Inflation (Economics)

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    The Federal Reserve Meets Wednesday. Here’s What to Watch.

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    Officials are likely to keep interest rates unchanged at the conclusion of their January meeting. Here’s a look at what might come next.Federal Reserve officials will conclude their two-day meeting on Wednesday, and they are widely expected to keep interest rates steady at a two-decade high when they release their policy decision at 2 p.m.But investors are likely to closely watch the meeting — particularly Chair Jerome H. Powell’s 2:30 p.m. news conference — for hints of when policymakers might begin to lower interest rates. The Fed has held its policy rate in a range of 5.25 to 5.5 percent since July, and officials projected in December that they might lower borrowing costs by three-quarters of a percentage point over the course of 2024.But both the timing and the magnitude of those rate cuts remain uncertain. On the one hand, inflation has come down more swiftly than many economists had expected in recent months. On the other, economic growth is proving stronger than anticipated, which could give companies the wherewithal to keep raising prices into the future.Here’s what to know about this meeting.The Fed’s statement could change.The Fed’s post-meeting policy statement has suggested that officials will watch economic data “in determining the extent of any additional policy firming that may be appropriate.” Now that further rate increases are looking less and less likely, that language may be in for a tweak.Powell has a delicate balancing act.Fed officials do not want to keep interest rates so high for so long that they squeeze the economy too much and tip it into a recession. On the other hand, they do not want to cut rates too much too early, allowing the economy to accelerate and risking a renewed pickup in inflation. Mr. Powell could talk about how officials will try to strike that balance.Growth vs. inflation will be critical.A lot of what comes next will hinge on which numbers Mr. Powell and his colleagues decide to focus on — growth or inflation — and investors might get a hint at that this week. Growth and consumer spending are both faster than many economists had expected. But the Fed’s preferred inflation gauge is also below 3 percent for the first time since early 2021, even after stripping out food and fuel costs, which can fluctuate from month to month.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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    Global Economy Is Heading Toward ‘Soft Landing,’ I.M.F. Says

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    The International Monetary Fund upgraded its growth forecasts and offered a more optimistic outlook for the world economy.The global economy has been battered by a pandemic, record levels of inflation, protracted wars and skyrocketing interest rates over the past four years, raising fears of a painful worldwide downturn. But fresh forecasts published on Tuesday suggest that the world has managed to defy the odds, averting the threat of a so-called hard landing.Projections from the International Monetary Fund painted a picture of economic durability — one that policymakers have been hoping to achieve while trying to manage a series of cascading crises.In its latest economic outlook, the I.M.F. projected global growth of 3.1 percent this year — the same pace as in 2023 and an upgrade from its previous forecast of 2.9 percent. Predictions of a global recession have receded, with inflation easing faster than economists anticipated. Central bankers, including the Federal Reserve, are expected to begin cutting interest rates in the coming months.“The global economy has shown remarkable resilience, and we are now in the final descent to a soft landing,” said Pierre-Olivier Gourinchas, the chief economist of the I.M.F.Policymakers who feared they would need to hit the brakes on economic growth to contain rising prices have managed to tame inflation without tipping the world into a recession. The I.M.F. expects global inflation to fall to 5.8 percent this year and 4.4 percent in 2025 from 6.8 percent in 2023. It estimates that 80 percent of the world’s economies will experience lower annual inflation this year.The brighter outlook is due largely to the strength of the U.S. economy, which grew 3.1 percent last year. That robust growth came despite the Fed’s aggressive series of rate increases, which raised borrowing costs to their highest levels in 22 years. Consumer spending in America has held strong while businesses have continued to invest. The I.M.F. now expects the U.S. economy to grow 2.1 percent this year, up from its previous prediction of 1.5 percent.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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    Why Cut Rates in an Economy This Strong? A Big Question Confronts the Fed.

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    The central bank is widely expected to lower interest rates this year. But with growth and consumer spending chugging along, explaining it may take some work.The Federal Reserve is widely expected to leave interest rates unchanged at the conclusion of its meeting on Wednesday, but investors will be watching closely for any hint at when and how much it might lower those rates this year.The expected rate cuts raise a big question: Why would central bankers lower borrowing costs when the economy is experiencing surprisingly strong growth?The United States’ economy grew 3.1 percent last year, up from less than 1 percent in 2022 and faster than the average for the five years leading up to the pandemic. Consumer spending in December came in faster than expected. And while hiring has slowed, America still boasts an unemployment rate of just 3.7 percent — a historically low level.The data suggest that even though the Fed has raised interest rates to a range of 5.25 to 5.5 percent, the highest level in more than two decades, the increase has not been enough to slam the brakes on the economy. In fact, growth remains faster than the pace that many forecasters think is sustainable in the longer run.Fed officials themselves projected in December that they would make three rate cuts this year as inflation steadily cooled. Yet lowering interest rates against such a robust backdrop could take some explaining. Typically, the Fed tries to keep the economy running at an even keel: lowering rates to stoke borrowing and spending and speed things up when growth is weak, and raising them to cool growth down to make sure that demand does not overheat and push inflation higher.The economic resilience has caused Wall Street investors to suspect that central bankers may wait longer to cut rates — they were previously betting heavily on a move down in March, but now see the odds as only 50-50. But, some economists said, there could be good reasons for the Fed to lower borrowing costs even if the economy continues chugging along.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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    Economists Predicted a Recession. Instead, the Economy Grew.

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    A widely predicted recession never showed up. Now, economists are assessing what the unexpected resilience tells us about the future.The recession America was expecting never showed up.Many economists spent early 2023 predicting a painful downturn, a view so widely held that some commentators started to treat it as a given. Inflation had spiked to the highest level in decades, and a range of forecasters thought that it would take a drop in demand and a prolonged jump in unemployment to wrestle it down.Instead, the economy grew 3.1 percent last year, up from less than 1 percent in 2022 and faster than the average for the five years leading up to the pandemic. Inflation has retreated substantially. Unemployment remains at historic lows, and consumers continue to spend even with Federal Reserve interest rates at a 22-year high.The divide between doomsday predictions and the heyday reality is forcing a reckoning on Wall Street and in academia. Why did economists get so much wrong, and what can policymakers learn from those mistakes as they try to anticipate what might come next?It’s early days to draw firm conclusions. The economy could still slow down as two years of Fed rate increases start to add up. But what is clear is that old models of how growth and inflation relate did not serve as accurate guides. Bad luck drove more of the initial burst of inflation than some economists appreciated. Good luck helped to lower it again, and other surprises have hit along the way.“It’s not like we understood the macro economy perfectly before, and this was a pretty unique time,” said Jason Furman, a Harvard economist and former Obama administration economic official who thought that lowering inflation would require higher unemployment. “Economists can learn a huge, healthy dose of humility.”Economists, of course, have a long history of getting their predictions wrong. Few saw the global financial crisis coming earlier this century, even once the mortgage meltdown that set it off was well underway. We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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    U.S. Economy Grew at 3.3% Rate in Latest Quarter

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    The increase in gross domestic product, while slower than in the previous period, showed the resilience of the recovery from the pandemic’s upheaval.The U.S. economy continued to grow at a healthy pace at the end of 2023, capping a year in which unemployment remained low, inflation cooled and a widely predicted recession never materialized.Gross domestic product, adjusted for inflation, grew at a 3.3 percent annual rate in the fourth quarter, the Commerce Department said on Thursday. That was down from the 4.9 percent rate in the third quarter but easily topped forecasters’ expectations and showed the resilience of the recovery from the pandemic’s economic upheaval.The latest reading is preliminary and may be revised in the months ahead.Forecasters entered 2023 expecting the Federal Reserve’s aggressive campaign of interest-rate increases to push the economy into reverse. Instead, growth accelerated: For the full year, measured from the end of 2022 to the end of 2023, G.D.P. grew 3.1 percent, up from less than 1 percent the year before and faster than the average for the five years preceding the pandemic. (A different measure, based on average output over the full year, showed annual growth of 2.5 percent in 2023.)“Stunning and spectacular,” Diane Swonk, chief economist at KPMG, said of the latest data. “We’ll take the win.” More

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    A Fed Governor Reiterates That Rate Cuts Are Coming

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    Christopher Waller, one of seven Washington-based Fed governors, said officials should cut rates as inflation cools — though timing was uncertain.A prominent Federal Reserve official on Tuesday laid out a case for lowering interest rates methodically at some point this year as the economy comes into balance and inflation cools — although he acknowledged that the timing of those cuts remained uncertain.Christopher Waller, one of the Fed’s seven Washington-based officials and one of the 12 policymakers who get to vote at its meetings, said during a speech at the Brookings Institution on Tuesday that he saw a case for cutting interest rates in 2024.“The data we have received the last few months is allowing the committee to consider cutting the policy rate in 2024,” Mr. Waller said. While noting that risks of higher inflation remain, he said, “I am feeling more confident that the economy can continue along its current trajectory.”Mr. Waller suggested that the Fed should lower interest rates as inflation falls. Because interest rates do not incorporate price changes, otherwise so-called real rates that are adjusted for inflation would otherwise be climbing as inflation came down, thus weighing on the economy more and more heavily.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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    U.S. Added 216,000 Jobs in December, Outpacing Forecasts

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    Hiring has throttled back from 2021 and 2022, but last year’s growth was still impressive by longer-term standards.The U.S. labor market ended 2023 with a bang, gaining more jobs than experts had expected and buoying hopes that the economy can settle into a solid, sustainable level of growth rather than fall into a recession.Employers added 216,000 jobs in December on a seasonally adjusted basis, the Labor Department reported on Friday. The unemployment rate was unchanged at 3.7 percent.Although hiring has slowed in recent months, layoffs remain near record lows. The durability of both hiring and wage gains is all the more remarkable in light of the Federal Reserve’s aggressive series of interest rate increases in the past couple of years. But a range of analysts warns that the coast is not yet clear and says the effects of those higher rates will take time to filter through business activity.“The real test for the labor market begins now, and so far it is passing the test,” said Daniel Altman, the chief economist at Instawork, a digital platform that connects employers with job seekers.Financial commentary in the past year has been dominated by dueling narratives about the economy. Most economists warned that the Fed’s driving up borrowing costs at a historically rapid pace would send the economy into a downturn. Heading into 2023, over 90 percent of chief executives surveyed by the Conference Board said they were expecting a recession. And many leading analysts thought that price increases could soften only if workers experienced significant job losses.But the resilience of the overall economy and consumer spending has so far defied that outlook: In June 2022, inflation was roughly 9 percent. Inflation has since tumbled to 3 percent while the unemployment rate has been largely unmoved.The economy gained 2.7 million jobs in 2023.Annual change in jobs More

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    Fed Minutes Showed Officials Feeling Better About Inflation

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    Central bankers wanted to signal that interest rates were likely at or near their peak while keeping their options open, December minutes showed.Federal Reserve officials wanted to use their final policy statement of 2023 to signal that interest rates might be at their peak even as they left the door open to future rate increases, minutes from their December meeting showed.The notes, released on Wednesday, explained why officials tweaked a key sentence in that statement — adding “any” to the phrase pledging that officials would work to gauge “the extent of any additional policy firming that may be appropriate.” The point was to relay the judgment that policy “was likely now at or near its peak” as inflation moderated and higher interest rates seemed to be working as planned.Federal Reserve officials left interest rates unchanged in their Dec. 13 policy decision and forecast that they would cut borrowing costs three times in 2024. Both the meeting itself — and the fresh minutes describing the Fed’s thinking — have suggested that the central bank is shifting toward the next phase in its fight against rapid inflation.“Several participants remarked that the Committee’s past policy actions were having their intended effect of helping to slow the growth of aggregate demand and cool labor market conditions,” the minutes said at another point. Given that, “they expected the Committee’s restrictive policy stance to continue to soften household and business spending, helping to promote further reductions in inflation over the next few years.”The Fed raised interest rates rapidly starting in March 2022, hoping to slow down economic growth by making it more expensive for households and businesses to borrow money. The economy has remained surprisingly resilient in the face of those moves, which pushed interest rates to their highest level in 22 years.But inflation has cooled sharply since mid-2023, with the Fed’s preferred measure of price increases climbing 2.6 percent in the year through November. While that is still faster than the central bank’s 2 percent inflation goal, it is much more moderate than the 2022 peak, which was higher than 7 percent. That has allowed the Fed to pivot away from rate increases.Officials had previously expected to make one final quarter-point move in 2023, which they ultimately skipped. Now, Wall Street is focused on when they will begin to cut interest rates, and how quickly they will bring them down. While rates are currently set to a range of 5.25 to 5.5 percent, investors are betting that they could fall to 3.75 to 4 percent by the end of 2024, based on the market pricing before the minutes were released. Many expect rate reductions to begin as soon as March.But Fed officials have suggested that they may need to keep interest rates at least high enough to weigh on growth for some time. Much of the recent progress has come as supply chain snarls have cleared up, but further slowing may require a pronounced economic cool-down.“Several participants assessed that healing in supply chains and labor supply was largely complete, and therefore that continued progress in reducing inflation may need to come mainly from further softening in product and labor demand, with restrictive monetary policy continuing to play a central role,” the minutes said.Other parts of the economy are showing signs of slowing. While growth and consumption have remained surprisingly solid, hiring has pulled back. Job openings fell in November to the lowest level since early 2021, data released Wednesday showed.Some Fed officials “remarked that their contacts reported larger applicant pools for vacancies, and some participants highlighted that the ratio of vacancies to unemployed workers had declined to a value only modestly above its level just before the pandemic,” the minutes noted.Fed officials also discussed their balance sheet of bond holdings, which they amassed during the pandemic and have been shrinking by allowing securities to expire without reinvesting them. Policymakers will need to stop shrinking their holdings at some point, and several officials “suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public.” More