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    Janet Yellen Gets a Chance to Shape the Fed, This Time From Outside

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    As Jerome H. Powell nears the end of his term as Federal Reserve chair, Ms. Yellen will have a say over whether he should stay on. Many progressive Democrats want him replaced.Janet L. Yellen has dedicated most of her professional life to the Federal Reserve. She served in its highest-ranking roles, including as president of the Federal Reserve Bank of San Francisco, on its Washington-based board and as the central bank’s first female chair. When President Donald J. Trump decided to replace her in that role in 2017, she was sorely disappointed.Now, as Treasury secretary, Ms. Yellen is getting another chance to shape the future of the institution. She will be a critical voice in deciding who ought to lead the central bank in what some see as a once-in-a-generation opportunity to remake an institution that shepherds America’s economy and helps to regulate its largest banks.Jerome H. Powell’s term as chair, which began in 2018 after Mr. Trump picked him to take over for Ms. Yellen, ends in February. Slots for the vice chair and the Fed’s top bank regulator will also be up for grabs soon, and a position on the Fed’s Board of Governors is already vacant. Assuming officials leave once their leadership terms end, the Biden administration may, in quick succession, be able to appoint four of the Fed’s seven board members, powerful policymakers who have constant votes on monetary decisions and exclusive regulatory authorities.Many progressive Democrats are pushing to oust the moderate Mr. Powell and replace him with a candidate who is focused on tight financial regulation, climate change and digital money — most likely the Fed governor Lael Brainard. Mr. Powell’s supporters see him as a champion for full employment, and would like him to be retained as a sign that competent leadership is rewarded.It’s unclear where Ms. Yellen’s preferences lie, but it’s common knowledge that she was unhappy when Mr. Trump broke a tradition of reappointment in her case.Many who would like to see Mr. Powell replaced play down the role she will have in shaping President Biden’s decision. But Treasury secretaries have traditionally been central to the Fed selection process, helping to advise and guide the president toward a choice that will be welcome on both Wall Street and in the Senate, which has to confirm nominees to the Fed board.Ms. Yellen’s views will carry significant weight in the deliberations, coloring both who is considered and the ultimate outcome. Discussions over the pick are also being held among Brian Deese, director of the National Economic Council; Ron Klain, the president’s chief of staff; and Cecilia Rouse, chair of the Council of Economic Advisers, according to people familiar with the deliberations. Mr. Biden will have the final word.Conversations over who should lead the institution could stretch into October, as they have in past Fed leadership decisions. But speculation over who will win the top jobs is already rampant.The Treasury Department declined to comment.The argument for replacing Mr. Powell, a Republican who was appointed as a Fed governor by President Barack Obama, has to do with things other than traditional interest rate policy. Democrats typically say he has done a relatively good job when it comes to guiding the economy using monetary tools.Under Mr. Powell’s leadership, the Fed parried Mr. Trump’s pressure campaign to lower rates when the economic backdrop was solid, and it reacted rapidly and effectively to the economic collapse triggered by the pandemic. The Fed is also credited with averting a financial crisis early last year as key markets seized. Mr. Powell’s Fed revamped its entire policy framework last year to focus more concertedly on achieving a strong job market that extends its benefits to as many people as possible.Jerome H. Powell has been Fed chair since 2018; his term ends in February.Sarahbeth Maney/The New York TimesMs. Yellen has repeatedly praised Mr. Powell’s performance.“He’s doing extremely well,” she told The New York Times in early 2020, discussing Mr. Powell’s conduct as he came under attack from the Trump White House.But Mr. Powell has opponents among more progressive groups. He often deferred to the Fed’s vice chair — a Trump appointee — for supervision when it came to regulation, regularly voting for tweaks to bank and financial rules that chipped quietly away at postcrisis financial reforms. He has also been criticized by climate focused groups for being too slow to elevate the Fed’s role in policing environment-related finance. Climate activists plan to protest at the Fed’s annual symposium this year in Jackson, Wyo., and Mr. Powell “will be a key target,” Thanu Yakupitiyage, head of U.S. communications at 350.org, said in an email. The group is one of the protest’s key organizers.Regulation and climate are key reasons some Democrats are lining up behind Ms. Brainard, the Fed governor and another leading candidate. Ms. Brainard, who also has a good relationship with Ms. Yellen, opposed Trump administration efforts to lighten bank oversight by loudly dissenting against a spate of regulatory decisions, often releasing meticulous statements detailing where they went awry.She is seen as a powerful and effective Fed governor, one who played a key role in shaping pandemic response programs. And while they are closely aligned on monetary policy, she has distinguished herself from Mr. Powell by pushing for a bigger role for the Fed on climate issues and a more proactive stance toward developing a digital currency.She also could help to anchor a leadership team that could usher in a fresh era for the Fed, her supporters argue.Andrew Levin, a former Fed economist, is one of several people who are pushing the idea that the White House appoint Ms. Brainard as chair and Sarah Bloom Raskin, a former top Fed and Treasury official, to the central bank’s top regulatory job. Mr. Levin, now a professor of economics at Dartmouth, would also favor nominating as vice chair Lisa Cook, a professor from Michigan State University who has researched racial disparities and labor markets and has worked to improve diversity in economics.That group would be diverse, compared with the Fed’s typically white and male leadership team. The Fed has been led by a woman — Ms. Yellen — for just four of its nearly 108 years. If appointed vice chair, Ms. Cook would be the highest-ranking Black woman in its history.“It’s a package deal that should work together,” Mr. Levin said. “This administration wants to send a message that they care about all of the people who are slipping through the cracks.”Those aren’t the only names floated for key positions. William Spriggs, chief economist at the A.F.L.-C.I.O. (and himself a fan of keeping Mr. Powell in the top job), is also on some lists for the vice chair or a governor.Progressive Democrats are lining up behind Lael Brainard, a Federal Reserve governor.Cliff Owen/Associated PressProgressive groups have been talking to lawmakers, arguing that Mr. Powell should be replaced, and key Democrats are sympathetic to some of their arguments.“My concern is that over and over, he has weakened the regulation here, he has led the Fed to ease up there,” Senator Elizabeth Warren, Democrat from Massachusetts, said on Bloomberg TV this month. “We need someone who understands and uses both the monetary policy tools and the regulatory tools to keep our economy safe.”But whether such objections will kill Mr. Powell’s chances remains to be seen. Powerful Democrats attuned to the issue, such as Senator Sherrod Brown of Ohio, have not signaled definitively that they would vote against Mr. Powell were he renominated. Even if Mr. Powell is retained, fresh faces in the other key jobs could inject diversity and expertise on issues like climate and financial oversight into the Fed’s top ranks.And another argument is working in Mr. Powell’s favor: tradition.When Mr. Trump replaced Ms. Yellen, he bucked a longstanding practice in which Fed chairs were reappointed if they had done a good job, regardless of their political background. The tradition is in part a nod to the fact that the Fed is meant to be independent of partisan politics.Democrats and their allies were infuriated.The decision was “seemingly rooted in simple-minded partisanship that demanded a Republican president replace a Democratic appointee as Fed chair,” Josh Bivens, research director at the typically liberal Economic Policy Institute, wrote in a statement at the time. “This decision breaks a longstanding norm of not elevating partisanship over competence when picking Fed chairs.”Mr. Bivens, in an email last week, said that the norm “is pretty broken,” but that the decision to replace a Fed chair should still come down to whether the incumbent had done a good job. There’s a strong case for keeping Mr. Powell based on his monetary policymaking at a moment of fierce debate over the Fed’s policy direction, he thinks.Ms. Yellen remains mindful of the tradition. She reacted sadly in 2018 to Mr. Trump’s decision to replace her, saying during a CBS News interview that she had made it clear she would have stayed on and felt a “sense of disappointment.”“It is common for people to be reappointed by presidents of the opposite party,” she said. More

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    July C.P.I. Report: Inflation Rose Quickly Again

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    Consumer prices rose at a rapid clip again in July, gains that could be problematic for both Federal Reserve officials and the Biden White House.Prices increased by 5.4 percent last month compared with a year earlier, the Labor Department’s Consumer Price Index showed on Wednesday. The inflation measure rose 0.5 percent from June.The annual gain was slightly more than the 5.3 percent jump expected by economists, according to the median prediction of those surveyed by Bloomberg. The monthly gain matched the anticipated 0.5 percent increase.The monthly figure did represent a moderation in the pace of increase — the C.P.I. rose 0.9 percent in June from May — but inflation is still faster than is typical.Economists widely expected that price gains would pick up this year after slumping in 2020, but the extent of the jump has come as a surprise. Yearly price gains will almost surely moderate in the months ahead, as a data quirk that’s been helping exaggerate them fades. Monthly gains are also expected to continue cooling off as businesses find ways to cope with short-term disruptions to supply chains, which have pushed car prices sharply higher and led to much of the 2021 pop.But the key question for the Fed, and the White House, is just how quickly that will happen.For the Fed, which is charged with keeping price gains low and steady over time, temporary price jumps are tolerable — but persistent gains would be a problem. For the White House, climbing costs have become a political headache as Republicans use them to claim that the Biden administration is mismanaging the economy.Here are a few things to know about Wednesday’s data.The C.P.I. is not the Fed’s target measure. The central bank aims for 2 percent inflation on average over time, and it defines that goal using the Personal Consumption Expenditures index, which has also been up this year but not quite as sharply as the measure reported on Wednesday. But the C.P.I. is more timely, and its data feeds into the Fed’s metric, which makes it very closely watched.Last year’s shutdown is less of a factor. A big factor behind gains earlier this year is something called the base effect. Prices for airline tickets and hotel rooms dropped last year when the economy locked down, so when today’s prices are measured against those figures, the increase looks outsized. But the base effect is now fading, because prices turned a corner after May 2020 as the economy reopened.Fast inflation will become a problem if it lasts. The increases this year have been driven by pandemic reopenings, as supplies for goods and services — think used cars and restaurant meals — struggle to keep up with booming demand. Policymakers are willing to tolerate that pickup, temporarily. It is a weird period.“The question is more, what the inflation outlook is going to be into the next year, 2022, 2023?” Charles Evans, president of the Federal Reserve Bank of Chicago, said on a call with reporters on Tuesday.Fed officials are watching wage increases and inflation expectations for a sign of whether the current burst of reopening-driven inflation will linger. If pay takes off on a sustained basis, employers may find that they need to charge more to cover their expenses. Likewise, if consumers and businesses start to expect rapid price increases, they may be more willing to accept higher prices, setting off a self-fulfilling prophesy.For now, policymakers don’t expect that to happen.“My best estimate is that this is something that will pass,” Jerome H. Powell, the Fed chair, said in a recent news conference. “It’s really a shock to the economy that will pass through.”Ben Casselman More

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    This Is a Terrible Time for Savers

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    In an upside-down world of financial markets, expected returns after inflation are at record lows.The Bank of England in London earlier this year. Worldwide demographic trends tied to the aging of the baby boom generation have contributed to a glut in savings.Matt Dunham/Associated PressIf you are saving money for the future, one way or another you had best be prepared to lose some of it.That is the implication of today’s upside-down world in the financial markets. The combination of high inflation, strong economic growth and very low interest rates has meant that “real” interest rates — what you can earn on your money after accounting for inflation — are lower than they have been in modern times.This outcome is a result of a glut of global savings and the Federal Reserve’s extraordinary efforts to bring the economy back to health. And it means the choice for a saver is stark. You can invest in safe assets and accept a high likelihood that you will get back less, in terms of purchasing power, than you put in. Or you can invest in risky assets in which you have a shot at positive returns but also a substantial risk of losing money should market sentiment turn negative.“For people who are risk averse, they have to get used to the worst of all possible worlds, which is watching their little pool of capital go down in real terms year after year after year,” said Sonal Desai, the chief investment officer of Franklin Templeton Fixed Income.Inflation outpacing interest rates is good news in certain circumstances: if you are able to borrow money at a fixed rate, for example, and use it to make an investment that will provide something of value over time, whether a house, farmland or equipment for a business.But consider the options if you are not in that position, and instead are saving money that you expect to need five years down the road — for the down payment on a house, or a child’s college expenses.You could keep the money in cash, such as through a bank deposit or money market mutual fund. Short-term interest rates are at zero or very close to it, depending on the specific place the money is parked, and Federal Reserve officials expect to keep rates there for perhaps another couple of years. Inflation has been at 4 percent to 5 percent over the last year, and many forecasters expect it to come down slowly.Or, you could buy a safe Treasury bond that matures in five years. The annual yield on that bond, as of Friday, was 0.77 percent. That means that if annual inflation is above that, the buying power of your savings will diminish over time. The highest-yielding federally insured bank certificates of deposit over that span offer only a little bit more, just over 1 percent.If you’re particularly nervous about rising prices, you could buy a Treasury Inflation Protected Security, a government-issued bond that is indexed to inflation. The five-year yield on TIPS? A negative 1.83 percent. That means that if inflation were 3 percent annually, your holding would return only 3 percent minus 1.83 percent, or 1.17 percent. In exchange for protection against the risk of high inflation, you must tolerate losing nearly 2 percent in purchasing power each year.Then again, you could take on a little more risk and buy, say, corporate bonds. But that adds the risk that the companies that issued the bonds will default — and it’s still only enough to roughly keep up with anticipated inflation. (An index of BBB-rated corporate bonds yielded only 2.19 percent late last week.)The stock market and other risky assets offer potentially higher returns, with some degree of protection from inflation. The corporate profits that are the basis for stock valuations are soaring, one reason major indexes hit record highs in recent days. But this comes with the omnipresent risk of a sell-off — tolerable for people investing for the long run but potentially problematic for those with shorter horizons.This extreme negative real interest rate environment leaves people whose job is to analyze and recommend bond investing strategies with few good options to advise.“It’s hard to even make an argument for fixed income at these levels,” said Rob Daly, the director of fixed income for Glenmede Investment Management. “It’s the old ‘pennies in front of a steamroller trade.’”That is to say: Someone who buys bonds with ultralow yields is collecting puny interest in exchange for taking the substantial risk that higher inflation or a surge in rates could more than wipe out gains (when interest rates rise, existing bonds fall in value).For those reasons, Mr. Daly recommends investors allocate more of their portfolios to cash. Yes, it will pay almost no interest, and so the saver will lose money in inflation-adjusted terms. But that money will be ready to invest in riskier, longer-term investments whenever conditions become more favorable.Similarly, Rick Rieder, the chief investment officer of global fixed income at BlackRock, the huge asset manager, recommends that investors focused on the medium term build a portfolio that combines stocks, which offer upside from rising corporate earnings, with cash, which offers safety even at the cost of negative real returns.“It’s surreal,” Mr. Rieder said. “This is one of those periods of time when the fundamentals are completely detached from reality. Where real rates are today makes no sense relative to the reality we live in.”The Fed, besides keeping its short-term interest rate target near zero, is buying $120 billion in securities every month through its quantitative easing program, and is only now starting to talk about plans to taper those purchases. That has the effect of putting an enormous buyer in the market that is bidding up the price of bonds, and thus pushing rates down.Fed officials believe the strategy of keeping easy monetary policy in place even as the economy is well into its recovery will help bring the American job market back to full health quickly. The aim is also to establish credibility that its 2 percent inflation target is symmetric, meaning that it will not panic when prices temporarily overshoot that target.Many of the people involved in market strategy are less than thrilled with this approach, and the consequences for would-be investors.“Nominal yields are low because of how much the Fed is buying,” said Ms. Desai of Franklin Templeton. “It’s ludicrous given where we are” with growth and inflation.At the same time, Americans have accumulated trillions in extra savings during the pandemic, money they are parking in all sorts of investments, which has been pushing asset prices upward and expected returns down. Arguably, the flip side of low expected returns on safe assets is stratospheric prices for real estate, meme stocks and cryptocurrencies.Globally, demographic trends tied to the aging of the enormous baby boom generation are causing a surge in savings. Gertjan Vlieghe, a top official with the Bank of England, has shown that the pattern of retirement savings evident in Britain and across advanced nations points to continued low interest rates.“We are only about two-thirds of the way through a multidecade demographic transition that is affecting interest rates,” Mr. Vlieghe said in a speech last month. “The key mechanism is not that older people have lower savings rates, but rather that, as people age, they hold higher levels of assets, in particular safe assets,” then spend those savings down slowly when they hit retirement years.That helps explain why interest rates have been persistently low across major economies — in Europe, the United States and Japan in particular — for years, even at times when those economies have been performing relatively well.In other words, Fed policy and the unique economics of the pandemic are major factors in the extremely low rates of summer 2021. But it doesn’t help that these come in an era when so much of the world is eager to save — and that part won’t change anytime soon. More

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    Digital Currency Is a Divided Issue at the Federal Reserve

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    Officials at the Federal Reserve seem to be increasingly divided over whether it ought to issue a digital dollar — a digital currency that traces straight back to the central bank rather than to the private banking sector.Speeches by several Fed officials show they have yet to align on the issue, even as the Fed’s peers in China, parts of Europe and smaller economies like the Bahamas have created digital currencies or are working toward issuing them. The Fed plans to release a report on the potential costs and benefits of a digital dollar this summer.Lael Brainard, a Fed governor appointed during the Obama administration, made it clear during remarks last week that she envisions a future in which America’s central bank explores and issues a digital currency. But Christopher Waller, her colleague on the Fed’s Board of Governors and a Trump nominee, made it equally obvious during a speech on Thursday that he questions whether that is necessary.“The dollar is very dominant in international payments,” Ms. Brainard said during remarks in Aspen, Colo., adding that she could not imagine a situation in which other countries issue digital currencies and the United States doesn’t have one.“I just, I can’t wrap my head around that,” she said. “That just doesn’t sound like a sustainable future to me.”Mr. Waller, by contrast, suggested that there is little a central bank digital offering could do that the private sector cannot and that the potential benefits of a digital dollar are most likely overstated, while the risks are substantial. He added that the United States need not worry about the U.S. dollar’s being supplanted by China’s digital offering.“I am left with the conclusion that a C.B.D.C. remains a solution in search of a problem,” Mr. Waller said on Thursday, referring to a central bank digital currency. He also voiced concerns that a central bank currency would give the Fed too much information about private citizens.Randal K. Quarles, the Fed’s vice chair for supervision, has also sounded dubious about the need for a central bank digital currency, painting the idea as a passing fad. Jerome H. Powell, the Fed chair, has at times questioned whether such an offering is necessary, but he has more recently stressed that it is important to investigate the idea and has called himself “legitimately undecided.”Supporters of central bank digital currency say it is critical for the United States to stay on top of the technology, even if it is not yet clear what benefits such currencies will offer in practice. Some suggest that a Fed digital dollar could prevent stablecoins — private digital assets backed by a bundle of currencies or other assets — from becoming dominant and creating a big financial stability risk.But opponents worry that a central bank digital currency would not offer benefits that the private sector did not or could not provide and that it might introduce cybersecurity vulnerabilities, issues that Mr. Waller raised Thursday.Commercial banks have also pushed back on the idea, worrying that their consumer banking services will be supplanted by Fed accounts and warning that such a situation would cause them to cut back on their lending. Mr. Waller — despite his overall skepticism — sounded unsympathetic to that argument.“There’s a lot of ways that banks could raise funds,” he said, noting that it might hit bank profit margins but that he wouldn’t have an issue with that. “The whole idea is that if they compete, then the funds don’t flow out, so it could be the case that just the existence of a C.B.D.C. causes fees to go down, deposits to go up.” More

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    Big Economic Challenges Await Biden and the Fed This Fall

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    Expiring unemployment benefits and the Delta variant add uncertainty to a recovery that has brought strong growth but an unusual labor market.WASHINGTON — The U.S. economy is heading toward an increasingly uncertain autumn as a surge in the Delta variant of the coronavirus coincides with the expiration of expanded unemployment benefits for millions of people, complicating what was supposed to be a return to normal as a wave of workers re-entered the labor market.That dynamic is creating an unexpected challenge for the Biden administration and the Federal Reserve in managing what has been a fairly swift recovery from a recession. For months, officials at the White House and the central bank have pointed toward the fall as a potential turning point for an economy that is struggling to fully shake off the effects of the pandemic — particularly in the job market, which remains millions of positions below prepandemic levels.The widespread availability of Covid-19 vaccines, the reopening of schools and the expiration of enhanced jobless benefits have been seen as a potent cocktail that should prod workers off the sidelines and into the millions of jobs that employers say they are having trouble filling.But that optimistic outlook might be imperiled by the resurgent virus and policymakers’ response to it. Big companies are already delaying return-to-office plans, an early and visible sign that life may not return to normal as rapidly as expected. At the same time, long-running federal supports for people hurt by the pandemic are going away, including a moratorium on evictions, which ended on Saturday, and an extra $300 per week for unemployed workers. That benefit expires on Sept. 6, and some states have moved to end it sooner.Federal lawmakers are also planning to repurpose more than $200 billion worth of Covid relief to help pay for a $1 trillion infrastructure plan. An infrastructure bill moving through the Senate would rescind previously allocated virus funds for colleges and universities along with unused unemployment benefits and airline aid. It would also claw back unspent funds from some expired small-business programs to help offset the plan’s $550 billion in new spending. Democratic leaders have been adamant that the Senate will vote on the infrastructure bill before leaving Washington for a scheduled August recess.White House economists have said they see no need yet to consider major new measures to bolster the recovery. After months of blockbuster economic growth, falling unemployment numbers, and complaints from business leaders and Republicans that government support is preventing workers from taking jobs, administration officials remain locked into their current policy stance despite renewed risks.Administration officials have said President Biden is not pushing to extend the extra $300 per week for jobless people. It’s unclear whether the administration will try to extend a program that expanded unemployment benefits to workers who would not typically qualify for them, including the self-employed, gig workers and part-timers.Officials say the $1.9 trillion economic aid package that Mr. Biden signed in March, and that caused forecasters to lift their estimates for growth this year, has given the economy enough cushion to endure another surge from the virus. Mr. Biden has also vowed that the virus will not lead to new “lockdowns, shutdowns, school closures and disruptions” like last year’s.“We are not going back to that,” he said last week.White House advisers say the most important thing the president can do for the economy is continue to make the case for more people to get vaccinated. On Thursday, Mr. Biden asked states to use money from the March stimulus package to pay $100 to every newly vaccinated person and said the government would reimburse employers who gave workers time off to be vaccinated or take others to get shots.“We have held the view from the beginning that addressing the pandemic and recovering the economy were inextricably linked. That continues to be true,” Brian Deese, who heads Mr. Biden’s National Economic Council, said in an interview. “But because of the progress that we have made in addressing the pandemic and in putting in place both historic and durable economic policy supports, we have a set of tools right now to address both of these challenges.”The Fed is taking an optimistic but wait-and-see approach. Central bankers voted at their July meeting to leave emergency support in place for now. They gave no precise date for when they may begin to reduce their help for the economy, though they are beginning to draw up a plan for paring back support.Much like their counterparts at the White House, officials at the Fed are counting on solid economic data this autumn. Jerome H. Powell, the Fed chair, said last week that he expected strong labor market progress in the months ahead, partly because virus fears and child care issues should subside.“There’s also been very generous unemployment benefits, which are now rolling off. They’ll be fully rolled off in a couple of months,” Mr. Powell said during a news conference after the Fed’s July meeting. “All of those factors should wane, and because of that we should see strong job creation moving forward.”Administration and Federal Reserve officials have expressed hope that children’s return to schools and fading fears of the virus will encourage more people to begin looking for work again.Whitney Curtis for The New York TimesMr. Biden told a CNN forum in Ohio on July 21 that he still sees no evidence that the supplemental benefits have had a “serious impact” on hiring. But even if they had, he said, they would soon run their course.“We’re ending all those things that are the things keeping people back from going back to work,” he said.That stance carries some risk. While the economy grew faster in the first half of this year than it had in decades, the job market is still missing 6.8 million positions from its February 2020 level, and while policymakers are optimistic, it is not clear how quickly those jobs will come back. The economy has never reopened from a pandemic before, and nobody knows to what degree unemployment insurance is dissuading workers.“Seven to nine million Americans should be working right now if the pandemic had never happened, so that’s a lot of Americans that we need to put back to work,” Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said on CBS’s “Face the Nation” on Sunday. “But is it six months, or is it two years? I’m not sure.”If it takes workers more time to go back into jobs, it could make for a much slower economic recovery than either the Fed or the White House is banking on. Workers stuck on the sidelines without enhanced benefits might pull back on spending, hurting demand and slowing the rapid rebound that has been underway in recent months.So far, administration economists remain heartened by the economic data. Officials said last week that they saw no evidence yet of the Delta variant’s hurting economic activity, and that they were hopeful that the more than 160 million Americans who were vaccinated would not pull back spending even if the variant continued to spread — making this wave of the virus less economically damaging than past ones.And as government spending support for the economy slows down, the Fed is still keeping money cheap to borrow, which should continue to pad economic growth.Shoppers in Los Angeles, where masks are required indoors. New public health guidelines could again chill some economic activity.Alex Welsh for The New York TimesFed officials have said they want to see more proof of the labor market’s healing before they slow their monthly bond purchases, which will be their first step toward a more normal policy setting.Mr. Powell said at his news conference last week that “we’re some way away from having had substantial further progress toward the maximum employment goal.”“I would want to see some strong job numbers,” he added.In the text of a speech on Friday, Lael Brainard, an influential Fed governor, said she wanted to see September economic data to assess whether the labor market was strong enough for the Fed to begin dialing back support, which suggests she would not favor signaling a start to the slowdown until later this fall. But her colleague Christopher J. Waller said in a CNBC interview on Monday that he would probably prefer to begin pulling back bond purchases quickly, if jobs data hold up, perhaps as soon as October.Increases in interest rates — the Fed’s more traditional, and more potent, tool — remain farther away. Most Fed officials in June projected that they would not lift their federal funds rate until 2023 at earliest, because they would like the labor market to return to full strength first.How rapidly the economy can achieve that goal is an open question. Employers regularly complain about the enhanced benefits, but even they have sent mixed messages on whether those are the main driver keeping labor at bay.“Many contacts were optimistic that labor availability would improve in the fall as schools restart and enhanced unemployment benefits end,” the Atlanta Fed’s qualitative report on business conditions found in June. “However, there were several who do not expect labor supply to improve for six to nine months.”Peter Ganong, an economist at the University of Chicago, said that if the pattern that he and his fellow researchers had seen in employment data held, he would not expect a wave of workers to jump back into jobs just because supplemental benefits expired.“So far, we see small employment differences even when vaccines are becoming available,” he said. Mr. Ganong and his co-authors compared the job-finding rates of people whose wages were more fully replaced by supplemental benefits and people whose wages were less fully replaced. They found small and relatively steady differences, even as the economy reopened.But Mr. Ganong cautioned that his research tracked the supplemental insurance. For many workers, unemployment benefits could come to an end altogether as extensions lapse, which may have a bigger effect.There is plenty of room for labor market progress. People in their prime working years are participating in the labor market by working or searching for jobs at much lower rates than before the pandemic — and that metric has made little progress in recent months.“Generally speaking, Americans want to work, and they’ll find their way into the jobs that they want,” Mr. Powell said last week. “It may take some time, though.”Alan Rappeport More

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    Home Prices Are Soaring. Is That the Fed’s Problem?

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    Low interest rates are one reason that the housing market has taken off. They are far from the only one.Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, has been nervously eyeing the housing market as he ponders the path ahead for monetary policy. Home prices are rising at a double-digit pace this year. The typical house in and around the city he calls home sold for $306,031 in June of this year, Zillow estimates, up from $261,710 a year earlier.Several of Mr. Kaplan’s colleagues harbor similar concerns. They are worried that the housing boom could end up looking like a bubble, one that threatens financial stability. And some fret that the central bank’s big bond purchases could be helping to inflate it.“It’s making me nervous that you’ve got this incipient housing bubble, with anecdotal reports backed up by a lot of the data,” James Bullard, the president of the Federal Reserve Bank of St. Louis, said during a call with reporters Friday. He doesn’t think things are at crisis levels yet, but he believes the Fed should avoid fueling the situation further. “We got in so much trouble with the housing bubble in the mid-2000s.”Policymakers don’t need to look far to see escalating prices, because housing is growing more expensive nearly everywhere. Buying a typical home in Boise, Idaho, cost about $469,000 in June, up from $335,000 a year ago, based on Zillow estimates of local housing values. A typical house in Boone, N.C., is worth $362,000, up from $269,000. Prices nationally have risen 15 percent over the past year, Zillow’s data shows, in line with the closely watched S&P CoreLogic Case-Shiller index of home prices, which rose a record 16.6 percent in the year through May.Bidding wars are frustrating buyers. Agents are struggling to navigate frantic competition. About half of small bankers in a recent industry survey said the current state of the housing market poses “a serious risk” to the United States economy. Lawmakers and economic policymakers alike are hoping things calm down — especially because frothy home prices could eventually spill into rent prices, worsening affordability for low-income families just as they face the end of pandemic-era eviction moratoriums and, in some cases, months of owed rent.Industry experts say the current home price boom emerged from a cocktail of low interest rates, booming demand and supply bottlenecks. In short, it’s a situation that many are feeling acutely with no single policy to blame and no easy fix.Fed officials face a particularly tricky calculus when it comes to housing.Their policies definitely help to drive demand. Bond-buying and low Fed interest rates make mortgages cheap, inspiring people to borrow more and buy bigger. But rates aren’t the sole factor behind the home price craze. It also traces back to demographics, a pandemic-spurred desire for space, and a very limited supply of new and existing homes for sale — factors outside of the central bank’s control.“Interest rates are one factor that’s supporting demand, but we really can’t do much about the supply side,” Jerome H. Powell, the Fed chair, explained during recent congressional testimony.It’s an unattractive prospect to pull back monetary support to try to rein in housing specifically, because doing so would slow the overall economy, making it harder for the central bank to foster full employment. The Fed’s policy-setting committee voted Wednesday to keep policy set to full-support mode, and Mr. Powell said at a subsequent news conference that the economy remains short of central bank’s jobs target.But central bank officials also monitor financial stability, so they are keenly watching the price surge.Demand for housing was strong in 2018 and 2019, but it really took off early last year, after the Fed cut interest rates to near-zero and began buying government-backed debt to soothe markets at the start of the pandemic. Mortgage rates dropped, and mortgage applications soared.That was partly the point as the Fed fought to keep the economy afloat: Home-buying boosts all kinds of spending, on washing machines and drapes and kiddie pools, so it is a key lever for lifting the entire economy. Stoking it helps to revive floundering growth.Those low interest rates hit just as housing was entering a societal sweet spot. Americans born in 1991, the country’s largest group by birth year, just turned 30. And as Millennials — the nation’s largest generation — were beginning to think about trading in that fifth-floor walk-up for a home of their own, coronavirus lockdowns took hold.Suddenly, having more space became paramount. For some, several rounds of government stimulus checks made down payments seem more workable. For others, remote work opened the door to new home markets and possibilities.Reina and David Pomeroy, 36 and 35, were living in a rental in Santa Clara, Calif., with their children, ages 2 and 7, when the pandemic hit. Buying at California prices seemed like a pipe dream and they wanted to live near family, so they decided to relocate to the Boulder, Colo., area, near Mr. Pomeroy’s brother.When Reina and David Pomeroy were ready to give up their rented townhouse and buy, they looked outside California to avoid the state’s high home prices.Ulysses Ortega for The New York TimesThey closed in late July, and they move in a few days. Ms. Pomeroy was able to take her job at a start-up remote, and Mr. Pomeroy is hoping that Google, his employer, will allow him to move to its Boulder office. The pair saw between 20 and 30 houses and made — and lost — six offers before finally sealing the deal, over their original budget and $200,000 above the $995,000 asking price on their new 5-bedroom.Their experience underlines the other key issue driving prices up: “There’s not enough inventory for everyone that’s looking,” said Corey Keach, the Redfin agent who helped the Pomeroys find their home.Home supply fell across the residential real estate market following the mid-2000s housing bust, as construction slumped thanks in part to zoning regulations and tough financing standards. Shortages in lumber, appliances and labor have emerged since the pandemic took hold, making it hard for builders to churn out units fast enough.“The rapid price appreciation we’re seeing is Econ 101 unfolding in real time,” said Chris Glynn, an economist at Zillow.There are early signs that the market might be bringing itself under control. Applications for new mortgages have slowed this year, and existing home inventories have risen somewhat. Many housing economists think price increases should moderate later this year.And while the heady moment in American housing does have some echoes of the run-up to the 2008 financial crisis — borrowing made cheap by the Fed is enabling ambitious buying, and investors are increasingly jumping into the market — the differences may be even more critical.Homeowners, like the Pomeroys, have been more able to afford the homes they are buying than they were back in 2005 and 2006. People who get mortgages these days tend to have excellent credit scores, unlike that earlier era.And a big part of the problem in mid-2000s lay on Wall Street, where banks were slicing and dicing bundles of mortgages into complicated financial structures that ultimately came crashing down. Banks were holding a lot of those inventive securities on their balance sheets, and their implosion caused widespread pain in the financial sector that brought lending — and thus business expansions, hiring and spending — to a screeching halt.Banks are now much better regulated. But that isn’t to say that no financial stability risks hide in the current boom.The home price run-up could also help to keep inflation high. The government measures inflation by capturing the costs of what people are regularly consuming — so it counts housing expenses in terms of rents, not home prices.But a skyrocketing housing market is connected to rising rents: it makes it harder for people to make the leap to homeownership, which increases demand for rentals and pushes rents up. That can matter a lot to inflation data, since housing costs tied to rents make up about a third of one key measure. So what can the Fed do about any of this? Officials, including Mr. Bullard, have suggested that it might make sense for the Fed to slow its monthly purchases of Treasury debt and mortgage-backed securities soon, and quickly, to avoid giving housing an unneeded boost by keeping mortgages so cheap.Discussions about how and when the Fed will taper off its buying are ongoing, but most economists expect bond-buying to slow late this year or early next. That should nudge mortgage rates higher and slow the booming market a little.But borrowing costs are likely to remain low by historical standards for years to come. Longer-term interest rates have fallen even as the Fed considers dialing back bond purchases, because investors have grown more glum about the global growth outlook. And the Fed is unlikely to lift its policy interest rate — its more powerful tool — away from rock bottom anytime soon.Ideally, officials would like to see the economy return to full employment before lifting rates, and most don’t expect that moment to arrive until 2023. They’re unlikely to speed up the plan just to cool off housing. Fed officials have for decades maintained that bubbles are difficult to spot in real time and that monetary policy is the wrong tool to pop them.For now, your local housing market boom is probably going to be left to its own devices — meaning that while first time home buyers may end up paying more, they will also have an easier time financing it.“We felt a little bit more comfortable paying more for the house to lock in low interest rates,” said Mr. Pomeroy, explaining that they could have compromised on amenities they wanted but didn’t.“Interest rates are so low and money is cheap,” he said. “Why not do it?” More

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    The Fed’s Favorite Price Index Rose 4 Percent. What Comes Next?

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    The Federal Reserve’s inflation gauge popped in June from a year earlier. Economists think it will begin to moderate.The Federal Reserve’s preferred measure of inflation climbed by 4 percent in June compared with a year earlier, as a rebounding economy and strong demand for goods and services helped to push prices higher.The gains in the Personal Consumption Expenditures inflation index were the fastest since 2008, but in line with economists’ expectations. That rapid pace is not expected to last — and how much and how quickly it will fade is the economic question of the moment.Inflation has been surprisingly quick this year. Economists knew prices would post strong increases as they were measured against weak figures from 2020, when costs for many common purchases slumped. But the jump in recent months has been more intense than most were expecting.Prices for goods and services risePercent change in personal consumption expenditures index from prior year

    Source: Bureau of Economic AnalysisBy The New York TimesThat’s partly because supply bottlenecks have emerged across America’s reopening economy. Computer chip shortages pushed up the prices of electronics and delayed automobile production, causing used car prices to surge as people scrambled to find vehicles. Employers are struggling to hire back workers fast enough to meet returning demand, and wages and prices at restaurants and some other service providers have begun to move higher.Spending remains strong, Friday’s release also showed, climbing 1 percent in June compared with May. That was more than the 0.7 percent pop that economists in a Bloomberg survey had anticipated, and adjusted for inflation, it was still up 0.5 percent.Even as consumer demand holds up, June’s inflation data may be a high point in the price pressure saga. Last year’s low figures are becoming a less important factor, and many economists expect the rapid pace of price gains to begin to moderate in the coming months. A breakneck increase in used vehicle prices, which has been large enough to push overall prices higher, showed signs of moderating in July.Yet how quickly inflation will fall back to the Fed’s 2 percent target, which it tries to hit on average over time, is increasingly uncertain. It is hard to know how quickly the supply chain snarls that have complicated the price picture so far this year will clear up, or whether new ones will emerge. Climbing coronavirus cases around the world and the emergence of new variants, like Delta, could make for continued disturbances in global production and shipping routes, ones that will hit just in time for the back-to-school and the holiday shopping seasons.“The problem with the Delta variant is that the factors that are reducing the supply of goods and labor are elongated and continue,” said Constance L. Hunter, chief economist for the accounting firm KPMG. “This prolongs many of the components of the pandemic that were causing inflation.”Michael Patrick, a chef and restaurateur in Memphis, has had to raise pay for cooks and dishwashers to entice them to return to his upscale Southern food restaurant, Rizzo’s by Michael Patrick. His food costs have risen, too, because supply-chain issues have made it hard to get chicken and other key ingredients. So he has responded by raising menu prices twice in recent months. So far, his customers aren’t complaining.“People aren’t even blinking,” he said. “Not one person has said to me, ‘I can’t believe you raised your price on meatloaf two dollars.’”But Mr. Patrick is concerned about the effects of the Delta variant. Both he and his customers have learned to navigate pandemic life, he said, so he is confident he will be able to maintain sales. But if the resurgence of the virus leads to more shutdowns at meat-processing plants and other food producers, that could pose a bigger challenge.“Canola oil, beef, chicken — it’s all going up because the supplies just weren’t there,” he said. “Hopefully, at the end of the day, these variants don’t cause a lot of these companies to close their doors again.”It will matter for workers how quickly today’s robust price gains fade. Higher prices are taking a bite out of workers’ paychecks. Income after taxes fell 0.5 percent June, accounting for the impact of inflation. Over the past year, inflation has more than offset a modest rise in after-tax income.The data released Friday showed that core inflation, which strips out volatile food and fuel prices and can give a cleaner reading on price trends, picked up by 3.5 percent in June from a year earlier, for the highest annual reading in 30 years.The headline index climbed 0.5 percent from May to June, slightly less than the 0.6 percent that economists in a Bloomberg survey had expected.The fresh inflation data, released by the Commerce Department, came out later than a separate Labor Department inflation report. But they are closely watched because the Fed uses the Personal Consumption Expenditure index — which tracks things people consume but do not directly pay for, like medical care — to judge progress toward its inflation target.“The U.S. economy surprised us all,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a speech on Friday. “Quite a bit of inflation, much more than we have experienced historically. Of course, we do expect that to moderate, but I don’t think it’s going to moderate completely in 2022.”The Fed is willing to look through inflation it expects to be temporary, but it would be concerned if it saw rapid price gains turning into a stickier situation. Officials are especially watching trends like rising wages for a sense of whether price gains will last.Wages and salaries rose 0.9 percent in the second quarter, slightly slower than in the first three months of the year, according to separate data released Friday by the Labor Department. But pay is rising rapidly in some industries that are reopening as the pandemic ebbs: Wages in the leisure and hospitality sector rose 2.8 percent in the second quarter, and are up 6.1 percent over the past year.Service workers are getting raisesPercent change from prior quarter in private-sector wages and salaries

    Note: Data is seasonally adjustedSource: Bureau of Labor StatisticsBy The New York TimesShould pay increases turn into a cycle — one in which workers regularly ask for more money to cover rising costs, and employers give raises but pass the expense on — it could make for persistent inflation down the road. Fed officials generally do not think that is happening right now.“There is a form of wage inflation that can lead to price inflation, and we’re not seeing that right now,” Jerome H. Powell, the central bank’s chair, said at a news conference on Wednesday.Mr. Powell and many of his colleagues have maintained that price pressures should fade as the economy gets back to normal — Mr. Bullard is among the more concerned Fed officials when it comes to inflation. Many central bankers point out that even though inflation has come in hot in recent months, consumer expectations for future inflation remain at historically normal levels.White House economic officials have been stressing similar points, and arguing that high inflation is no reason to dial back their policy ambitions, which they say would not add to price pressures. The Biden administration is trying to shepherd a $1 trillion bipartisan infrastructure bill through Congress, one that includes $550 billion in new spending to make far-reaching investments in the nation’s transit and public works.But Republicans have seen rising inflation as a poignant way to criticize the Biden administration, which they say is mismanaging the economic reopening and allowing prices to gallop out of control.“There’s no question we have serious inflation right now,” Senator Patrick J. Toomey, a Republican from Pennsylvania, said in a CNN interview last week. “There is a question about how long it lasts. And I’m just worried that the risk is high that this is going to be with us for a while.”Even some central bankers are becoming wary as inflation rises.“The risk on inflation is that it does not fall back as rapidly as we had hoped, or that we get some other kind of shock that sends inflation even higher in 2022,” Mr. Bullard said on Friday. He argued that the central bank ought to start slowing down its big bond-buying campaign, so that it can finish that “taper” early next year and be prepared to lift interest rates as necessary.“It’s not that we’d have to lift off sooner,” he said. “But we’d want to have the option.” More

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    The Fed’s favorite price index rose 4 percent.

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    The Federal Reserve’s favorite inflation index climbed by 4 percent in June compared with a year earlier, as a rebounding economy and soaring demand for goods helped to push prices higher.The gains in the Personal Consumption Expenditures inflation index were the fastest since 2008, but in line with economists expectations. That rapid pace is not expected to last, but how much and how quickly it will fade is the economic question of the moment.Inflation has been surprisingly rapid this year. Economists knew prices would post strong increases as they were measured against weak figures from 2020, when costs for many common purchases slumped. But the jump has been more intense than most were expecting.That’s partly because supply bottlenecks have emerged across America’s reopening economy. Computer ship shortages pushed up the prices of electronics and delayed automobile production, causing used car prices to surge. Employers are struggling to hire back workers fast enough to meet returning demand, and prices for restaurant meals and some other services have begun to move higher.June’s personal consumption expenditure price data may be a high point in the inflationary saga. Last year’s low figures are fading from the data, and many economists expect the rapid pace of price gains to begin to moderate in the coming months.On a monthly basis, inflation climbed 0.5 percent from May to June, slightly less than the 0.6 percent economists in a Bloomberg survey had expected. The core inflation index, which strips out volatile food and fuel, climbed 3.5 percent over the past year.How quickly inflation will fall back to the Fed’s 2 percent target, which it tries to hit on average over time, is increasingly uncertain. It is hard to know how quickly the supply chain snarls that have complicated the price picture so far this year will clear up, or whether new ones will emerge. Climbing coronavirus cases around the world could make for continued disturbances in global production and shipping routes, ones that will hit just in time for back-to-school and the holiday shopping season. More