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    The Pandemic Is Testing the Federal Reserve’s New Policy Plan

    Year 1 of the Fed’s framework, unveiled at its Jackson Hole conference in 2020, has included high inflation and job market healing. Now comes the hard part.When Jerome H. Powell speaks at the Federal Reserve’s biggest annual conference on Friday, he will do so at a tense economic moment, as prices rise rapidly while millions of jobs remain missing from the labor market. That combination promises to test the meaning of a quiet revolution the central bank chair ushered in one year ago.Mr. Powell used his remarks at last year’s conference, known as the Jackson Hole economic symposium and held by the Federal Reserve Bank of Kansas City, to announce that Fed officials would no longer raise interest rates to cool off the economy just because joblessness was falling and inflation was expected to heat up. They first wanted proof that prices were climbing sustainably, and they would welcome gains slightly above their 2 percent goal.He was laying groundwork for a far more patient Fed approach, acknowledging the grim reality that across advanced economies, interest rates, growth and inflation had spent the 21st century slipping lower in a strength-sapping downward spiral. The goal was to stop the decline.But a year later, that backdrop has shifted, at least superficially. Big government spending in response to the pandemic has pushed consumption and growth higher in the United States, and inflation has rocketed to levels not seen in more than a decade. The labor market is swiftly healing, though it has yet to fully recover. Now it falls to Mr. Powell to explain why full-blast support from the Fed remains necessary.Investors initially expected Mr. Powell to use Friday’s remarks at the Jackson Hole conference to lay out the Fed’s plan for “tapering” — or slowing down — a large-scale bond buying program it has been using to support the economy. Fed officials are debating the timing of such a move, which will mark their first step toward a more normal policy setting. But after minutes from the central bank’s July meeting suggested that the discussion remained far from resolved, and as the Delta variant pushes coronavirus infections higher and threatens the economic outlook, few now anticipate a clear announcement.“Two to three months ago, people were expecting the whole taper plan at Jackson Hole,” said Priya Misra, head of global rates strategy at TD Securities. “Now, it’s more the economic outlook that people are struggling with.”While Mr. Powell expects price increases to fade, he has been clear that the Fed will act to choke off inflationary pressures if they don’t abate.An Rong Xu for The New York TimesMr. Powell’s speech, which will be virtual, could instead give him a chance to explain how the Fed is thinking about Delta variant risks, recent rapid inflation and labor market progress — and how all three square with the central bank’s policy approach.The Fed is buying $120 billion in government-backed bonds each month, and it has kept its main interest rate near zero since March 2020. Both policies make borrowing cheap, fueling spending by businesses and households and bolstering the labor market.Officials have clearly linked their interest rate plans to their new framework: They said in September that they would not lift rates until the job market reached full employment. Bond buying ties back less directly, but it serves as a signal of the Fed’s continued patience.Critics of the Fed’s wait-and-see stance have questioned whether it is wise for the Fed to buy mortgage-backed and Treasury debt at a rapid clip when home prices have soared and inflation has been taking off. Republican lawmakers and some prominent Democrats alike have worried that the Fed is being insufficiently nimble as economic conditions change.“They chose a framework that was designed to provide a commitment to a highly dovish policy,” said Lawrence H. Summers, a Treasury secretary in the Clinton administration and an economist at Harvard University. “The problem morphed into overheating being the big concern, rather than underheating.”Inflation jumped to 4 percent in June, based on the Fed’s preferred measure. Most economists expect rapid price gains to fade as pandemic-related supply bottlenecks clear up, but it is unclear how quickly and fully that will happen.And while there are still nearly seven million fewer jobs than there were before the pandemic, unfilled positions have jumped, wages for lower earners are taking off, and employers widely complain about being unable to hire enough workers. If labor costs remain higher, that, too, could cause longer-lasting inflation pressures.Some Fed officials would prefer to slow bond purchases soon, and fast, so that the central bank is in a position to raise interest rates next year if price pressures do become pernicious.Other policymakers see today’s rising prices and job openings as trends that are destined to abate. Companies will work through supply-chain disruptions, and consumers will spend away savings they amassed from government stimulus checks and months stuck at home. Workers will settle into jobs. When things return to normal, they reason, the tepid inflation of years past will probably return.Given that view, and the fact that the labor market is still missing so many positions, they argue that the Fed’s new policy paradigm calls for patience.At the central bank’s meeting in late July, minutes showed, a few officials fretted that the Fed “would need to be mindful of the risk that a tapering announcement that was perceived to be premature could bring into question the committee’s commitment to its new monetary policy framework.”Mr. Powell typically tries to balance both concerns in his public remarks, acknowledging that inflation could remain elevated and pledging that the Fed will react if it does. But he has also emphasized that recent price pops are more likely to fade and that the central bank would prefer to remain helpful as the labor market healed.But in the months ahead, the Fed will need to make actual decisions, putting the meaning of its new framework to a very public test. Economists generally expect the central bank to announce a plan to slow its bond purchases in November or December.Once that taper is underway, attention will turn to interest rates, most likely with inflation still above 2 percent and the labor market recovery still at risk. When the Fed lifts rates will determine just how transformative the new policy framework has been.As of the Fed’s June economic forecasts, most officials did not expect to raise borrowing costs from rock bottom until 2023. If that transpires, it will be a notable shift from years past, one that allows the labor market to heal much more completely before significantly removing monetary help.In 2015, when the Fed last lifted interest rates from near zero, the joblessness rate was 5 percent and 77 percent of people between the ages of 25 and 54 worked. Already, joblessness is 5.4 percent and 78 percent of prime-age adults work.In fact, Fed officials projected that rates would remain on hold even as joblessness fell to 3.8 percent by the end of next year — below their estimate of the rate consistent with full employment in the longer run, which is about 4 percent.“That’s the most exciting part of what’s changed: They’re shooting for an ambitious prepandemic labor market,” said Skanda Amarnath, executive director of Employ America, a group that tries to persuade economic policymakers to focus on jobs. “Some fig leaf of progress is not enough.”But risks loom in both directions.If inflation remains high and an overly sanguine Fed has to rapidly reverse course to try to contain it, that could precipitate a painful recession.But if the Fed withdraws support unnecessarily, the labor market could take longer to heal, and investors might see the changes that Mr. Powell announced last year as a minor tweak rather than a meaningful commitment to raising inflation and fostering a more inclusive labor market.In that case, the economy might plunge back into a cycle of long-run stagnation, much like the one that has confronted Japan and much of Europe.“This is going to be an episode that will test the patience and credibility of the Federal Reserve,” said David Wilcox, a former Fed staff official who is now director of U.S. economics research at Bloomberg Economics. 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    What an Adult Tricycle Says About the World’s Bottleneck Problems

    The supply-chain problems rocking companies may get worse heading into the holidays, as delays continue to snarl global trade and shipping prices jump even higher.Catrike has 500 of its three-wheeled bikes sitting in its workshop in Orlando, Fla., nearly ready to be sent to expectant dealers. The recumbent trikes have been waiting for months for rear derailleurs, a small but crucial part that is built in Taiwan.“We’re sitting on $2 million in inventory for one $30 part,” said Mark Egeland, the company’s general manager.The company’s problems offer a window into how supply-chain disruptions are rocking companies in the United States and around the world, pushing inflation higher, delaying deliveries and exacerbating economic uncertainty.It is unclear when the snarls will clear up — and it’s possible they will get worse before they get better. The holiday season is right around the corner, American companies are running light on inventory, and coronavirus outbreaks continue to shut factories around the world. Demand for goods remains strong as households use money saved during months stuck at home to buy athletic equipment, couches and clothing.That could keep pressure on global goods producers and the transportation routes that serve them even as consumers begin to redirect their spending back toward dinners out and theater tickets — a shift that many analysts had hoped would help supply chains return to normal.The critical questions for economic policymakers are how long the problems will last and how much they will feed into consumer prices, which have jumped sharply this year, both because of data quirks and bottlenecks. Federal Reserve officials regularly say they expect the faster price gains to prove “transitory,” but they are careful to stress that supply chains are a major source of lingering uncertainty, making it unclear how quickly rapid gains will fade.“I’m less in that ‘transitory’ camp,” said Phil Levy, the chief economist at Flexport, which tracks ocean shipments and helps importers plan so that their parts can get in by desired dates. “And more in the ‘we have reason to be concerned’ camp.”Container costs have rocketed up. Earlier this month, container shipping rates from China and East Asia to the United States’ East Coast climbed above $20,000, compared with about $4,000 a year ago, according to data from the freight-tracking firm Freightos. Those attractive high prices are encouraging ships to abandon other routes, causing the problem to spread. And shipping issues have been exacerbated by related imbalances: Boats are backing up at ports, and as demand for goods booms in the United States, empty shipping containers haven’t been able to get back to China fast enough.Chris Miller assembling a wheel for a Catrike. The company thinks that sorting out its supply issues could take 12 to 18 months.Octavio Jones for The New York TimesSome suppliers are eating higher production and transport costs. Full Speed Ahead, which produces crank sets for Catrike, has seen expenses increase as the demand for raw aluminum has risen. Shipping costs are also four to five times what they were a year ago, said Mark Vandermolen, the company’s managing director.Full Speed Ahead has passed “very little, if any at all,” of those cost increases on to customers, he said, and he hopes to “maintain pricing for as long as possible until it is no longer sustainable.”But not all of Catrike’s suppliers have absorbed climbing costs, and whether higher prices for components make for more expensive consumer products — actual inflation, as it is conventionally measured — depends on how companies like Catrike and the dealers they work through decide to adjust.Catrike raised prices by $200 early this year, its first adjustment since 2010, to cover costs. But the company is at a “sweet spot” where it’s outperforming competitors by offering affordable products, so it would prefer to leave prices steady now, Mr. Egeland said.He’s also cautious: Catrike hasn’t printed prices in its newest catalog, in case rising expenses make another increase necessary.The Fed — which has primary responsibility for keeping inflation steady — has made clear that it is content to look past a recent pop in inflation. If companies lift prices once or twice amid reopening challenges, the central bank can tolerate that as a one-off change.Officials would worry more if price increases dragged on for months or years. If that happens, consumers and businesses alike could come to expect consistently higher prices. They might demand higher pay, and a cycle of inflationary increases could take off.It will take time to know whether the bottlenecks will lead to more permanent damage. Supply chains are still badly snarled. The time it takes for parts from one of Catrike’s suppliers to arrive by sea in North America from a factory in Indonesia has jumped to three months, and sometimes it takes four — double what it took before. Estimates from Flexport confirm the problem is widespread along that shipping route. More

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    Biden and the Fed Wanted a Hot Economy. There’s Risk of Getting Burned.

    So far, in a real-world test of a new approach to economic policy, prices have been rising faster than wages.Seen at a U-Haul in Overland, Mo., earlier this summer. A “high-pressure” economy has brought more people into the labor market and pushed up wages at the lower end of the income scale. Whitney Curtis for The New York TimesThere is a big idea in economic policy that has become ascendant in recent years: Great things can be achieved for American workers if the economy is allowed to run hot.The notion of creating a “high-pressure” economy is that government should be willing to risk a bit of inflation in the near term to achieve conditions that will over the long run lift people out of poverty, prevent the scars of recessions from becoming permanent, and make the nation’s economic potential stronger.This idea has origins in a 1973 paper by Arthur M. Okun, and was largely confined to think tank conferences in the 2010s. Now, it is the intellectual underpinning of American economic policy, embraced at the highest levels by the Biden administration and the Federal Reserve.It makes for a real-world test of a new approach to economic policy. The results so far show that pushing the economic accelerator to the floor has trade-offs, specifically the combination of trillions in federal spending with interest rates held near zero.While that combination has some created some important beneficial effects, the summer of 2021 has not produced quite the high-pressure economy its enthusiasts were hoping for.The good news is that job openings are abundant, wages for people at the lower end of the pay scale are rising quickly, and it appears that the post-pandemic recovery won’t be like the long slog that followed the three previous recessions.But consumer prices have been rising faster than average wages — meaning that, on average, workers are seeing the purchasing power of their paycheck fall. People looking to buy a car or build a house or obtain a wide variety of other products are finding it hard to do so. And while much of that reflects temporary supply disruptions that should abate in coming months, other forces could keep prices rising. These include soaring rents and the delayed effects of higher prices from companies having to pay higher wages.“I don’t think of the last few months as either vindication or repudiation, yet,” said Josh Bivens, director of research at the Economic Policy Institute and a longtime enthusiast of policymakers seeking a high-pressure economy.In effect, unlike the slow-moving developments of the 2010s, when the debates over running the economy hot took shape, things are moving so fast right now that it is hard to be sure how things will look as conditions stabilize.Still, “I think the benefits of carrying on the go-for-growth strategy will come,” Mr. Bivens said, noting exceptionally strong job creation in recent months.A more traditional view has been that it is unwise for policymakers to try to push unemployment too low, because doing so will generate inflation. That thinking lost credibility as the 2010s progressed — the jobless rate fell ever lower, with few signs of an inflation spike.But while the tight labor market from 2017 to 2019 generated strong inflation-adjusted wage gains for workers, especially at the lower end of the pay scale, there is nothing automatic about that process. In a booming economy, if companies raise prices more rapidly than they increase worker pay — taking a higher markup on the products they sell — it will mean workers are effectively making less for each hour of work.In the past, it has cut both ways. In the strong economies of the late 1960s and late 1990s, average hourly earnings for nonmanagerial workers persistently rose faster than inflation. In the late 1980s, the reverse was true.And it is also true now. Wages and salaries in the private sector were up 3.6 percent in the second quarter from a year earlier, according to Employment Cost Index data, the strongest since 2002. But the Consumer Price Index was up 4.8 percent in that same span, meaning workers lost ground. Other measures of compensation and inflation tell a similar story.One big question is whether elevated inflation is simply an unavoidable consequence of the reopening of the economy after a pandemic, or is at least partly a result of the aggressive use of fiscal and monetary policy to heat up the economy quickly.For example, automobile prices are through the roof, which analysts attribute mainly to microchip shortages caused by production decisions made during the pandemic. But is part of the spike in prices also a result of high demand, spurred by stimulus checks the government has sent and low interest rates that make car loans cheap?Jason Furman, a Harvard economist and former chairman of the White House Council of Economic Advisers, points out that the United States is experiencing significantly higher inflation than other countries that are facing the same supply problems. Consumer prices rose 2.2 percent in the year ended in July in the euro area, compared with 5.4 percent in the United States.“My guess is that real wage growth is faring better right now in Europe than it is in the United States, and it’s faring better because there is less demand and thus less inflation,” Mr. Furman said.The story is better when you look at how lower-paid workers in the United States are doing. The shortages of workers, especially in service industries, are translating into raises for people who don’t make a lot. Data from the Federal Reserve Bank of Atlanta shows that median hourly wages for people in the bottom 25 percent of earners have risen at a 4.6 percent rate over the last year, compared with 2.8 percent for the top 25 percent.And many of the benefits of a hot economy come in the form of pulling more people into the work force and enabling them to work more hours. Employers have added an average of 617,000 jobs a month so far in 2021, versus 173,000 a month in 2011, in the aftermath of the global financial crisis. If sustained, the United States is on track to return to its prepandemic employment level two years after the recession ended. Such a recovery took five years after the previous recession.Advocates of running a hot economy emphasize that a rapid recovery is good for reducing inequality, in part by ensuring there are plenty of job opportunities so that people don’t have to be out of work for long stretches.“We are seeing ongoing stimulus and expanded income support programs doing what they’re supposed to do,” said J.W. Mason, a fellow at the Roosevelt Institute and a longtime proponent of running the economy hot. “The numbers we should really be looking at are employment growth and wage growth, especially at the low end, and those trends are positive and encouraging. They’re the numbers we would have hoped to see at the beginning of the year.”In the late years of the last expansion, employment gains were particularly strong for racial minorities, people with low levels of education, and some others who often have a hard time getting hired.“The thing we know for certain is that when you run a hot economy, people get jobs who wouldn’t otherwise get jobs,” Mr. Furman said. “That by itself is sufficient reason to want to run a hot economy. You’re talking about some of the most vulnerable workers getting hired, and that’s a wonderful thing.”Still, even some supporters of running the economy hot see risk that the scale and pace of stimulus actions have been too much.“It’s not that my commitment to a tight labor market has weakened,” said Michael Strain of the American Enterprise Institute, one of the center-right voices who favored the approach. “It’s that the specific policy mix is a mistake, for a bunch of reasons. There is such a thing as too much stimulus, which becomes counterproductive, either because inflation eats away wage gains or the supply side of the economy can’t keep up.”Even people who believe in a high-pressure economy, in other words, would do well to keep an eye on just how high that pressure is getting, and how sustainable it really is. More

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

    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

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

    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.

    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

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    Federal Reserve Keeps Rates Unchanged but Cites ‘Progress’ Toward Goals

    The central bank gave the clearest hint yet that it will soon begin to shift bond-buying from emergency mode.The chair, Jerome H. Powell, said the Fed was keeping interest rates unchanged and would continue to buy large amounts of government debt, but suggested that these purchases could taper off as recovery continued.Stefani Reynolds for The New York TimesThe Federal Reserve on Wednesday offered the most direct signal yet that it will begin to dial back its emergency support for the economy in the near future, as its chair, Jerome H. Powell, made it clear that policymakers will do so deliberatively and with plenty of warning.Fed officials voted to leave both of their key policy supports intact before wrapping up their two-day July meeting, holding interest rates near zero and continuing government-backed bond purchases unabated. Those two tools fuel economic demand by making money cheap to borrow and spend.But they spent the meeting debating when and how to slow the bond-buying program, which is expected to be the first step toward a more normal policy setting as the economy rebounds strongly from its pandemic stupor. A decision isn’t imminent, but officials used their July policy statement to signal that one is coming.The Fed had said in December that it would keep buying bonds at a steady pace — $120 billion per month — until it had made “substantial” further progress toward its two targets, stable inflation and maximum employment.“Since then, the economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings,” the Fed’s policy-setting committee said in its postmeeting statement on Wednesday.Mr. Powell offered an even more detailed outlook for the purchase program during his subsequent news conference. He explained that officials had not yet decided on the pace or structure of the coming slowdown, and that there were a “range of views” on when it should happen.“We’re going to continue to try to provide clarity as appropriate,” Mr. Powell said, adding that this meeting had involved the first deep-dive discussion on those issues.Mr. Powell delivered another message: The Fed isn’t ready to withdraw support just yet. He said that while the economy was progressing toward “substantial” progress, “we have some ground to cover on the labor market side.”Investors have been keenly watching for any news on when and how the Fed will begin to withdraw from buying assets, worried that the announcement of a tapering program might whipsaw markets. Fed critics have been asking why the central bank continues to buy bonds, fueling an already-scorching housing market and pushing up sky-high stock prices.Fed officials are trying to strike a balance, ensuring they are prepared to slow stimulus measures as the economy strengthens while avoiding an abrupt pullback. The latter could undermine the Fed’s credibility and potentially roil markets, causing lending to dry up and slowing the recovery when millions of prepandemic jobs are still missing and risks to the economy persist.“They don’t want to cause a sharp and fast increase in interest rates — that would be detrimental,” said Roberto Perli, head of global policy research at Cornerstone Macro. “The labor market is still not where it should be.”Lingering threats to the outlook have been underscored by rising coronavirus cases in the United States and around the world tied to the Delta variant.Mr. Powell acknowledged risks from the variant, but he suggested that any economic pullback it drove might not be as severe as last year’s. Still, he said, “it might weigh on the return to the labor market,” noting that the Fed will be monitoring that “carefully.”But the Fed chair conveyed a generally optimistic tone about the economy on Wednesday.While he pointed out that the labor market had a lot of room left to heal, he also suggested that workers were lingering on the sidelines because they were afraid of the virus, had caregiving duties or were receiving generous unemployment insurance benefits. Those factors should fade as life returns to normal.The United States is on a path to a strong labor market, and “it shouldn’t take too long, in macroeconomic time, to get there,” Mr. Powell said.He discussed at length another reality of the reopening era: rising prices. As economic growth roars back, with strong consumer spending supported by repeated government stimulus checks, inflation is surging. That is partly the result of data quirks, but also because demand for washing machines, electronics, cars and housing is outstripping what producers can supply.The Consumer Price Index picked up by 5.4 percent in June compared with a year earlier, the quickest pace since 2008. The Fed’s preferred inflation gauge has been slightly more muted, at 3.9 percent in May, but that, too, is well above the central bank’s 2 percent average inflation goal.“Inflation has increased notably” Mr. Powell said, adding that it is likely to remain elevated in coming months. But as supply bottlenecks abate, he said, “inflation is expected to drop back toward our longer-run goal.”Price gains could turn out to be higher and more persistent than Fed officials expect, Mr. Powell acknowledged. But expectations of where prices might head next seem consistent with the Fed’s goal, he said.When Fed officials say they expect today’s pressures to prove “transitory,” Mr. Powell said, they mean that increases today will not lead to ever-higher prices down the road.To put it even more plainly: A bag of flour might cost 5 cents more this year, but if the increase is transitory, it will not keep going up 5 cents with each passing year.“The increases will happen — we’re not saying they will reverse,” Mr. Powell said, but “the process of inflation will stop.”For now, officials are monitoring price increases but also staying focused on a different set of risks: About 6.8 million jobs are still missing compared with February 2020 levels. Workers are taking time to sort back into suitable employment, and the central bank wants to make sure the economic recovery is robust as they try to do that.Even when the Fed begins to dial back bond-buying, interest rates are likely to remain low. Long-running forces, including the aging population and rising inequality, have pushed them down naturally, and the central bank is expected to keep its main policy rate — the federal funds rate — at rock bottom, where it has been since March 2020.Officials have signaled that, barring a sustained burst in inflation or financial stability risks, they would like to leave interest rates near zero until the job market has returned to full employment. Their latest economic projections, released in June, suggested that most officials did not expect the economy to meet that high bar until 2023.Mr. Powell reiterated a commitment to seeing the recovery through.“The labor market has a ways to go,” he said. “We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.” More