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    Covid’s effect on the jobs numbers may leave Washington in the dark.

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    Without clarity on how quickly the labor market can shake off Omicron, the Fed will have difficulty applying the data to its interest rate strategy.Jerome H. Powell, the Federal Reserve chair, has compared setting monetary policy to stumbling through an unlit room: You feel your way to the door cautiously to avoid making a painful mistake.The analogy is likely to ring especially true after the Omicron-jumbled job report for January, as the virus obscures the pace of progress in the job market and leaves policymakers in the dark. But the Fed may lack the luxury of creeping slowly through the dinginess this time.Mr. Powell and his colleagues are poised to raise interest rates for the first time since 2018 in March, a move meant to cool off the economy as inflation runs at its fastest pace in nearly 40 years. It will likely be in the uncomfortable position of making that move — and signaling what comes next, as markets are pointing to as many as five 2022 rate increases — at a time when the latest job market data look lackluster at best, bleak at worst.The Fed will look past a few months of virus-depressed job market data as officials try to assess the actual strength of the economic rebound: The Omicron variant is already in retreat in the United States, and there’s little reason to expect an extended lull in hiring after a year of breakneck labor market progress.But the virus flare-up and its economic repercussions underline a challenge that is likely to confront the Fed throughout 2022 as it pares back its support. It’s hard to know what will happen next in a coronavirus-stricken business environment.“We’ll be humble and nimble,” Mr. Powell pledged of the central bank’s policy path, speaking at a news conference last month.The Fed typically navigates by watching incoming labor market data — especially the unemployment rate, lately — and inflation data. But it could take a few months for the jobs picture to clear, and in the meantime, inflation is running hot. Used-vehicle prices, which have been a big driver of overall price increases, might be on the cusp of stabilizing but have yet to cool off notably. Gasoline prices are headed back up, food is costing more and rents have been increasing steeply.That is likely to leave the Fed, which typically takes away its help at moments of strong labor market progress, moving when the job market is hitting a bump.“It’s the Omicron fog,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “It’s not going to give us visibility.”Fed officials are trying to make sure that they do not fall behind the curve on high inflation, allowing it to become so locked into consumer and business expectations that it becomes a permanent feature of the economic landscape. How the Fed strikes the balance — and how much it slows down the economy with its rate increases this year — could have important political implications, too. Voters are already glum about the economy’s prospects, and President Biden is suffering in the polls. More

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    Sarah Bloom Raskin Faces a Contentious Senate Hearing

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    Sarah Bloom Raskin is a longtime Washington policy player with progressive credentials and a track record of speaking out against the fossil fuel industry, qualities that helped her to win the White House’s nomination to be America’s top bank cop.But those same views could leave her with a narrow path to confirmation as the Federal Reserve’s vice chair for supervision — especially if Senator Ben Ray Luján, a New Mexico Democrat who is recovering from a stroke, is not present for her vote before the full Senate. (A senior aide to Mr. Luján said he was expected to make a full recovery, and would return in four to six weeks, barring complications.)And Ms. Raskin’s views are almost certain to ignite sparks at her hearing before the Senate Banking Committee on Thursday.Ms. Raskin has been nominated alongside Lisa D. Cook and Philip N. Jefferson, both economists up for seats on the Fed’s Board of Governors. Ms. Raskin, Dr. Cook and Dr. Jefferson will field questions from the Senate Committee on Banking, Housing and Urban Affairs at 8:45 a.m. on Thursday.Ms. Raskin, a former Fed governor and high-ranking Treasury official who was most recently a professor at Duke Law School, is seen as a known entity by the banking industry that she would oversee. But business groups have been critical of her attention to climate issues — including an opinion piece she wrote in 2020 criticizing the Fed’s decision to design one of its emergency loan programs in a way that allowed fossil fuel companies to access emergency loans.“I’m deeply concerned that Sarah Bloom Raskin has — let’s be honest, she has explicitly, publicly advocated that the Fed use its powers to allocate capital,” Senator Patrick J. Toomey of Pennsylvania, the top Republican on the committee, said in an interview on Tuesday. “I think that’s disqualifying, and I think that is going to be a topic of discussion.”Such full-throated opposition from Republicans may mean more than just a heated hearing — Ms. Raskin may need to maintain the support of every Democrat in the Senate to stay on the narrow path to confirmation. If Democrats were to lose their fragile grasp on the Senate majority because Mr. Luján has not returned yet, it is not clear that she would garner the votes she would need to pass.Fed nominees need a simple majority to clear the Senate Banking Committee and then to win confirmation from the Senate as a whole, meaning that it is possible that Ms. Raskin could skate through if all 50 senators who caucus with Democrats vote in her favor, with Vice President Kamala Harris breaking a tie.Vice chair for supervision is arguably the most important job in American financial regulation, and given those high stakes, Ms. Raskin’s chances are being closely watched.“I’m not expecting her to get many, if any, Republican votes,” said Ian Katz, a managing director at Capital Alpha Partners, explaining that he thinks she will ultimately secure enough Democratic support to pass, assuming all the Senators, including Mr. Luján, vote. “You hear different things from the industry: You hear some concerns that she is too progressive, but you also hear that she’s well within the mainstream.”Oil and gas businesses are mounting a campaign against more decisive climate monitoring by the Fed, worried that the central bank will subject banks to stringent oversight that dissuades them from lending money to the industry. This could bring skeptical questioning for all three nominees.“I am concerned about all of the Fed nominees and their apparent willingness, despite what some of them said, to include bank and financial regulations designed to prohibit legal industries from operating in the United States borrowing money,” Senator Jerry Moran of Kansas, a Republican who sits on the committee, said on Wednesday.Mr. Toomey said during an interview on Wednesday that he also had some reservations about Dr. Cook.Lisa D. Cook, a Michigan State University economist well known for her work in trying to improve diversity in economics, will also face questions from the committee on Thursday.Brittany Greeson for The New York TimesMuch of the opposition coming from Republicans and lobbyists alike is aimed at Ms. Raskin, though. She argued in a Project Syndicate column recently that “all U.S. regulators can — and should — be looking at their existing powers and considering how they might be brought to bear on efforts to mitigate climate risk.”But Ms. Raskin struck a gentler tone in her prepared testimony for the hearing, released Wednesday night, noting that the role does not involve excluding certain sectors and asserting that bank supervisors must ensure that “the safety of banks and the resilience of our financial system are never compromised in favor of short-term political agendas or special interest groups.”It is unclear at this point whether those assurances will be enough for her critics.The Chamber of Commerce, in a letter to the Senate committee last week, urged lawmakers to ask Ms. Raskin about her position on whether the Fed’s regulatory approach should try to curb credit access for oil and gas companies. The business group asked whether Ms. Raskin would be independent of politics. After Democratic members of the Federal Deposit Insurance Corporation board clashed with and ultimately precipitated the resignation of the Trump appointee Jelena McWilliams, who was the regulator’s chairwoman, some Republicans have raised concerns that something similar could happen at the Fed. In December, partisan politics helped to scupper the nomination of Saule Omarova, who withdrew herself from consideration to be comptroller of the currency after attacks from Republicans and banking lobbyists, and as she struggled to draw wide enough support from Democrats.By contrast, the banking industry has taken a more benign view of Ms. Raskin. The Financial Services Forum, which represents the chief executive officers of the largest banks, congratulated Ms. Raskin and the other White House Fed picks in a statement after their nominations were announced, as did the American Bankers Association.Ms. Raskin is seen as a qualified candidate who understands the roles various regulators play in overseeing banks, according to one banking industry executive who asked not to be identified discussing regulatory matters. Even though bankers expect Ms. Raskin to be confirmed, they are awaiting more clarity around her stance on climate finance and disclosures, the executive said.As she is received as a mainstream pick, centrist Democrats have sounded content with Ms. Raskin.“I’ve been very impressed with her,” Senator Mark Warner, Democrat of Virginia, said on Tuesday, adding that he had not met her yet but that he was “favorably inclined” and noting that banks have expressed comfort with her.Senator Joe Manchin III from West Virginia, a key centrist Democrat, said on Wednesday that he hadn’t yet studied the nominees, adding that he’s “going to get into that” because he’s “very concerned” about issues including inflation.A Harvard-trained lawyer, Ms. Raskin is a former deputy secretary at the Treasury Department, where she focused on financial system cybersecurity, among other issues. She also spent several years as Maryland’s commissioner of financial regulation. Ms. Raskin is married to Representative Jamie Raskin, a Maryland Democrat.If confirmed, she would be only the second person formally appointed as the Fed’s vice chair for supervision, succeeding Randal K. Quarles, a Trump administration pick who typically favored lighter and more precise regulation. Ms. Raskin, by contrast, has a track record of calling for stricter regulation. Dr. Cook and Dr. Jefferson might both might be quizzed about their views on policy and professional backgrounds. The Fed has seven governors — including its chair, vice chair and vice chair for supervision — who vote on monetary policy alongside five of its 12 regional bank presidents. Governors hold a constant vote on regulation.Philip N. Jefferson, an administrator and economist at Davidson College who has worked as a research economist at the Fed, is also a nominee for the Fed’s board.John Crawford/Davidson CollegeDr. Cook, who would be the first Black woman ever to sit on the Fed’s board, is a Michigan State University economist well known for her work in trying to improve diversity in economics. She earned a doctorate in economics from the University of California, Berkeley, and was an economist on the White House Council of Economic Advisers under President Barack Obama.“High inflation is a grave threat to a long, sustained expansion, which we know raises the standard of living for all Americans and leads to broad-based, shared prosperity,” Dr. Cook said, after emphasizing her decades of experience, calling tackling America’s current burst in prices the Fed’s “most important task.”Dr. Jefferson, who is also Black, is an administrator and economist at Davidson College who has worked as a research economist at the Fed. He has written about the economics of poverty, and his research has delved into whether monetary policy that stokes investment with low interest rates helps or hurts less-educated workers.He seconded that the Fed must “ensure that inflation declines to levels consistent with its goals,” speaking in his prepared testimony.Dr. Cook, Dr. Jefferson, and Ms. Raskin are up for confirmation alongside Jerome H. Powell — who had previously been renominated as Fed chair — and Lael Brainard, a Fed governor who is the Biden administration’s pick for vice chair. Senator Sherrod Brown of Ohio, the committee chairman, said all five candidates will face a key committee vote on Feb. 15, and that Senator Chuck Schumer of New York, the majority leader, “knows to move quickly” for a full floor vote.If all pass, the Fed’s leadership will be the most diverse in both race and gender that it has ever been — fulfilling a pledge of Mr. Biden’s to make the long heavily male and white central bank more representative of the public that it is intended to serve. More

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    Fed Officials Make It Clear on Inflation: This Time Is Different

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    Federal Reserve officials are preparing to pull back their economic help as inflation remains stubbornly high and the labor market swiftly heals, and they are signaling clearly that the last business cycle is a poor template for what comes next.During the economic expansion that stretched from the global financial crisis to the start of the pandemic, the Fed acted very gradually — it slowly dialed back bond buying meant to help the economy, then only ploddingly shrank its balance sheet of asset holdings. Central bankers increased borrowing costs sporadically between 2015 and the end of 2018, raising them at every other meeting at the very fastest.But inflation was muted, the labor market was slowly crawling out of an abyss, and business conditions needed the Fed’s support. This time is different, a series of Fed presidents emphasized on Monday — suggesting that the pullback in policy support is likely to be quicker and more decisive.Four of the central bank’s 12 regional presidents spoke on Monday, and all suggested that the Fed could soon begin to cool off the economy. Central bankers are widely expected to make a series of interest rate increases starting in March, and could soon thereafter begin to fairly rapidly shrink their balance sheet holdings. The pace of policy retreat is still up for debate and officials reiterated that it will hinge on incoming data — but several also noted that economic conditions are unusually strong.“The economy is far stronger than it has been, during any of my time in this role, and certainly, during any of the recoveries that we’ve been trying to navigate our policy through in recent memory,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with Yahoo Finance. Any risks “that our policies are going to lead to a contraction in the economy, I think they’re relatively far off.”Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.While it took the Fed a long time to begin shrinking its balance sheet last time, the central bank will probably move more promptly in 2022, Esther George, president of the Federal Reserve Bank of Kansas City, suggested during a speech.“With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook,” said Ms. George, who votes on monetary policy this year.Tricky questions lie ahead about how big the balance sheet should be, she noted. The Fed’s holdings have swollen to nearly $9 trillion, more than twice its size before the pandemic.Ms. George estimated that the Fed’s big bond holdings were weighing down longer-term interest rates by roughly 1.5 percentage points — nearly cutting the interest rate on 10-year government debt in half. While shrinking the balance sheet risks roiling markets, she warned that if the Fed remains a big presence in the Treasury market, it could distort financial conditions and imperil the central bank’s prized independence from elected government.“While it might be tempting to err on the side of caution, the potential costs associated with an excessively large balance sheet should not be ignored,” she said. She suggested that shrinking the balance sheet could allow policymakers to raise rates, which are currently set near-zero, by less.Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, also argued for an active — albeit still gradual — path toward removing policy help.The Fed is not behind the curve, she said on a Reuters webcast, but it needs to react to the reality that the labor market appears at least temporarily short on workers and inflation is running hot. Prices picked up by 5.8 percent in the year through December, nearly three times the 2 percent the Fed aims for on average and over time.“We’re not trying to combat some vicious wage-price spiral,” Ms. Daly said. Still, she said she could support a rate increase as soon as March, and hinted that four rate increases could be reasonable, a path that would slow things down while “not pulling away the punch bowl completely and causing disruptions.”Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Fed Officials Make It Clear: This Time Is Different

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    Federal Reserve officials are preparing to pull back their economic help as inflation remains stubbornly high and the labor market swiftly heals, and they are signaling clearly that the last business cycle is a poor template for what comes next.During the economic expansion that stretched from the global financial crisis to the start of the pandemic, the Fed acted very gradually — it slowly dialed back bond buying meant to help the economy, then only ploddingly shrank its balance sheet of asset holdings. Central bankers increased borrowing costs sporadically between 2015 and the end of 2018, raising them at every other meeting at the very fastest.But inflation was muted, the labor market was slowly crawling out of an abyss, and business conditions needed the Fed’s support. This time is different, a series of Fed presidents emphasized on Monday — suggesting that the pullback in policy support is likely to be quicker and more decisive.Four of the central bank’s 12 regional presidents spoke on Monday, and all suggested that the Fed could soon begin to cool off the economy. Central bankers are widely expected to make a series of interest rate increases starting in March, and could soon thereafter begin to fairly rapidly shrink their balance sheet holdings. The pace of policy retreat is still up for debate and officials reiterated that it will hinge on incoming data — but several also noted that economic conditions are unusually strong.“The economy is far stronger than it has been, during any of my time in this role, and certainly, during any of the recoveries that we’ve been trying to navigate our policy through in recent memory,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with Yahoo Finance. Any risks “that our policies are going to lead to a contraction in the economy, I think they’re relatively far off.”Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.While it took the Fed a long time to begin shrinking its balance sheet last time, the central bank will probably move more promptly in 2022, Esther George, president of the Federal Reserve Bank of Kansas City, suggested during a speech.“With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook,” said Ms. George, who votes on monetary policy this year.Tricky questions lie ahead about how big the balance sheet should be, she noted. The Fed’s holdings have swollen to nearly $9 trillion, more than twice its size before the pandemic.Ms. George estimated that the Fed’s big bond holdings were weighing down longer-term interest rates by roughly 1.5 percentage points — nearly cutting the interest rate on 10-year government debt in half. While shrinking the balance sheet risks roiling markets, she warned that if the Fed remains a big presence in the Treasury market, it could distort financial conditions and imperil the central bank’s prized independence from elected government.“While it might be tempting to err on the side of caution, the potential costs associated with an excessively large balance sheet should not be ignored,” she said. She suggested that shrinking the balance sheet could allow policymakers to raise rates, which are currently set near-zero, by less.Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, also argued for an active — albeit still gradual — path toward removing policy help.The Fed is not behind the curve, she said on a Reuters webcast, but it needs to react to the reality that the labor market appears at least temporarily short on workers and inflation is running hot. Prices picked up by 5.8 percent in the year through December, nearly three times the 2 percent the Fed aims for on average and over time.“We’re not trying to combat some vicious wage-price spiral,” Ms. Daly said. Still, she said she could support a rate increase as soon as March, and hinted that four rate increases could be reasonable, a path that would slow things down while “not pulling away the punch bowl completely and causing disruptions.”Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Inflation and Deficits Don’t Dim the Appeal of U.S. Bonds

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

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

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

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    Fed Signals Rate Increase in March, Citing Inflation and Strong Job Market

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    Federal Reserve officials signaled on Wednesday that they were on track to raise interest rates in March, given that inflation has been running far above policymakers’ target and that labor market data suggests employees are in short supply.Central bankers left rates unchanged at near-zero — where they have been set since March 2020 — but the statement after their two-day policy meeting laid the groundwork for higher borrowing costs “soon.” Jerome H. Powell, the Fed chair, said officials no longer thought America’s rapidly healing economy needed so much support, and he confirmed that a rate increase was likely at the central bank’s next meeting.“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so,” Mr. Powell said.While he declined to say how many rate increases officials expected to make this year, he noted that this economic expansion was very different from past ones, with “higher inflation, higher growth, a much stronger economy — and I think those differences are likely to be reflected in the policy that we implement.”The Fed was already slowing a bond-buying program it had been using to bolster the economy, and that program remains on track to end in March. The Fed’s post-meeting statements and Mr. Powell’s remarks signaled that central bankers could begin to shrink their balance sheet holdings of government-backed debt soon after they begin to raise interest rates, a move that would further remove support from markets and the economy.Investors have been nervously eyeing the Fed’s next steps, worried that its policy changes will hurt stock and other asset prices and rapidly slow down the economy. Stocks on Wall Street gave up their gains and yields on government bonds rose as Mr. Powell spoke. The S&P 500 ended with a loss of 0.2 percent after earlier rising as much as 2.2 percent. The yield on 10-year Treasury notes, a proxy for investor expectations for interest rates, jumped as high as 1.87 percent.The Fed has pivoted sharply from boosting growth to preparing to cool it down as businesses report widespread labor shortages and as prices across the economy — for rent, cars and couches — soar. Consumer prices are rising at the fastest pace since 1982, eating away at paychecks and creating a political liability for President Biden and Democrats. It is the Fed’s job to keep inflation under control and to set the stage for a strong job market.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.“The Fed has completed its pivot from being patient to panicked on inflation,” Diane Swonk, the chief economist at Grant Thornton, wrote in a research note to clients after the meeting. “Its next move will be to raise rates.”The Fed’s withdrawal of policy support could temper consumer and corporate demand as borrowing money to buy a car, a boat, a house or a business becomes more expensive. Slower demand could give supply chains, which have fallen behind during the pandemic, room to catch up. By slowing down hiring, the Fed’s moves could also limit wage growth, which might otherwise feed into inflation if employers raised prices to cover higher labor costs.Investors nudged up their expectations for rate increases following the meeting and now project the Fed to raise rates five times this year, based on market pricing, and for the Fed’s policy rate to end the year between 1.25 and 1.5 percent. And economists increasingly warn that it is possible central bankers could move quickly — perhaps lifting borrowing costs at each consecutive meeting instead of leaving gaps, or in half-percentage point increases instead of the quarter-point moves that are more typical.But Mr. Powell demurred when asked about the pace of rate increases, saying that it was important to be “humble and nimble” and that “we’re going to be led by the incoming data and the evolving outlook.”“He went out of his way not to commit to a preset course,” said Subadra Rajappa, the head of U.S. rates strategy at Société Générale. The lack of clarity over what happens next “is a setup for a volatile market.”While interest rates are expected to rise over the coming years, most economists and investors do not expect them to return to anything like the double-digit levels that prevailed in the early 1980s. The Fed anticipates that its longer-run interest rate might hover around 2.5 percent.Investors also have been eagerly watching to see how quickly the Fed will shrink its balance sheet of asset holdings. The Fed’s policy committee released a statement of principles for that process on Wednesday, setting out plans to “significantly” reduce its holdings “in a predictable manner” and “primarily” by adjusting how much it reinvests as assets expire.“They are trying, I think, to reduce market uncertainty around the balance sheet — but they’re telling us it’s happening,” said Priya Misra, the global head of rates strategy at TD Securities, adding that the release suggested that the process would begin within a few months.Mr. Powell noted during his news conference that both of the areas the Fed is responsible for — fostering price stability and maximum employment — had prodded the central bank to “move steadily away” from helping the economy so much.“There are many millions more job openings than there are unemployed people,” Mr. Powell said. “I think there’s quite a bit of room to raise interest rates without threatening the labor market.”The unemployment rate has fallen to 3.9 percent, down from its peak of 14.7 percent at the worst economic point in the pandemic and near its February 2020 level of 3.5 percent. Wages are growing at the fastest pace in decades.Inflation F.A.Q.Card 1 of 6What is inflation? More