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    Fed Raises Interest Rate Half a Percentage Point, Largest Increase Since 2000

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    The Fed Wants to Fight Inflation Without a Recession. Is It Too Late?

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    Federal Reserve officials took a while to recognize that inflation was lasting. The question is whether they can tame it gently now.The Federal Reserve is poised to set out a path to rapidly withdraw support from the economy at its meeting on Wednesday — and while it hopes it can contain inflation without causing a recession, that is far from guaranteed.Whether the central bank can gently land the economy is likely to serve as a referendum on its policy approach over the past two years, making this a tense moment for a Fed that has been criticized for being too slow to recognize that America’s 2021 price burst was turning into a more serious problem.The Fed chair, Jerome H. Powell, and his colleagues are expected to raise interest rates half a percentage point on Wednesday, which would be the largest increase since 2000. Officials have also signaled that they will release a plan for shrinking their $9 trillion balance sheet starting in June, a policy move that will further push up borrowing costs.That two-front push to cool off the economy is expected to continue throughout the year: Several policymakers have said they hope to get rates above 2 percent by the end of 2022. Taken together, the moves could prove to be the fastest withdrawal of monetary support in decades.The Fed’s response to hot inflation is already having visible effects: Climbing mortgage rates seem to be cooling some booming housing markets, and stock prices are wobbling. The months ahead could be volatile for both markets and the economy as the nation sees whether the Fed can slow rapid wage growth and price inflation without constraining them so much that unemployment jumps sharply and growth contracts.“The task that the Fed has to pull off a soft landing is formidable,” said Megan Greene, chief global economist at the Kroll Institute, a research arm of the Kroll consulting firm. “The trick is to cause a slowdown, and lean against inflation, without having unemployment tick up too much — that’s going to be difficult.”Optimists, including many at the Fed, point out that this is an unusual economy. Job openings are plentiful, consumers have built up savings buffers, and it seems possible that growth will be resilient even as business conditions slow somewhat.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.But many economists have said cooling price increases down when labor is in demand and wages are rising could require the Fed to take significant steam out of the job market. Otherwise, firms will continue to pass rising labor costs along to customers by raising prices, and households will maintain their ability to spend thanks to growing paychecks.“They need to engineer some kind of growth recession — something that raises the unemployment rate to take the pressure off the labor market,” said Donald Kohn, a former Fed vice chair who is now at the Brookings Institution. Doing that without spurring an outright downturn is “a narrow path.”Fed officials cut interest rates to near-zero in March 2020 as state and local economies locked down to slow the coronavirus’s spread at the start of the pandemic. They kept them there until March this year, when they raised rates a quarter point.But the Fed’s balance-sheet approach has been the more widely criticized policy. The Fed began buying government-backed debt in huge quantities at the outset of the pandemic to calm bond markets. Once conditions settled, it bought bonds at a pace of $120 billion, and continued making purchases even as it became clear that the economy was healing more swiftly than many had anticipated and inflation was high.Late-2021 and early-2022 bond purchases, which are what critics tend to focus on, came partly because Mr. Powell and his colleagues did not initially think that inflation would become longer lasting. They labeled it “transitory” and predicted that it would fade on its own — in line with what many private-sector forecasters expected at the time.When supply chain disruptions and labor shortages persisted into the fall, pushing up prices for months on end and driving wages higher, central bankers reassessed. But even after they pivoted, it took time to taper down bond buying, and the Fed made its final purchases in March. Because officials preferred to stop buying bonds before lifting rates, that delayed the whole tightening process.The central bank was trying to balance risks: It did not want to quickly withdraw support from a healing labor market in response to short-lived inflation earlier in 2021, and then officials did not want to roil markets and undermine their credibility by rapidly reversing course on their balance sheet policy. They did speed up the process in an attempt to be nimble.Under Jerome H. Powell, the Fed, which meets on Wednesday, is trying to walk a thin line.Nate Palmer for The New York Times“In hindsight, there’s a really good chance that the Fed should have started tightening earlier,” said Karen Dynan, an economist at the Harvard Kennedy School and a former Treasury Department chief economist. “It was really hard to judge in real time.”Nor was the Fed’s policy the only thing that mattered for inflation. Had the Fed begun to pull back policy support last year, it might have slowed the housing market more quickly and set the stage for slower demand, but it would not have fixed tangled supply chains or changed the fact that many consumers have more cash on hand than usual after repeated government relief checks and months spent at home early in the pandemic.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    The Fed’s favorite inflation index is still rising fast, but shows some hints of slowing.

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    The price index that the Federal Reserve watches most closely climbed 6.6 percent in the year through March, the fastest pace of inflation since 1982 and the latest reminder of the painfully rapid price increases plaguing consumers and challenging policymakers.Much of the gain in the Personal Consumption Expenditures price index, released Friday, was driven by a pop in energy prices that came early in Russia’s invasion of Ukraine along with rising food costs. After stripping out volatile food and fuel prices, a core index climbed by a slightly more muted 5.2 percent in the year through March.On a monthly basis, that core measure picked up by 0.3 percent, slower than its pace the previous month.Central bank and White House officials spent much of 2021 hoping that a pandemic-era surge in used car prices and cost increases in other goods would fade as supply chains returned to normal, and strong demand cooled. But inflation has remained too high for the Fed’s comfort for a year, despite occasional hopeful signs like the latest monthly slowdown in the core measure, and its persistence is now drawing a firm response from the central bank.Policymakers lifted interest rates in March for the first time since 2018, and have set the stage for an even larger rate increase at their meeting next week. Many Fed officials now expect to raise rates back to a neutral setting — around 2 percent — by the end of the year as they try to slow down borrowing, temper demand and allow supply to catch up. The goal is to help cool off inflation so that it does not become locked into consumer and business expectations, which might make it a more permanent feature of America’s economy.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.The task ahead is difficult. The Fed has in the past caused recessions while trying to weigh down high inflation. Officials are constraining demand just as the war in Ukraine ramps up uncertainty and threatens to keep prices for gas and other commodities elevated, potentially making the cental bank’s job even more challenging.White House officials have been emphasizing the role that the war is playing in elevating inflation, often blaming President Vladimir V. Putin of Russia for higher prices. While Russia’s invasion did push gas prices sharply higher last month, inflation had been high for months before the conflict.Government spending helped fuel some of that increase. As households received stimulus checks and expanded unemployment benefits in 2020 and 2021, they built up cash buffers, which has helped to sustain fervid spending on couches, cars and grills even as costs have climbed higher. Strong demand for goods in particular collided with shutdowns of overseas factories and overburdened transit routes to spur shortages and push prices up.Now, though, inflation has become broader. As employers struggle to hire enough workers to meet strong consumer demand, they are paying higher wages. That could prompt some businesses to charge more to cover their rising costs. It could also help households to keep up their spending.A number of services — notably rents and restaurant meals — have grown more expensive in recent months.The Fed is trying to keep those widespread price pressures from becoming embedded. While officials still expect price increases to begin fading soon and to be running considerably slower by the end of the year, they are no longer betting on that outcome.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    How Rising Mortgage Rates Are Affecting the Housing Market

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    Mortgage costs have jumped as the Federal Reserve has raised rates. With higher rates come fewer offers.Luis Solis, a real estate agent in Portland, Ore., marked a milestone weekend late last month. It was the first time in two years that one of his listings made it to Monday without any offers.This particular house was listed at $500,000, and after a Saturday open house there were promises of at least three bids, including one for $40,000 over the asking price. Then Monday came, and there were none. Then Tuesday, and Wednesday. An offer finally came in, but instead of being 10 to 15 percent higher than the listing — something that became almost standard at the height of the coronavirus pandemic’s housing market — it was right at $500,000. And it was the only one. And the buyer took it.“We didn’t have the competing offers that would drive up the price,” Mr. Solis said. “It’s not crazy like it was.”Taking some air out of the crazed market — and the hot economy in general — is precisely what the Federal Reserve wanted to do when it raised its key interest rate in March and signaled more increases to come. Mortgage rates have surged in response, jumping to 5 percent from slightly more than 3 percent since the start of the year.That rise means the monthly payment on a $500,000 house like the one Mr. Solis just sold would be about $500 more a month than it was at the end of last year, assuming a fixed-rate mortgage and 20 percent down payment. And the higher cost comes on top of a more than 30 percent rise in home prices over the past two years, according to Zillow.Now early data and interviews across the industry suggest that many buyers have finally been exhausted by declining affordability and cutthroat competition, causing the gravity-defying pandemic housing market to start easing up.Open houses have thinned. Online searches for homes have dropped. Homebuilders, many of whom have accrued backlogs of eager buyers, say rising mortgage rates have forced them to go deeper into those waiting lists to sell each house. In a recent survey of builders, Zelman & Associates, a housing research firm, found that while builders were still seeing strong demand, cancellations had inched up, though still well below historically low levels. Builders have also grown increasingly concerned about rising mortgage rates and surging home prices.“There is a lot more concern than there had been,” said Ivy Zelman, chief executive of Zelman & Associates.By any standard that prevailed before 2020, this would be a hot real estate market. Home prices remain high, and not only is there little sign they will fall anytime soon, but many economists predict a continued rise through the year. Still, after two years of torrid demand, agents had become accustomed to fielding multiple offers for each listing and setting price records each weekend. That frenzy, brought on by pandemic migrations and the growing centrality of the home as a space where people both live and work, is now subsiding.“We’re seeing some early indications that a growing share of home buyers, especially in expensive coastal markets, are getting priced out,” said Daryl Fairweather, chief economist at Redfin.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.For buyers, however, the market will still feel plenty competitive. Even if prices aren’t rising at the pace of the past two years, homes are selling within a week of being listed and posting no significant price declines.Construction in Missoula, Mont. Among homebuilders, “there is a lot more concern than there had been,” said Ivy Zelman of Zelman & Associates.Tailyr Irvine for The New York TimesThat rising mortgage rates have not had more of an effect shows how difficult it is to tamp down prices and bring demand into balance in an economy where a lack of supply — marked by half-empty car lots, furniture order backlogs and a paucity of homes for sale — is playing a guiding role.In the prepandemic world of bustling offices and smoothly functioning supply chains, such a steep rise in mortgage rates, on top of years of double-digit price appreciation, would have economists predicting a severe drop in demand and maybe even falling prices. Those trends would have echoed through the broader economy, with fewer people spending on moving vans and new couches, and as existing homeowners felt on less solid financial footing and potentially curbed their own spending. Instead, economists are predicting that prices will continue to rise — by double digits in some forecasts — through the year.“I don’t think it’s going to stop the housing market,” said Mike Fratantoni, chief economist at the Mortgage Bankers Association.The problem is there are so few homes for sale that even a slower market is unlikely to create enough inventory to satisfy demand anytime soon. For years the United States has suffered from a chronically undersupplied housing market. Home building plunged after the Great Recession and remained at a recessionary pace long after the economy and job market had recovered. Even today, the pace of home building remains below the heights of the mid-2000s, before the 2008 financial crisis and housing market crash.This makes it a good time to be a seller — assuming you don’t need to buy. Christopher J. Waller, a governor at the Fed, is living this out.“I sold my house yesterday in St. Louis to an all-cash buyer, no inspection,” Mr. Waller said in panel discussion on Monday. “But I’m trying to buy a house in D.C., and now I’m on the other side, going: ‘This is insane.’”He noted that the sharp rise in mortgage rates over recent months should have an effect on what happens with housing.The recent lack of new building was not for lack of interest. Members of the millennial generation, now in their late 20s to early 40s, are in their prime home buying years. Their desire to buy houses and start families has collided with scant supply, leading to an increase in prices.Shutdowns in the early months of the pandemic slowed home building, but housing starts have been on an upswing lately. New home completions remain low, however, because the tight labor market and supply chain disruptions have homebuilders scrambling to find wood, dishwashers, garage doors — and workers.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    A Fed governor says the latest inflation data reaffirms the case for big rate increases.

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    Christopher J. Waller, one of the Federal Reserve’s governors in Washington, said on Wednesday that recent economic data suggests that the central bank should raise interest rates by more than usual in May, and potentially in June and July as well.“The data has come in exactly to support that type of policy action, if the committee decides to do so,” Mr. Waller said during a CNBC interview on Wednesday, adding that the data may justify “possibly more in June and July.”Fed officials have coalesced around the need to “expeditiously” return policy to a neutral setting, one in which borrowing costs are neither stoking economic growth nor slowing it so much that unemployment rises, as inflation remains stubbornly rapid. Mr. Waller and other officials have made a case for making big rate increases to speed up the process, following the Fed’s decision to increase rates by a quarter of a percentage point in March.Jerome H. Powell, the Fed chair, has signaled that a large rate increase is up for debate, and minutes from the central bank’s last meeting showed that “many” officials would have favored a large increase in March if it hadn’t been for uncertainty created by Russia’s invasion of Ukraine.Mr. Waller suggested that even though inflation might be touching a peak — data this week showed it rising at the fastest pace since 1981, as the war in Ukraine drove gas prices higher and exacerbated already-rapid price increases — it remained “very high,” and the Fed was going to need to keep working to reduce it.It is probably the case that “this is pretty much the peak — it’s going to start coming down,” Mr. Waller said, adding that he had forecast price increases slowing throughout the second part of the year as part of the economic projections he submitted at the Fed’s March meeting. “We’re already seeing some oil prices retreating back.”But Mr. Waller said it was critical to lift rates up to, and even above, neutral to bring down inflation.“Right now, our main concern is getting these prices down, and we can do that without causing a recession,” he said.Markets have heavily penciled in big rate increases in May and June, and investors had marked up the odds of a big move in July over recent weeks. More

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    Inflation Hits Fastest Pace Since 1981, at 8.5% Through March

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    Gasoline weighed heavily in the increases, while prices moderated in several categories. Some economists say the overall rate may have peaked.Inflation hit 8.5 percent in the United States last month, the fastest 12-month pace since 1981, as a surge in gasoline prices tied to Russia’s invasion of Ukraine added to sharp increases coming from the collision of strong demand and stubborn pandemic-related supply shortages.Fuel prices jumped to record levels across much of the nation and grocery costs soared, the Labor Department said Tuesday in its monthly report on the Consumer Price Index. The price pressures have been painful for American households, especially those that have lower incomes and devote a big share of their budgets to necessities.But the news was not uniformly bad: A measure that strips out volatile food and fuel prices decelerated slightly from February as used car prices swooned. Economists and policymakers took that as a sign that inflation in goods might be starting to cool off after climbing at a breakneck pace for much of the past year.In fact, several economists said March may be a high-water mark for overall inflation. Price increases could begin abating in the coming months in part because gasoline prices have declined somewhat — the national average for a gallon was $4.10 on Tuesday, according to AAA, down from a $4.33 peak in March. Some researchers also expect consumers to stop buying so many goods, whether furniture or outdoor equipment, which could begin to take pressure off overtaxed supply chains.“These numbers are likely to represent something of a peak,” said Gregory Daco, the chief economist at Ernst & Young’s strategy consultancy, EY-Parthenon. Still, he said, it will be crucial to watch whether price increases excluding food and fuel — so-called core prices — slow down in the months ahead.A letup would be welcome news for the White House, because inflation has become a major liability for Democrats as midterm elections approach in November. Public confidence in the economy has fallen sharply, and as rapid price increases undermine support for President Biden and his party, they could imperil their control of Congress.Inflation Rates Around the World More

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    March Fed Minutes: ‘Many’ Officials in Favor of a Big Rate Increase

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    Minutes from the Federal Reserve’s March meeting showed that central bankers were preparing to shrink their portfolio of bond holdings imminently while raising interest rates “expeditiously,” as the central bank tries to cool off the economy and rapid inflation.Fed officials are making money more expensive to borrow and spend in a bid to slow shopping and business investment, hoping that weaker demand will help to tame prices, which are now climbing at the fastest pace in four decades.Central bankers raised interest rates by a quarter of a percentage point in March, their first increase since 2018 — and the minutes showed that “many” officials would have preferred an even bigger rate move and were held back only by uncertainty tied to Russia’s invasion of Ukraine. Markets now expect the Fed to make half-point increases in May and possibly June, even as they begin to withdraw additional support from the economy by shrinking their balance sheet.The balance sheet stands at nearly $9 trillion — swollen by pandemic response policies — and Fed officials plan to shrink it by allowing some of their government-backed bond holdings to expire starting as soon as May, the minutes showed. That will help to further push up interest rates, potentially leading to slower growth, more muted hiring and weaker wage increases. Eventually, the theory goes, the chain reaction should help to slow inflation. “They’re very resolute in fighting inflation and moving it lower,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “They are concerned.”While central bankers were hesitant to react to rapid inflation last year, hoping it would prove “transitory” and fade quickly, those expectations have been dashed. Price increases remain rapid, and officials are watching warily for signs that they might turn more permanent.“All participants underscored the need to remain attentive to the risks of further upward pressure on inflation and longer-run inflation expectations,” the minutes showed.Now, officials are trying to cool off the economy as it is growing quickly and the job market is rapidly improving. Employers added 431,000 jobs in March, wages are climbing swiftly, and the unemployment rate is just about matching the 50-year low that prevailed before the pandemic.Central bankers are hoping that the strong job market will help them slow the economy without tipping it into an outright recession. That will be a challenge, given the Fed’s blunt policy tools, a reality that officials have acknowledged.At the same time, Fed officials are worried that if they do not respond vigorously to high inflation, consumers and businesses may come to expect persistently higher prices. That could perpetuate quick price increases and make wrestling them under control even more painful.“It is of paramount importance to get inflation down,” Lael Brainard, a Fed governor who is the nominee to be the central bank’s vice chair, said on Tuesday. “Accordingly, the committee will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.”Ms. Brainard’s statement that balance sheet shrinking could happen “rapidly” caught markets by surprise, sending stocks lower and rates on bonds higher. Investors also focused their attention on the minutes released on Wednesday.The notes from the March meeting provided more details about what the balance sheet process might look like. Fed officials are coalescing around a plan to slow their reinvestment of securities, the minutes showed, most likely capping the monthly shrinking at $60 billion for Treasury securities and $35 billion for mortgage-backed debt.That would be about twice the maximum pace the Fed set when it shrank its balance sheet between 2017 and 2019, confirming the signal policymakers have been giving in recent weeks that the plan could proceed much more quickly this time around.The Russia-Ukraine War and the Global EconomyCard 1 of 6Rising concerns. More