar size price increase in the fourth quarter of 2022 and increased its profit margin.“I don’t think our margins are going to deteriorate at all,” Mr. Johnston said in a recent interview with Bloomberg TV. “In fact, what we’ve said for the year is we’ll be at least even with 2022, and may in fact increase margins during the course of the year.”The bags of Doritos, cartons of Tropicana orange juice and bottles of Gatorade drinks sold by PepsiCo are now substantially pricier. Customers have grumbled, but they have largely kept buying. Shareholders have cheered. PepsiCo declined to comment.PepsiCo is not alone in continuing to raise prices. Other companies that sell consumer goods have also done well.The average company in the S&P 500 stock index increased its net profit margin from the end of last year, according to FactSet, a data and research firm, countering the expectations of Wall Street analysts that profit margins would decline slightly. And while margins are below their peak in 2021, analysts are forecasting that they will keep expanding in the second half of the year.For much of the past two years, most companies “had a perfectly good excuse to go ahead and raise prices,” said Samuel Rines, an economist and the managing director of Corbu, a research firm that serves hedge funds and other investors. “Everybody knew that the war in Ukraine was inflationary, that grain prices were going up, blah, blah, blah. And they just took advantage of that.”But those go-to rationales for elevating prices, he added, are now receding.The Producer Price Index, which measures the prices businesses pay for goods and services before they are sold to consumers, reached a high of 11.7 percent last spring. That rate has plunged to 2.3 percent for the 12 months through April.The Consumer Price Index, which tracks the prices of household expenditures on everything from eggs to rent, has also been falling, but at a much slower rate. In April, it dropped to 4.93 percent, from a high of 9.06 percent in June 2022. The price of carbonated drinks rose nearly 12 percent in April, over the previous 12 months.“Inflation is going to stay much higher than it needs to be, because companies are being greedy,” Mr. Edwards of Société Générale said.But analysts who distrust that explanation said there were other reasons consumer prices remained high. Since inflation spiked in the spring of 2021, some economists have made the case that as households emerged from the pandemic, demand for goods and services — whether garage doors or cruise trips — was left unsated because of lockdowns and constrained supply chains, driving prices higher.David Beckworth, a senior research fellow at the right-leaning Mercatus Center at George Mason University and a former economist for the Treasury Department, said he was skeptical that the rapid pace of price increases was “profit-led.”Corporations had some degree of cover for raising prices as consumers were peppered with news about imbalances in the economy. Yet Mr. Beckworth and others contend that those higher prices wouldn’t have been possible if people weren’t willing or able to spend more. In this analysis, stimulus payments from the government, investment gains, pay raises and the refinancing of mortgages at very low interest rates play a larger role in higher prices than corporate profit seeking.“It seems to me that many telling the profit story forget that households have to actually spend money for the story to hold,” Mr. Beckworth said. “And once you look at the huge surge in spending, it becomes inescapable to me where the causality lies.”Mr. Edwards acknowledged that government stimulus measures during the pandemic had an effect. In his eyes, this aid meant that average consumers weren’t “beaten up enough” financially to resist higher prices that might otherwise make them flinch. And, he added, this dynamic has also put the weight of inflation on poorer households “while richer ones won’t feel it as much.”The top 20 percent of households by income typically account for about 40 percent of total consumer spending. Overall spending on recreational experiences and luxuries appears to have peaked, according to credit card data from large banks, but remains robust enough for firms to keep charging more. Major cruise lines, including Royal Caribbean, have continued lifting prices as demand for cruises has increased going into the summer.Many people who are not at the top of the income bracket have had to trade down to cheaper products. As a result, several companies that cater to a broad customer base have fared better than expected, as well.McDonald’s reported that its sales increased by an average of 12.6 percent per store for the three months through March, compared with the same period last year. About 4.2 percent of that growth has come from increased traffic and 8.4 percent from higher menu prices.The company attributed the recent menu price increases to higher expenses for labor, transportation and meat. Several consumer groups have responded by pointing out that recent upticks in the cost of transportation and labor have eased.A representative for the company said in an email that the company’s strong results were not just a result of price increases but also “strong consumer demand for McDonald’s around the world.”Other corporations have found that fewer sales at higher prices have still helped them earn bigger profits: a dynamic that Mr. Rines of Corbu has coined “price over volume.”Colgate-Palmolive, which in addition to commanding a roughly 40 percent share of the global toothpaste market, also sells kitchen soap and other goods, had a standout first quarter. Its operating profit for the year through March rose 6 percent from the same period a year earlier — the result of a 12 percent increase in prices even as volume declined by 2 percent.The recent bonanza for corporate profits, however, may soon start to fizzle.Research from Glenmede Investment Management indicates there are signs that more consumers are cutting back on pricier purchases. The financial services firm estimates that households in the bottom fourth by income will exhaust whatever is collectively left of their pandemic-era savings sometime this summer.Some companies are beginning to find resistance from more price-sensitive customers. Dollar Tree reported rising sales but falling margins, as lower-income customers who tend to shop there searched for deals. Shares in the company plunged on Thursday as it cut back its profit expectations for the rest of the year. Even PepsiCo and McDonald’s have recently taken hits to their share prices as traders fear that they may not be able to keep increasing their profits.For now, though, investors appear to be relieved that corporations did as well as they did in the first quarter, which has helped keep stock prices from falling broadly.Before large companies began reporting how they did in the first three months of the year, the consensus among analysts was that earnings at companies in the S&P 500 would fall roughly 7 percent compared with the same period in 2022. Instead, according to data from FactSet, earnings are expected to have fallen around 2 percent once all the results are in.Savita Subramanian, the head of U.S. equity and quantitative strategy at Bank of America, wrote in a note that the latest quarterly reports “once again showed corporate America’s ability to preserve margins.” Her team raised overall earnings growth expectations for the rest of the year, and 2024. More

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    Consumer Spending Rose More Than Expected in April

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    New data on spending and income suggest that the economy remains robust despite the Federal Reserve’s interest rate increases.Americans’ income and spending both rose in April, a sign of economic resilience amid rising prices and warnings of a possible recession.Consumer spending increased 0.8 percent in April, the Commerce Department said Friday. The uptick followed a two-month slowdown in spending and exceeded forecasters’ expectations, as Americans shelled out for cars, restaurant meals, movie tickets and other goods and services.After-tax income rose 0.4 percent, fueled by a strong job market that continues to push up wages and bring more people into the work force. Data from the Labor Department this month showed that Americans in their prime working years were employed in April at the highest rate in more than two decades.Separate data released by the Commerce Department on Friday showed that a key measure of business investment also picked up in April, a sign that corporate executives aren’t expecting a major slump in demand in coming months.Consumers’ resilience is a mixed blessing for officials at the Federal Reserve, who worry that robust spending is contributing to inflation, but who also don’t want it to slow so rapidly that the economy falls into a recession. The gradual slowdown in spending seen in recent months is broadly consistent with the “soft landing” scenario that policymakers are aiming for, but they have been wary of declaring victory too soon — a concern that April’s data, which showed persistent inflation alongside stronger spending, could underscore.“The odds of a recession dropped again,” wrote Robert Frick, corporate economist with Navy Federal Credit Union, in a note to clients on Friday. “The one problem from the report is inflation remains stubbornly high, and may tempt the Fed to raise the federal funds rate even more, when a pause was on the table,” he added, referring to the upcoming meeting of policymakers in June.It is unclear how long consumers can continue to prop up the economic recovery. Savings that some households built up in the pandemic have begun to dwindle, and there are signs companies are beginning to pull back on hiring. The standoff over the debt limit could further sap the economy’s momentum, although there were signs on Thursday evening that leaders in Washington were closing in on a deal to avert a default. More

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    Fed Officials Were Split Over June Rate Pause, Minutes Show

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    In the Federal Reserve’s last meeting, “several” participants thought rates may have moved high enough to get inflation under control.Federal Reserve officials were unanimous in their decision to raise interest rates earlier this month, but were conflicted over whether additional increases would be necessary to bring inflation under control, according to minutes from the Fed’s last meeting released on Wednesday.The Fed voted to raise interest rates by a quarter-point on May 3, to a range of 5 to 5.25 percent, the 10th straight increase since the central bank started its campaign to rein in inflation last year. Although officials left the door open to further rate increases, the minutes make clear that “several” policymakers were leaning toward a pause.“Several participants noted that if the economy evolved along the lines of their current outlooks, then further policy firming after this meeting may not be necessary,” the minutes said.Still, some officials believed “additional policy firming would likely be warranted at future meetings” since progress on bringing inflation back to the central bank’s 2 percent target could continue to be “unacceptably slow.”Policymakers believed that the Fed’s moves over the past year had significantly contributed to tighter financial conditions, and they noted that labor market conditions were starting to ease. But they agreed that the labor market was still too hot, given the strong gains in job growth and an unemployment rate near historically low levels.Officials also agreed that inflation was “unacceptably high.” Although price increases have shown signs of moderating in recent months, declines were slower than officials expected, and officials were concerned that consumer spending could remain strong and keep inflation elevated. Some noted, however, that tighter credit conditions could slow household spending and dampen business investment.Fed officials believed the U.S. banking system was “sound and resilient” after the collapses of Silicon Valley Bank and Signature Bank this year led to turbulence in the banking sector. Although they noted that banks might be pulling back on lending, policymakers said it was too soon to tell how big of an impact credit tightening might have on the overall economy.One source of concern for policymakers was brinkmanship over the nation’s debt limit, which caps how much money the United States can borrow. If the cap is not raised by June 1, the Treasury Department could be unable to pay all of its bills in a timely manner, resulting in a default. Many officials said it was “essential that the debt limit be raised in a timely manner” to avoid the risk of severely damaging the economy and rattling financial markets.The central bank’s next move remains uncertain, with policymakers continuing to leave their options open ahead of their June meeting.“Whether we should hike or skip at the June meeting will depend on how the data come in over the next three weeks,” Christopher Waller, a Federal Reserve governor, said in a speech on Wednesday.The president of the Minneapolis Fed, Neel Kashkari, said in an interview with The Wall Street Journal last week that he could support holding rates steady at the June 13-14 meeting to give policymakers more time to assess how the economy is shaping up.“I’m open to the idea that we can move a little bit more slowly from here,” he said.Officials have reiterated that they will continue to monitor incoming data before reaching a decision. On Friday, the Commerce Department will release a fresh reading of the Personal Consumption Expenditures index, the Fed’s preferred gauge of inflation. Early next month, the federal government will also release new data on job growth in May. More

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    San Francisco Fed Ties to S.V.B. Chief Attracts Scrutiny to Century-Old Setup

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    As Greg Becker, the former C.E.O. of Silicon Valley Bank, prepares to testify before Congress, boards that oversee regional Federal Reserve branches are in the spotlight.The collapse of Silicon Valley Bank has drawn attention to the relationship between the Federal Reserve Bank of San Francisco, which was in charge of overseeing safety and soundness at the lender, and the bank’s former chief executive, Greg Becker, who for years sat on the San Francisco Fed’s board of directors.The bank’s collapse on March 10 has prompted criticism of the Fed, whose bank supervisors were slow to spot and stop problems before Silicon Valley Bank experienced a devastating run that necessitated a sweeping government response.Now, Mr. Becker could face lawmaker questions about his board role — and whether it created too close a link between the bank and its regulators — when he testifies on Tuesday before the Senate Banking Committee about Silicon Valley Bank’s collapse.In prepared testimony published before the hearing, Mr. Becker said he was “truly sorry” for the bank’s failure. “I do not believe that any bank could survive a bank run of that velocity and magnitude,” he said.Mr. Becker’s position on the San Francisco Fed board would have given him little formal power, according to current and former Fed employees and officials. The Fed’s 12 reserve banks — semiprivate institutions dotted across the country — each has a nine-person board of directors, three of whom come from the banking industry. Those boards have no say in bank supervision, and serve mainly as advisers for the Fed bank’s leadership.But many acknowledged that the setup created the appearance of coziness between S.V.B. and the Fed. Some outside experts and politicians are beginning to question whether the way the Fed has been organized for more than a century makes sense today.“They’re like a glorified advisory committee,” said Kaleb Nygaard, who researches central banks at the University of Pennsylvania. “It causes massive headaches in the best of times, potentially fatal aneurysms in the worst of times.”The Fed boards date back to 1913.In the days after Silicon Valley Bank’s collapse, headlines about Mr. Becker’s close ties to his bank’s regulator abounded, with many raising questions about a possible conflict of interest.Though regional Fed presidents and other officials play a limited role in bank oversight — which is mostly in Washington’s domain — some critics wondered if supervisors at the San Francisco Fed failed to effectively police Silicon Valley Bank partly because of the reserve bank’s close ties to the bank’s chief executive.And some asked: Why do banks have representatives on the Fed Board at all?The answer is tied to the Fed’s history.When Congress and the White House created the Fed in 1913, they were skeptical about giving either the government or the private sector unilateral power over the nation’s money supply. So they compromised. They created a public Fed Board in Washington, alongside quasi-private reserve banks around the country.Those reserve banks, which ended up numbering 12 in total, would be set up like private companies with banks as their shareholders. And much like other private companies, they would be overseen by boards — ones that included bank representatives. Each of the Fed reserve banks has nine board members, or directors. Three of them come from banks, while the others come from other financial companies, businesses, and labor and community groups.“The setup is the way that it is because of the way the Fed was set up in 1913,” said William Dudley, the former president of the Federal Reserve Bank of New York, who said that the directors served mainly as a sort of advisory focus group on banking issues and operational issues, like cybersecurity.The boards may give members benefits.Several former Fed officials said that the bank-related board members provided a valuable function, offering real-time insight into the finance industry. And 10 current and former Fed employees interviewed for this article agreed on one point: These boards have relatively little official power in the modern era.While they vote for changes on a formerly important interest rate at the Fed — called the discount rate — that role has become much less critical over time. Board members select Fed presidents, though since the 2010 Dodd Frank law, the bank-tied directors have not been allowed to participate in those votes.But the law didn’t go so far as to cut bank representatives from the boards altogether because of a lobbying push to keep them intact, said Aaron Klein, who was deputy assistant secretary for economic policy at the Treasury Department at the time and worked closely on the law’s passage.“The Fed didn’t want that, and neither did the bankers,” Mr. Klein said.From a bank’s perspective, directorships offer prestige: Regional Fed board members rub shoulders with other bank and community leaders and with powerful central bankers.They might also offer either an actual or a perceived information advantage about the economy and about monetary policy. Although the discount rate is not as important today, directors at some regional banks are given economic briefings as they make their decisions.Mr. Becker would have seen Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, at meetings held roughly once a month, her calendars suggest.Jim Wilson/The New York TimesRegional board discount votes have often been seen as a sort of weather vane for how a regional bank’s leadership is thinking about policy — suggesting that directors might know how their president is going to vote when it comes to the federal funds rate, the important interest rate that the Fed uses to guide the speed of the economy.That is notable in an era in which Wall Street traders hang on Fed officials’ every word when it comes to interest rates.“It’s a very awkward thing,” said Narayana Kocherlakota, a former president of the Federal Reserve Bank of Minneapolis. “There’s no gain to having them vote on discount rates.”Renée Adams, a former New York Fed researcher who studies corporate boards and is now at the University of Oxford, has found that when a bank executive becomes a director, the stock price of their firm rises on the news.“The market believes that they have some advantage,” she said.And Board members do get substantial face time with Fed presidents, who meet regularly with their directors. Mr. Becker would have seen Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, at meetings held roughly once a month, her calendars suggest.‘Supervisory leniency’ is a risk.Bank-tied directors have no direct role in supervision, nor can they appoint officials or participate in budget decisions related to bank oversight, according to the Fed.But Mr. Klein is skeptical that Mr. Becker’s position on the San Francisco Fed’s board did not matter at all in the case of Silicon Valley Bank.“Who wants to be the person raising problems about the C.E.O. who is on the board of your own C.E.O.?” he said, explaining that even though the organizational structure might have drawn clear lines, those may not have cleanly applied in the “real world.”Ms. Adams’s research found that banks whose executives sat on boards did in fact see fewer enforcement actions — slaps on the wrist from Fed supervisors — during the director’s tenure. “There may be supervisory leniency,” she said.Changing the system might prove difficult.This is not the first time the Fed regional boards have raised ethical issues. In the years leading up to the 2008 financial crisis, Dick Fuld, the Lehman Brothers chief executive at the time, and Steve Friedman, who was a director at Goldman Sachs, both served on the New York Fed board.Mr. Fuld resigned just before Lehman collapsed in 2008. Mr. Friedman left in 2009, after news broke that he had bought Goldman Sachs stock during the crisis, at a time when the Treasury and the Fed were drawing up plans to bolster big banks.Given that controversy, politicians have at times focused on the Fed boards. The Democratic Party included language in its 2016 platform to bar executives of financial institutions from serving on reserve bank boards. And the issue has recently garnered bipartisan interest. Draft legislation under development by members of the Senate Banking Committee would limit directorships to small banks — those with less than $10 billion in assets, according to a person familiar with the material.The committee has a hearing on Fed accountability planned for May 17. Senators Elizabeth Warren, Democrat from Massachusetts, and Rick Scott, Republican from Florida, plan to introduce the legislation ahead of that, a spokesperson for Ms. Warren said.“It’s dangerous and unethical for executives from the largest banks to serve on Fed boards where these bankers could secure preferential regulatory treatment or exploit privileged information,” Ms. Warren said in a statement.But — as the Dodd Frank legislation illustrated — stripping banks of their power at the Fed has been a heavy lift.“As a political target,” said Ms. Binder, the political scientist, “it’s a little in the weeds.” More

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    Biden Taps Philip Jefferson and Adriana Kugler for Top Fed Jobs

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    President Biden announced his plan to nominate Adriana Kugler, an official at the World Bank, for a Fed governor job, while elevating Philip Jefferson to the role of vice chair.WASHINGTON — President Biden on Friday said he would nominate Adriana Kugler for a seat on the Federal Reserve Board and would elevate Philip Jefferson, a current governor, as vice chair of the central bank.If they are confirmed by the Senate, the Fed would get its first Latina board member and its second Black vice chair, a move that could both make the Fed more diverse and build out its leadership team at a challenging economic moment.Mr. Biden chose Ms. Kugler, an economist with a background in labor economics who has Colombian heritage and is the U.S. executive director of the World Bank, to fill the Fed’s only remaining open governor position on its seven-member board. In a corresponding move, he elevated Mr. Jefferson, an economist who was confirmed overwhelmingly to the board when Mr. Biden nominated him to an open governor position, to be the Fed’s vice chair.The New York Times previously reported on the expected nominations.Lael Brainard, who became head of Mr. Biden’s White House National Economic Council earlier this year, was the vice chair of the Fed until February.Because the Fed’s vice chair comes from among its seven governors, Ms. Brainard’s resignation left both a governor seat open and the vice chair role vacant. Ms. Kugler will take the open spot on the board, while Mr. Jefferson, who is already a Fed governor, will be elevated to the leadership position.The Biden administration needed to balance a complicated set of priorities as it filled those open spots at the Fed, the world’s most powerful central bank. The administration is under pressure, especially from Senator Bob Menendez, Democrat of New Jersey, to appoint a Latino or Latina to the Fed Board. And the Fed itself is at an unusually challenging juncture: It is trying to wrestle rapid inflation lower with the most aggressive policy campaign since the 1980s, one that could come at a significant cost the job market.Mr. Biden also announced that he would nominate Lisa Cook, a sitting Fed governor whose term will expire early next year, to another full 14-year term as a member of the board.“These nominees understand that this job is not a partisan one, but one that plays a critical role in pursuing maximum employment, maintaining price stability and supervising many of our nation’s financial institutions,” Mr. Biden said in statement announcing the picks.A Latino person has never served on the Fed board in the central bank’s more than 109-year history, so Ms. Kugler’s nomination would be a first if it ended in confirmation. It would also add an official with considerable experience in labor economics: Ms. Kugler, who was formerly an economist and administrator at Georgetown University, served as chief economist of the Labor Department during the Obama administration from 2011 to 2013.She has worked in the economics departments at the University of Houston and at University Pompeu Fabra in Barcelona, and she has a doctorate from the University of California, Berkeley.Mr. Menendez praised the decision in a statement on Friday, and made clear that he will support the nominees.“I for one will make it my personal mission to help ensure swift confirmations for Jefferson, Cook and Kugler,” he said.Mr. Jefferson, who took office at the Fed last May, is an economist who most recently served as an administrator at Davidson College and has a doctorate in economics from the University of Virginia. During his tenure at the Fed, he has built a reputation as an inquisitive listener with an interest in staff economic research.Mr. Jefferson was born in Washington D.C., in a neighborhood called Kingman Park. During his confirmation hearing to be a Fed governor, he recalled that in his youth, “it was a place where the line between a future of success or struggle was thin.”If confirmed, he would be the second Black person to reach such an elevated position at the Fed, following Roger W. Ferguson Jr., an economist and business executive. More

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    Inflation Slowed in April, Marking 10th Month of Moderation

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    Price increases cooled, capping months of declines. The details held hints of hope.Inflation slowed for a 10th straight month in April, a closely watched report on Wednesday showed, good news for American families struggling under the burden of higher costs and for policymakers in Washington as they try to wrangle rapid price increases.The Consumer Price Index climbed 4.9 percent in April from a year earlier, less than the 5 percent that economists in a Bloomberg survey had expected. Inflation has come down notably from a peak just above 9 percent last summer, though it has remained far higher than the 2 percent annual gains that were normal before the pandemic.Cheaper prices for airline tickets, new cars and groceries including eggs and produce helped to pull inflation lower last month even as gas prices and rents climbed briskly. In an important shift, prices for some services slowed — a positive for the Federal Reserve, which has been raising interest rates to slow the economy and wrestle inflation lower. Central bankers have been watching services costs carefully in part because they have been proving stubborn.The report also provided welcome news for President Biden. Inflation has plagued voters for more than two years now, weighing on the president’s approval ratings. As prices climb less dramatically with each passing month, they may become a less pressing concern.Yet economists warned against overstating the progress: While inflation is showing positive signs of cooling, a chunk of the decline since last summer has come as supply chains have healed. With that low-hanging fruit gone, it could be a long and bumpy path back to a normal inflation rate.“Inflation is still sticky; I don’t think that the Fed is going to look at this and cut rates, or heave an especially big sigh of relief,” said Priya Misra, head of global rates research at TD Securities. “Not so fast. We can’t draw the conclusion that the inflation problem is over.”Even so, stock prices jumped in response to the data as investors — who tend to prefer lower interest rates — greeted it as good news for the Fed.After stripping out food and fuel to get a sense of the underlying trend in price increases — what economists call a core measure — consumer prices climbed 5.5 percent from a year earlier, a slight deceleration from 5.6 percent in the previous reading.And a closely watched measure of services prices outside of housing costs pulled back even more meaningfully. That was an encouraging sign that a stubborn component of inflation is finally on the verge of cracking, but it was also driven partly by a moderation in travel expenses that might not last, said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives.That slowdown offered “a little bit of good news, but also probably a little bit of a head fake,” she said.While inflation has been gradually cooling for months, it has remained too elevated for policymakers.Higher Prices for Services Are Now Driving InflationBreakdown of the inflation rate, by category

    Note: The services category excludes energy services, and the goods category excludes food and energy goods.Sources: Bureau of Labor Statistics; New York Times analysisBy The New York TimesMuch of the slowing in price increases has come as supply chain bottlenecks that emerged during the depths of the pandemic have cleared up, allowing goods shortages to ease. Energy prices have also moderated after a surge in summer 2022 that was tied to Russia’s invasion of Ukraine.But underlying trends that could keep inflation persistently high over time have remained intact, including unusually strong wage growth, which could prod companies to try to charge more.That is one reason Fed officials have been paying such close attention to service prices: They tend to be more responsive to strength in the economy, and they can be difficult to slow down once they pick up.There are reasons to hope for more measured services inflation in coming months. Rents have begun to climb more slowly in market-based trackers, which should begin to show up in the official inflation data.But the question is whether the Fed has slowed the economy enough for other service prices — for things like travel, manicures, child care and health care — to follow suit.Central bankers have raised interest rates over the past year at the fastest pace since the 1980s to slow lending and weigh down growth, lifting borrowing costs above 5 percent as of this month.Those increases have made it more expensive to borrow money to buy a house or expand a business. As growth cools and companies compete less aggressively for workers, wage growth has already begun to slow. That chain reaction is expected to sap demand, which could make it harder for firms to increase prices without scaring away customers.But the full effect of the Fed’s moves is still playing out. The fallout could be intensified by a series of recent high-profile bank failures, which might make other lenders nervous and prompt them to pull back on extending credit.And Congress is approaching a showdown over raising the nation’s debt limit, which could also shape the outlook: If markets panic as Democrats and Republicans struggle to reach a deal and investors worry that the American government will fail to pay its bills, that could trickle out to hurt the economy.Democrats have warned that the brinkmanship could undermine progress in a strong economy with slowing inflation, while Republicans argued on Wednesday that rapid inflation is evidence that they are correct to demand spending cuts.With so many factors poised to weaken the economy, Fed officials are now assessing whether they need to raise borrowing costs further, or whether their moves so far will suffice to guide inflation back to normal. John C. Williams, the president of the Federal Reserve Bank of New York, told reporters in New York on Tuesday that the Fed’s next decision — to lift rates or to pause — would hinge on incoming data.“We’ll adjust policy going forward based on what we see out there,” he said.Policymakers will receive the consumer price report for May on June 13, the day before their decision, but officials typically give markets at least a hint of what they might do with rates ahead of time. Given that, central bankers are likely to pay close attention to the April inflation report.Fed officials will also receive May jobs data and a reading of the personal consumption expenditures price index — the measure they officially target in their 2 percent inflation goal, but one that comes out with more of a delay — before their next meeting. The personal consumption measure builds partly on the data from the consumer price report.For now, the fresh inflation figures probably aren’t enough to convince policymakers that they should change course and reduce interest rates soon, economists said.“It probably keeps them on track to pause at the next meeting,” Ms. Rosner-Warburton said. More

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    Financial Stability Experts at the Fed Turn a Wary Eye on Commercial Real Estate

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    A financial stability report from the Federal Reserve flagged concerns tied to rising interest rates, including in commercial real estate.Federal Reserve financial stability experts are on the lookout for weaknesses after a year of rising interest rates — and as they survey the potential risks confronting the system, they are increasingly watching office loans and other commercial real estate borrowing.Fed officials have lifted borrowing costs rapidly over the past year — to just above 5 percent from near-zero in early 2022 — to cool rapid inflation by slowing the economy. So far, the fallout from that abrupt change has been most obvious in the banking sector. A series of high-profile banks have collapsed or faced turmoil in recent weeks partly because they were poorly prepared for heftier borrowing costs.But Fed staff members and market experts whom they survey cited commercial real estate as another area worth watching in the central bank’s twice-annual Financial Stability Report, which was released Monday.The jump in interest rates over the past year “increases the risk” that commercial borrowers will not be able to refinance their loans when the loans reach the end of their term, Fed staff wrote in the report, noting that commercial real estate values remain “elevated.”“The magnitude of a correction in property values could be sizable and therefore could lead to credit losses by holders of C.R.E. debt,” the report said — noting that many of those holders are banks, and particularly smaller banks.“The Federal Reserve has increased monitoring of the performance of C.R.E. loans and expanded examination procedures for banks with significant C.R.E. concentration risk,” the report said.The Fed’s comments on commercial real estate amounted to muted watchfulness rather than a full-throated warning — but they come at a time when many investors and economists are closely monitoring the sector. The outlook for office buildings in downtown areas, where workers have not fully returned after a shift to remote work that began during the coronavirus pandemic, has emerged as a particular concern on Wall Street.The report included a survey of 25 professionals at broker-dealers, investment funds, research and advisory organizations, and universities, and those respondents ranked commercial real estate as their fourth-biggest financial stability concern — behind risks from interest rate increases, banking sector stress, and U.S.-China tensions, but ahead of Russia’s war in Ukraine and an impending fight in Congress about raising the debt limit.“Many contacts saw real estate as a possible trigger for systemic risk, particularly in the commercial sector, where respondents highlighted concerns over higher interest rates, valuations and shifts in end-user demand,” the report said.The Fed’s stability report also focused on risks to the economy that might come from the recent banking sector turmoil, which many officials are worried might prompt banks to pull back when it comes to lending. A Fed survey of bank loan officers released on Monday showed that demand for many types of loans has fallen in recent months, and it is becoming gradually harder to borrow.Worries could “lead banks and other financial institutions to further contract the supply of credit to the economy,” the Fed report said. “A sharp contraction in the availability of credit would drive up the cost of funding for businesses and households, potentially resulting in a slowdown in economic activity.”And if banks pull back in a dramatic way, it could have knock-on effects, the Fed report warned.“With a decline in profits of nonfinancial businesses, financial stress and defaults at some firms could increase,” the report said, especially because companies are very indebted — which puts them on dicier footing if business goes badly. More

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    U.S. Employers Added 253,000 Jobs Despite Economic Worries

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    Employers added 253,000 jobs in April and unemployment fell to 3.4 percent, but the labor market’s strength complicates the Fed’s inflation fight.The labor market is still defying gravity — for now.Employers added 253,000 jobs in April on a seasonally adjusted basis, the Labor Department reported Friday, in a departure from the cooling trend that had marked the first quarter and was expected to continue.The unemployment rate was 3.4 percent, down from 3.5 percent in March, and matched the level in January, which was the lowest since 1969. Wages also popped slightly, growing 4.4 percent over the past year.The higher-than-forecast job gain complicates the Federal Reserve’s potential shift toward a pause in interest rate increases. Jerome H. Powell, the Fed chair, said on Wednesday that the central bank might continue to raise rates if new data showed the economy wasn’t slowing enough to keep prices down.It’s also an indication that the failure of three banks and the resulting pullback on lending, which is expected to hit smaller businesses particularly hard, hasn’t yet hamstrung job creation.“All these things are telling us it’s not a hard stop; it’s creating a headwind, but not a debilitating headwind,” said Carl Riccadonna, the chief U.S. economist at BNP Paribas. “A gradual downturn is happening, but it sure is stubborn and persistent in the trend.” Despite the strong showing in April, the labor market continues to gently descend from blistering highs.Downward revisions to the previous two months’ data meaningfully altered the spring employment picture, subtracting a total of 149,000 jobs. That brings the three-month average to 222,000 jobs, a clear slowdown from the 400,000 added on average in 2022. Most economists expect a more marked downshift later in the year.Jobs increased across industriesChange in jobs in April 2023, by sector More

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    Wages Grow Steadily, Defying Fed’s Hopes as it Fights Inflation

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    Wage growth ticked up in April, good news for American workers but bad news for officials at the Federal Reserve, who have been hoping to see a steady moderation in pay gains as they try to wrestle inflation back under control.Average hourly earnings climbed by 4.4 percent in the year through April. That compared with 4.3 percent in the previous month, and was more than the 4.2 percent that economists had expected.The increase in wages compared with the previous month — at 0.5 percent — was the fastest since March 2022.The hourly earnings measure can bounce around from month to month, so it is possible that the April increase is a blip rather than a reversal in the trend toward cooler wage gains. Even so, the data underscored that the Fed faces a bumpy road as it tries to slow the economy and bring inflation under control.Fed officials are closely watching the pace of wage growth as they try to assess how quickly inflation is likely to fade. While officials regularly acknowledge that wage gains did not initially cause rapid price increases, they worry that it will prove difficult to return inflation to normal with pay gains rising so rapidly.Companies may charge more in order to cover their climbing labor costs. And when households are earning more, they are more capable of keeping up with higher expenses without pulling back their spending — enabling businesses to charge more for hotel rooms, child care and restaurant meals without scaring away consumers.The Fed has raised interest rates at the fastest pace since the 1980s starting from March 2022. Officials this week lifted borrowing costs to just about 5 percent and signaled that they might pause their rate moves as soon as their June meeting, depending on incoming economic data.Jerome H. Powell, the Fed chair, noted during his news conference this week that wage growth has remained strong. He suggested the solid job market was one reason the Fed would likely keep rates high to continue slowing the economy “for a while” as it tried to wrestle inflation, which remains above 4 percent, back to the central bank’s 2 percent goal.“Right now, you have a labor market that is still extraordinarily tight,” he said, noting that a more dated wage figure released last week was “a couple percentage points above what would be consistent with 2 percent inflation over time.”That measure, the Employment Cost Index, showed that wages and salaries for private-sector U.S. workers were up 5.1 percent in March from a year earlier. While that is somewhat faster than the gain reported by the overall average hourly earnings figures for April that were released Friday, it is roughly in line with a closely-watched measure within the monthly jobs report that tracks pay gains for rank and file workers.Pay for production and nonsupervisory workers — essentially, people who are not managers — climbed by 5 percent in the year through April, Friday’s report showed. That number has continued to gradually moderate, even as the slowdown in the overall index has stalled.Fed policymakers will have another month of job and wage data in hand before they make their next interest-rate decision on June 14, making Friday’s figures just one of many factors that are likely to inform whether they pause rate increases or press ahead with more policy adjustments. Officials will also have further evidence of how much the recent turmoil in the banking sector is slowing the economy before they next meet.A series of high-profile bank failures have spooked investors and could generate caution at lenders across the country, which could make it harder to access loans for construction projects and mortgages and help to cool growth — but it is unclear so far how large that effect will be.Perhaps most importantly, officials will receive fresh inflation data before their next decision.“They’ll need to see the inflation data and digest this holistically,” said Kathy Bostjancic, chief economist at Nationwide. She said that the strong jobs numbers were just one month of data, but that they were “jarring” to see at a moment when economists had been looking for a slowdown.“Assuming that the inflation numbers continue to trend lower gradually, I think they can go on hold in June,” she said of the Fed. “But it will depend in the inflation readings.” More