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    Yellen’s China Visit Aims to Ease Tensions Amid Deep Divisions

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    Mutual skepticism between the United States and China over a wide range of economic and security issues has festered in recent years.The last time a U.S. Treasury secretary visited China, Washington and Beijing were locked in a trade war, the Trump administration was preparing to label China a currency manipulator, and fraying relations between the two countries were roiling global markets.Four years later, as Treasury Secretary Janet L. Yellen prepares to arrive in Beijing, many of the economic policy concerns that have been festering between the United States and China remain — or have even intensified — despite the Biden administration’s less antagonistic tone.The tariffs that President Donald J. Trump imposed on Chinese goods are still in effect. President Biden has been working to restrict China’s access to critical technology such as semiconductors. And new restrictions curbing American investment in China are looming.Treasury Department officials have downplayed expectations for major breakthroughs on Ms. Yellen’s four-day trip, which begins when she arrives in Beijing on Thursday. They suggest instead that her meetings with senior Chinese officials are intended to improve communication between the world’s two largest economies. But tensions between United States and China remain high, and conversations between Ms. Yellen and her counterparts are likely to be difficult. She met in Washington with Xie Feng, China’s ambassador, on Monday, and the two officials had a “frank and productive discussion,” according to the Treasury.Here are some of the most contentious issues that have sown divisions between the United States and China.Technology and trade controlsChinese officials are still smarting at the Biden administration’s 2022 decision to place significant limitations on the kinds of advanced semiconductors and chip-making machinery that can be sent to China. Those limits have hampered China’s efforts to develop artificial intelligence and other kinds of advanced computing that are expected to help power each country’s economy and military going forward.The government of the Netherlands, which is home to semiconductor machinery maker ASML, on Friday announced new restrictions on machinery exports to China. On Monday, China placed restrictions on exports of germanium and gallium, two metals used to make chips.The Biden administration is mulling further controls on advanced chips and on American investment into cutting-edge Chinese technology.Semiconductors have always been one of the biggest and most valuable categories of U.S. exports to China, and while the Chinese government is investing heavily in its domestic capacity, it remains many years behind the United States.The Biden administration’s subsidy program to strengthen the U.S. semiconductor industry has also rankled Chinese officials, especially since it includes restrictions on investing in China. Companies that accept U.S. government money to build new chip facilities in the United States are forbidden to make new, high-tech investments in China. And while Chinese officials — and some American manufacturers — were hopeful that the Biden administration would lift tariffs on hundreds of billions of dollars of Chinese imports, that does not seem to be in the offing. While Ms. Yellen has questioned the efficacy of tariffs, other top officials within the administration see the levies as helpful for encouraging supply chains to move out of China.The administration is employing both carrots and sticks to carry out a policy of “de-risking” or “friend-shoring” — that is, enticing supply chains for crucial products like electric vehicle batteries, semiconductors and solar panels out of China.President Biden during a visit to a Taiwan Semiconductor Manufacturing Company plant under construction in Phoenix. The Biden administration’s efforts to assist the U.S. semiconductor industry has rankled Chinese officials.T.J. Kirkpatrick for The New York TimesDeteriorating business environmentsCompanies doing business in China are increasingly worried about attracting negative attention from the government. The most recent target was Micron Technology, a U.S. memory chip maker that failed a Chinese security review in May. The move could cut Micron off from selling to Chinese companies that operate key infrastructure, putting roughly an eighth of the company’s global revenue at risk. In recent months, consulting and advisory firms in China with foreign ties have faced a crackdown.American officials are growing more concerned with the Chinese government’s use of economic coercion against countries like Lithuania and Australia, and they are working with European officials and other governments to coordinate their responses.Businesses are also alarmed by China’s ever-tightening national security laws, which include a stringent counterespionage law that took effect on Saturday. Foreign businesses in China are reassessing their activities and the market information they gather because the law is vague about what is prohibited. “We think this is very ill advised, and we’ve made that point to several members of the government here,” said R. Nicholas Burns, the U.S. ambassador to China, in an interview in Beijing.In the United States, companies with ties to China, like the social media app TikTok, the shopping app Temu and the clothing retailer Shein, are facing increasing scrutiny over their labor practices, their use of American customer data and the ways they import products into the United States.CurrencyChina’s currency, the renminbi, has often been a source of concern for American officials, who have at times accused Beijing of artificially weakening its currency to make its products cheaper to sell abroad.The renminbi’s recent weakness may pose the most difficult issue for Ms. Yellen. The currency is down more than 7 percent against the dollar in the past 12 months and down nearly 13 percent against the euro. That decline makes China’s exports more competitive in the United States. China’s trade surplus in manufactured goods already represents a tenth of the entire economy’s output.The renminbi is not alone in falling against the dollar lately — the Japanese yen has tumbled for various reasons, including rising interest rates in the United States as the Federal Reserve tries to tamp down inflation.Chinese economists have blamed that factor for the renminbi’s weakness as well. Zhan Yubo, a senior economist at the Shanghai Academy of Social Sciences, said the decline in the renminbi was the direct result of the Fed’s recent increases in interest rates.At the same time, China has been cutting interest rates to help its flagging economy. The interest rate that banks charge one another for overnight loans — a benchmark that tends to influence all other interest rates — is now a little over 5 percent in New York and barely 1 percent in Shanghai. That reverses a longstanding pattern in which interest rates were usually higher in China.The Fed’s rate increases have made it more attractive for companies and households to send money out of China and invest it in the United States, in defiance of Beijing’s stringent limits on overseas money movements.China pledged as part of the Phase 1 trade agreement with the United States three years ago not to seek an advantage in trade by pushing down the value of its currency. But the Biden administration’s options may be limited if China lets its currency weaken anyway.Global debtChina has provided more than $500 billion to developing countries through its lending program, making it one of the world’s largest creditors. Many of those borrowers, including several African nations, have struggled economically since the pandemic and face the possibility of defaulting on their debt payments.The United States, along with other Western nations, has been pressing China to allow some of those countries to restructure their debt and reduce the amount that they owe. But for more than two years, China has insisted that other creditors and multilateral lenders absorb financial losses as part of any restructuring, bogging down the loan relief process and threatening to push millions of people in developing countries deeper into poverty.In June, international creditors including China agreed to a debt relief plan with Zambia that would provide a grace period on its interest payments and extend the dates when its loans are due. The arrangement did not require that the World Bank or International Monetary Fund write off any debts, offering global policymakers like Ms. Yellen hope for similar debt restructuring in poorer countries.Human rights and national security issuesTensions over national security and human rights have created an atmosphere of mutual distrust and spilled over into economic relations. The flight of a Chinese surveillance balloon across the United States this year deeply unsettled the American public, and members of Congress have been pressing the administration to reveal more of what it knows about the balloon. Mr. Biden’s recent labeling of China’s leader, Xi Jinping, as a “dictator” also rankled Chinese officials and state-run media.American officials continue to be concerned about China’s human rights violations, including the suppression of the democracy movement in Hong Kong and the detention of mainly Muslim ethnic minorities in the Xinjiang region of northwestern China. A senior Treasury Department official, speaking on the condition of anonymity before Ms. Yellen’s trip, said the United States had no intention of shying away from its views on human rights during the meetings in China.Chinese officials continue to protest the various sanctions that the United States has issued against Chinese companies, organizations and individuals for national security threats and human rights violations — including sanctions against Li Shangfu, China’s defense minister. The Chinese government has cited those sanctions as a reason for its rejection of high-level military dialogues. More

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    Key Inflation Gauge Cooled in May, Welcome News for Federal Reserve

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    The Federal Reserve is monitoring “core” price increases for a hint at how inflation will develop. A slowdown in May is likely to come as a welcome development.The Federal Reserve’s preferred inflation measure climbed more slowly than economists had expected in the year through May after stripping out food and fuel prices — an encouraging sign that price increases are gradually moderating.Although inflation has been cooling notably on an overall basis in recent months, Fed officials have been closely tracking the “core” inflation measure that cuts out grocery and gas costs, which they think offers a better signal of how price increases might shape up in the months and years to come. It has been stuck at an elevated level and slowing down only gradually, a source of concern for policymakers who have spent more than a year raising interest rates in a bid to tame price increases.The May data broke with that trend, at least a little. Prices climbed 4.6 percent over the past year, excluding food and fuel. That compared with 4.7 percent in the previous month, which economists had expected would repeat itself. Core inflation is down from a 5.4 percent peak, but it remains well above the Fed’s 2 percent inflation goal.Progress in wrestling overall inflation has been swifter. The Personal Consumption Expenditures index measure that includes food and gas climbed 3.8 percent in the year through May, in line with economists’ forecasts. That measure peaked at about 7 percent last summer.More moderate overall inflation is taking some pressure off consumers: Cheaper tanks of gas and less rapid price increases in the grocery aisle are helping paychecks to go further. But for officials at the Fed, signs that inflation remains stubborn under the surface have been a reason to worry. Officials believe that they need to wrestle core price increases lower to make sure that the economy’s future is one of modest and steady price increases.To do that, Fed policymakers have been raising interest rates. Making it more expensive to get a home loan or expand a business restricts the economy’s momentum. By slowing growth and cooling demand, the moves are meant to make it harder for corporations to increase their prices without losing customers.Policymakers skipped a rate increase at their June meeting after 10 straight moves, but they have signaled that they expect to lift rates beyond their current level of just above 5 percent — perhaps to 5.5 percent by the end of the year. Investors have been betting on only one more move this year, but they increasingly see two rate moves as a possibility.Jerome H. Powell, the Fed chair, emphasized this week at an event in Madrid that the outlook for how much more rates might move this year is uncertain.“We’ve all seen inflation be, over and over again, shown to be more persistent and stronger than expected,” Mr. Powell said. “At some point that may change. And I think we have to be ready to follow the data and be a little patient as we let this unfold.” More

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    GDP Data Shows US Economic Growth Rate of 2% in Q1

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    The NewsThe United States economy grew faster early this year than previously believed.Gross domestic product, adjusted for inflation, expanded at an annual rate of 2 percent in the first three months of the year, the Commerce Department said Thursday. That was a significant upward revision from the 1.1 percent growth rate in preliminary data released in April. (An earlier revision, released last month, showed a slightly stronger rate of 1.3 percent.)An alternative measure of growth, based on income rather than production, painted a different picture, showing that the economy contracted for the second quarter in a row. That measure was also revised upward from the prior estimate.The report underscored the surprising resilience of the country’s economic recovery, which has remained steady despite high inflation, rapidly rising interest rates and persistent predictions of a recession from many forecasters on Wall Street.The new data is cause for “genuine optimism,” wrote Gregory Daco, chief economist at EY, the consulting firm previously known as Ernst & Young, in a note to clients. “This is leading many to rightly question whether the long-forecast recession is truly inevitable.”Consumers are powering the recovery through their spending, which increased at a 4.2 percent rate in the first quarter, up from a 1 percent rate in late 2022 and faster than the 3.7 percent rate initially reported in April. That spending, fueled by a strong job market and rising wages, helped offset declines in other sectors of the economy like business investment and housing.Consumers are powering the recovery through their spending, which increased at 4.2 percent rate in the first quarter.Jim Wilson/The New York TimesWhat It Means: Complications for the Fed.The continued strength of the consumer economy poses a conundrum for policymakers at the Federal Reserve, who have been raising interest rates in an effort to curb inflation without causing a recession.On the one hand, data from the first quarter provides some signs of success: Economic growth has slowed but not stalled, even as inflation has cooled significantly since the middle of last year.But many forecasters, both inside and outside the central bank, are skeptical that inflation will continue to ease as long as consumers are willing to open their wallets — meaning policymakers are likely to take further steps to rein in growth. At their meeting this month, Fed officials left interest rates unchanged for the first time in more than a year, but they have signaled they are likely to resume rate increases in July.The Fed chair, Jerome H. Powell, at a conference in Madrid on Thursday, noted that inflation had repeatedly defied forecasts of a slowdown.“We’ve all seen inflation be — over and over again — shown to be more persistent and stronger than we expected,” he said.What’s Next: Data on income and spending.Mr. Powell and his colleagues will get more up-to-date evidence on their progress on Friday, when the Commerce Department releases data on personal income, spending and inflation from May.Jeanna Smialek More

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    Fed Chair Powell Says He Expects Slower Interest Rate Increases to Continue

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    After rapid interest rate increases, Federal Reserve officials could move to a steadily slower pace — though they are not ready to commit.Jerome H. Powell, the Federal Reserve chair, said on Thursday that he would expect to continue with a slower pace of interest rate increases after central bankers skipped raising interest rates in June for the first time in 11 policy meetings — but he did not rule out that officials could return to back-to-back rate moves.“It may be that we don’t move for a meeting, and then move at a meeting,” Mr. Powell said.Speaking at a conference in Madrid, he reiterated an assertion he made a day earlier that he would not take future rate increases at consecutive meetings “off the table.” But he added that he would expect a more patient approach to persist.“We did take one meeting where we didn’t move, so that’s in a way a moderation of the pace,” he explained. “So I would expect something like that to continue, assuming the economy evolves about as expected.”Mr. Powell noted, however, that the economy “has a tendency to do something different” than policymakers anticipate.Fed officials raised interest rates rapidly in 2022, making a string of three-quarter-point increases. They slowed to a half-point move late last year, and have been progressively moving toward smaller, and now more intermittent, adjustments.Raising interest rates is like hitting the brakes on economic growth: It slows consumer and business demand in order to bring down inflation. Lifting rates more gradually is akin to tapping the brake pedal less firmly. Fed officials are still slowing the economy, but they are trying to avoid an unnecessarily jarring halt. For now, central bankers expect to raise their policy rate two more times in 2023, from just above 5 percent to just above 5.5 percent. If those moves happen at an every-other-meeting pace, that could mean rate increases at the central bank’s meetings in July and November.But significant uncertainty clouds that forecast. Investors put a low — though rising — probability on two more rate increases by the end of the year. They are betting that it is more likely that the Fed will make only one more rate increase in 2023, as the economy slows and inflation cools.Mr. Powell noted that the Fed has repeatedly been wrong in the other direction, overestimating how quickly price increases moderate.“We’ve all seen inflation be — over and over again — shown to be more persistent and stronger than we expected,” he said.“It wouldn’t have been thinkable to have a 5 percent interest rate before the pandemic,” he later added. “And now the question is — is that tight enough policy?” More

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    What Is Happening in the Housing Market?

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    Home construction surged in May and prices have ticked up, even with interest rates at a 15-year high. The resilience has surprised some economists.Gianni Martinez, 31, thought that it would be fairly easy to buy an apartment.Mortgage rates are now hovering around 7 percent — the highest they’ve been since 2007 — thanks to the Federal Reserve’s efforts to tame inflation. Central bankers have lifted their official policy rate to about 5 percent over the past 15 months, which has translated into higher borrowing costs across the economy.Mr. Martinez, a tech worker, expected that to cool down Miami real estate. But instead, he is finding himself in stiff competition for one- to two-bedroom apartments near the ocean. He has made seven or eight offers and is willing to put 25 percent down, but he keeps losing, often to people paying cash instead of taking out a pricey mortgage.“Because of interest rates at 7 percent, I didn’t think it would be this competitive — but that doesn’t matter to cash buyers,” Mr. Martinez said, noting that he’s competing with foreign bidders and other young people who show up to open houses with their parents in tow, suggesting Mom or Dad may be helping to foot the bill.“When there is a correctly priced listing, it’s a madhouse,” he said.The Fed’s rate increases are aimed at slowing America’s economy — in part by restraining the housing market — to try to bring inflation under control. Those moves worked quickly at first to weaken interest-sensitive parts of the economy: Housing markets across the United States pulled back notably last year. But that cool-down seems to be cracking.Home prices fell nationally in late 2022, but they have begun to rebound in recent months, a resurgence that has come as the market has proved especially strong in Southern cities including Miami, Tampa and Charlotte. Fresh data set for release on Tuesday will show whether that trend has continued. Figures out last week showed that national housing starts unexpectedly surged in May, jumping by the most since 2016, as applications to build homes also increased.Housing seems to be finding a burst of renewed momentum. Climbing home prices will not prop up official inflation figures — those are based on rental rather than purchased housing costs. But the revival is a sign of how difficult it is proving for the Fed to curb momentum in the economy at a time when the labor market remains strong and consumer balance sheets are generally healthier than before the pandemic.“It’s another data point: Things are not cooling off as much as they thought,” said Kathy Bostjancic, chief economist for Nationwide Mutual. In fact, new housing construction “tells us something about where the economy is headed, so this suggests that things are potentially picking up.”

    Note: Data is seasonally adjusted.Source: S&P CoreLogic Case-Shiller IndexBy The New York TimesThat could matter for policy: Fed officials think that the economy needs to spend some time growing at a speed that is below its full potential for inflation to fully cool off. In a weak economy, consumers don’t want to buy as much, so companies struggle to charge as much.The question is whether the economy can slow sufficiently when real estate is stabilizing or even heating back up, leaving homebuilders feeling more optimistic, construction companies hiring workers and homeowners feeling the mental boost that comes with climbing home equity.So far, the Fed’s leader, at least, has sounded unworried.“The housing sector nationally has flattened out, and maybe ticked up a little bit, but at a much lower level from where it was,” Jerome H. Powell, the Fed chair, told lawmakers last week, adding a day later that “you’ve actually kind of seen it hit a bottom now.”Higher rates have helped to markedly cool down sales of existing homes, to his point, though demand for new houses is being bolstered by two sweeping long-run trends.Millennials — America’s largest generation — are in their late 20s and early 30s, peak years for moving out on their own and attempting to purchase a house.And a shift to remote work during the pandemic seems to have spurred people who might otherwise have stayed with roommates or parents to live on their own, based on recent research co-written by Adam Ozimek, chief economist at the Economic Innovation Group.“Remote work means working from home for a lot of people,” Mr. Ozimek said. “That really increases the value of space.”Available housing supply, meantime, has been tight. That’s also partly because of the Fed. Many people refinanced their mortgages when interest rates were at rock bottom in 2020 and 2021, and they are now reluctant to sell and lose those cheap mortgages.“The most surprising thing about this housing market is how the increase in interest rates has affected supply and demand pretty equally,” said Daryl Fairweather, chief economist at Redfin. The pullback in demand was probably a bit more intense, she said, but builders are benefiting from a “dire lack of supply.”As young people continue to bid on houses and inventory comes up short, prices and construction are staging their surprise comeback.“Demand has hung in there better than we would have expected for that first-time buyer,” said Michael Fratantoni, chief economist at the Mortgage Bankers Association. Ms. Bostjancic said that the recent housing data will probably nudge the Fed toward higher rates. Officials paused their rate moves in June after 10 straight increases, but have suggested that they could lift them twice more in 2023, including at their meeting next month.If there’s a silver lining for the Fed, it is that home prices will not directly feed into inflation. America’s price measures use rents to calculate housing costs because they try to capture the cost of consumption. Buying a home is, in part, a financial investment.Rent growth has been stalling for months now — which is slowly feeding into official inflation data as people renew leases.“Rent growth is taking a nice, deep breath in,” said Igor Popov, chief economist at Apartment List. “Right now, it does not feel like there’s a lot of new heat.”Still, at least one Fed official has fretted that the pickup in housing could limit the scope of that slowdown. As home prices rise, some investors and landlords could decide to either charge more or to shift from renting out houses and to buying and selling them — curbing rental supply.“A rebound in the housing market is raising questions about how sustained those lower rent increases will be,” Christopher Waller, a Fed governor, said in a speech last month.He said that the upturn “even with significantly higher mortgage rates” raised questions “about whether the benefit from the slowing in rent increases will last as long as we have been expecting.” More

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    Bank of England Raises Rates More Than Expected, as Inflation Persists

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    ‘We know this is hard,’ the central bank’s governor said, after increasing interest rates by a half point, to 5 percent.The Bank of England raised interest rates by half a percentage point on Thursday, a larger-than-expected move, as policymakers struggle to bring down Britain’s persistently high rate of inflation.The central bank’s rate-setting committee lifted rates for a 13th consecutive time, to 5 percent, the highest since early 2008. The move is likely to intensify fears about the depth of Britain’s cost-of-living crisis, as homeowners prepare for jumps in monthly repayments while millions of households are already struggling to pay higher energy and food bills.The action came a day after the latest inflation data underscored the bank’s challenge: Consumer prices rose 8.7 percent in May from a year earlier, the same as the previous month, instead of falling as economists had predicted.The Bank of England’s decision is in sharp contrast to some of its international peers. Last week, the Federal Reserve decided to hold interest rates steady, at a range of 5 to 5.25 percent, and the European Central Bank raised rates by a quarter point.“The economy is doing better than expected, but inflation is still too high and we’ve got to deal with it,” Andrew Bailey, the Bank of England governor, said in a statement on Thursday. “We know this is hard — many people with mortgages or loans will be understandably worried about what this means for them. But if we don’t raise rates now, it could be worse later.”Indeed, there is accumulating evidence that inflation will be harder to stamp out than previously expected. In the past week, data has shown that pay in Britain has increased faster than expected, inflation in the services sector has accelerated and food inflation is still near the highest level in more than 45 years.The scale of the surprises in the data, especially for wage growth and services inflation, suggested a half-point rate increase “was required,” the minutes of the committee’s meeting said.The data “indicated more persistence in the inflation process, against the background of a tight labor market and continued resilience in demand,” the minutes said.The Bank of England’s rate increases could end up outlasting the recent rate-raising periods of both the Fed and the European Central Bank. Fed officials paused after 10 consecutive increases, and after eurozone policymakers raised rates for an eighth consecutive time last week, analysts predicted there would only be one or two more increases.The British central bank has pushed through a dramatic tightening of monetary policy in the last year and a half, raising interest rates from near zero since December 2021, in order to restrain the economy. But as British inflation data continues to take policymakers and other economists by surprise, traders are betting that the bank will have to raise interest rates higher and for longer to get inflation down to the 2 percent target. Before the policy decision was announced, traders were betting interest rates would reach 6 percent by early next year.The persistent price pressures in Britain are causing turmoil in the mortgage market, because they raise expectations that the bank will need to increase rates further. Traders, betting that the Bank of England will continue raising rates, have pushed up yields on government bonds. As mortgage offers reflect those higher interest rates, homeowners are growing concerned about jumps in their monthly repayments. Recently, some lenders pulled mortgage deals, in response to the rapid changes in the market.On Thursday, the central bank said is was monitoring closely the impact of its “significant” increases in interest rates, noting that because more people have fixed-terms on their mortgages, the full impact of higher interest rates “will not be felt for some time.”About 80 percent of mortgage holders have fixed-rate terms now, compared to about a third a decade ago. By the end of the year, about 1.3 million households are expected to reach the end of their fixed-rate term by the end of the year, prompting a reset in the rate that applies to their loan, the Bank of England said last month. The average mortgage holder in that group will see their monthly interest payments increase by about 200 pounds ($255), or £2,400 over the course of a year, if their mortgage rate rises 3 percentage points, which is what mortgage quotes suggested last month, the bank said.Since then, rates have risen even higher. Last weekend, the average rate for a two-year fixed-rate mortgage hit 6 percent for the first time this year.The extra financial burden on mortgage payers compounds the stubborn cost-of-living crisis, as inflation has outpaced pay for the past year and a half. About two-thirds of adults in Britain said their cost of living had increased in June compared with a month ago, and almost all of them said it was because of the higher cost of grocery shopping, according to a survey by the Office for National Statistics.Two members of the nine-person committee, Swati Dhingra and Silvana Tenreyro, voted to hold interest rates flat at 4.5 percent, arguing that the impact of past rate increases were still working through the economy, and so the bank was at risk of tightening policy more than necessary. They also said there were forward-looking indicators that suggested inflation and wage growth would fall significantly.But they were outvoted by all seven of the other members who chose a half-point increase, concerned that the impact on domestic prices and wages from external shocks, such as the war in Ukraine, would take longer to fade than they did to emerge. They predicted that lower wholesale energy prices would bring down the headline rate of inflation later in the year, but services inflation, which is dominated by companies’ wage costs and reflect domestic price pressures, would be “broadly unchanged” in the short term.As prices in Britain have continued to rise faster than expected, and faster than in the United States and Western Europe, the Bank of England has come under increasing scrutiny. Last month, the central bank’s governing body decided to commission a “a broad review” into the institution’s “forecasting and related processes during times of significant uncertainty.” More

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    Fed Chair Sees ‘Long Way to Go’ on Inflation Fight

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    Jerome H. Powell, the chair of the Federal Reserve, is set to tell House lawmakers that most central bank officials expect rates to rise further.Jerome H. Powell, the chair of the Federal Reserve, is set to tell House lawmakers that the United States remains a “long way” away from low and stable inflation even 15 months into the central bank’s campaign to cool the economy and wrestle down rapid price increases.Mr. Powell is scheduled to testify before the House Financial Services Committee at 10 a.m. He will explain to lawmakers that the labor market remains very tight and that inflation — while it has come down notably from its peak last summer — is still too fast. In light of that, the Fed could raise interest rates even higher than their current level of just above 5 percent.“Inflation has moderated somewhat since the middle of last year,” Mr. Powell will say, according to the text of his prepared remarks. “Nonetheless, inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go.”Fed officials left interest rates unchanged last week following 10 straight increases. But central bankers have been adamant that the decision to hit pause did not amount to a declaration of victory over inflation. Instead, moving more gradually will give policymakers time to assess how well higher rates are working to slow the economy as they try to strike a delicate balance of doing enough to cool growth without doing too much.“Considering how far and how fast we have moved, we judged it prudent to hold the target range steady,” Mr. Powell will tell lawmakers on Wednesday. Still, he will also add that “nearly all” voting Fed officials “expect that it will be appropriate to raise interest rates somewhat further by the end of the year.”Central bankers forecast in their fresh economic projections last week that they will probably raise interest rates to around 5.6 percent this year, which would amount to two more quarter-point rate increases. Mr. Powell said during his news conference following the decision last week that the Fed’s July 25-26 meeting will be “live,” meaning that a rate increase is possible at that gathering.Investors only expect the Fed to make one more rate increase before holding them steady through the rest of the year, based on market pricing, though significant uncertainty remains around that forecast — markets place some odds on higher rates, and some odds on a rate cut before the end of 2023.The Fed will need to assess how much the economy is slowing, and whether that is likely to be enough to return inflation to their 2 percent goal over time. Overall growth and the housing market have cooled since 2021, but consumption and even home prices have shown recent signs of strength and hiring has remained rapid.“We have been seeing the effects of our policy tightening on demand in the most interest rate–sensitive sectors of the economy,” Mr. Powell will tell lawmakers. “It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation.” More

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    U.K. Inflation Remains Stuck at 8.7 Percent

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    The rate, which had been expected to edge lower in May, shows that Britain’s cost-of-living crisis persists, and is likely to prompt the Bank of England to raise interest rates again.Britain’s inflation rate held steady in May, frustrating expectations that price increases would slow down, according to data released Wednesday, the day before the country’s central bank is widely expected to raise interest rates again.Consumer prices rose 8.7 percent from a year earlier, the same as in April, the Office for National Statistics said. Economists had forecast it would dip slightly. The data is likely to compound concerns that Britain’s cost-of-living crisis may intensify in the coming months as mortgage holders confront the burden of higher interest rates pushed through to tackle stubbornly strong inflation.The Bank of England on Thursday is expected to lift interest rates for a 13th consecutive time, by a quarter-point to 4.75 percent, the highest since early 2008.Last week, wage data showed pay growing faster than expected. On Wednesday, the statistics agency said core inflation, which excludes energy and food prices and is used to assess how deeply inflation is embedding in an economy, rose to 7.1 percent in the year through May, the fastest pace since 1992. Services inflation, an indicator that is closely watched by policymakers, climbed to 7.4 percent, from 6.9 percent in April.“The overwhelming impression is that this is a disappointing set of numbers that shows broad-based strength” in prices, Sandra Horsfield, an economist at Investec, wrote in an analyst note. “This is simply not good enough.”The rise in core inflation is “something that may cause some concern,” Grant Fitzner, the chief economist at the statistics agency, told the BBC.That’s because it has been pushed higher by price increases in services, such as at restaurants and hotels, much of it reflecting higher wage costs for companies, Mr. Fitzner said. “Services prices are quite sticky,” he said. “It can take longer for them to pick up but likewise longer for them to unwind as well.”This is leading to worries that overall inflation will be much slower to fall that it was to rise, he added.And that is what Britain is experiencing, as inflation data over the past few months has repeatedly defied expectations and stayed higher than predicted.Britain’s headline inflation rate has slowed from a peak of 11.1 percent in October, but it’s still uncomfortably high, especially compared with its international peers. In the United States, the Consumer Price Index rose 4 percent in May from the year before, and in the eurozone, inflation averaged 6.1 percent last month for the 20 countries that use the euro. The Federal Reserve has paused its interest rate increases, and traders are betting that the European Central Bank will raise rates just once or twice more; in Britain, though, investors are predicting the central bank will be forced to raise rates for longer to stamp out inflation.“We are in a situation now where markets are saying they’ve lost faith and that requires a big reaction from the bank,” said Andrew Goodwin, an economist at Oxford Economics. The central bank “needs to acknowledge that the game has changed,” he said, adding that he wouldn’t be surprised if the central bank raised rates by half a point on Thursday.Andrew Bailey, the governor of the Bank of England, said last week that policymakers still expected the inflation rate to come down, but “it’s taking a lot longer than expected.”Mr. Bailey’s predecessor, Mark Carney, said recently that Britain’s departure from the European Union was part of the reason Britain was suffering from stubbornly high inflation. There were other economic shocks at the same time, such as rising energy prices following Russia’s invasion of Ukraine, but Brexit is a “unique” part of the adjustment that will take years to resolve, he said.“We laid out in advance of Brexit that this will be a negative supply shock for a period of time and the consequence of that will be a weaker pound, higher inflation and weaker growth,” he told The Daily Telegraph last week.Traders are betting that the Bank of England’s interest rate could reach 6 percent by early next year. These expectations are shown through rising yields on government bonds, which now exceed the levels reached during Liz Truss’s brief but turbulent stint as prime minister last fall.In response, mortgage rates are rising too. Last weekend, the average rate for a two-year fixed-rate mortgage hit 6 percent for the first time this year.Last month, the central bank warned that many mortgage holders had not experienced the cost of higher interest rates yet. About 1.3 million households are expected to reach the end of their fixed-rate term by the end of the year, prompting a reset in the rate that applies to their loan. And the average mortgage holder in that group will see their monthly interest payments increase about 200 pounds ($255) a month, or £2,400 over the course of a year, if their mortgage rate rises 3 percentage points, which is what mortgage quotes suggested last month, the bank said.The additional financial strain follows months of higher prices, from energy bills to groceries. Food and nonalcoholic drink prices rose 18.3 percent in May from a year earlier, data showed on Wednesday, a slight slowdown from previous months when food inflation hit a 45-year high. The moderation in food and fuel prices was offset by rising prices at restaurants and hotels and for secondhand cars and live music events.“We know how much high inflation hurts families and businesses across the country,” Jeremy Hunt, the chancellor of the Exchequer, said in a statement on Wednesday, adding that the government’s plan to halve the rate of inflation would be the best way to keep costs and interest rates down.“We will not hesitate in our resolve to support the Bank of England as it seeks to squeeze inflation out of our economy,” he said.In January the government, led by Prime Minister Rishi Sunak, vowed to halve inflation by the end of the year, which would mean a rate of about 5 percent, amid waves of public and private sector strikes from workers frustrated by declining living standards.When that promise was made, it seemed almost guaranteed to succeed based on economic forecasts. But as the months have worn on, inflation has been harder to slow down than expected and that pledge is now at risk of being missed.Adding to the government’s challenges, separate data published on Wednesday estimated that Britain’s public sector debt exceeded 100 percent of gross domestic product for the first time since 1961, as the government paid out more money for energy support programs and social benefits to mitigate the cost-of-living crisis. More