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    Powell Signals Fed Could Start Removing Economic Support

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    The Fed chair warned that the Delta variant remained a risk and suggested that a rate increase was not on the table for some time.Speaking virtually at an annual conference, Jerome H. Powell, the Federal Reserve chair, said that the economy had made significant gains and that the Fed had made sufficient progress in forestalling inflation.Kevin Lamarque/ReutersEighteen months into the pandemic, Jerome H. Powell, the Federal Reserve chair, has offered the strongest sign yet that the Fed is prepared to soon withdraw one leg of the support it has been providing to the economy as conditions strengthen.At the same time, Mr. Powell made clear on Friday that interest rate increases remained far away, and that the central bank was monitoring risks posed by the Delta variant of the coronavirus.The Fed has been trying to bolster economic activity by buying $120 billion in government-backed bonds each month and by leaving its policy interest rate at rock bottom. Officials have been debating when to begin slowing their bond buying, the first step in moving toward a more normal policy setting. They have said they would like to make “substantial further progress” toward stable inflation and full employment before doing so.Mr. Powell, speaking at a closely watched conference that the Kansas City Fed holds each year, used his remarks to explain that he thinks the Fed has met that test when it comes to inflation and is making “clear progress toward maximum employment.”As of the Fed’s last meeting, in July, “I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said.But the Fed is navigating a difficult set of economic conditions. Growth has picked up and inflation is rising as consumers, flush with stimulus money, look to spend and companies struggle to meet that demand amid pandemic-related supply disruptions. Yet there are nearly six million fewer jobs than before the pandemic. And the Delta variant could cause consumers and businesses to pull back as it foils return-to-office plans and threatens to shut down schools and child care centers. That could lead to a slower jobs rebound.Mr. Powell made clear that the Fed wants to avoid overreacting to a recent burst in inflation that it believes will most likely prove temporary, because doing so could leave workers on the sidelines and weaken growth prematurely. While the Fed could start to remove one piece of its support, he emphasized that slowing bond purchases did not indicate that the Fed was prepared to raise rates.“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said in his address to the conference, which was held online instead of its usual venue — Jackson Hole in Wyoming — because of the latest coronavirus wave.The distinction he drew — between bond buying, which keeps financial markets chugging along, and rates, which are the Fed’s more traditional and arguably more powerful tool to keep money cheap and demand strong — sent an important signal that the Fed is going to be careful to let the economy heal more fully before really putting away its monetary tools, economists said.“He’s trying to reassure, in a time of extraordinary uncertainty,” said Diane Swonk, chief economist at the accounting firm Grant Thornton. “The takeaway is: We’re not going to snuff out a recovery. We’re not going to snuff it out too early.”Stocks rose on Friday, with gains picking up steam after Mr. Powell’s comments were released and investors realized that a rate increase was not in sight. Richard H. Clarida, the Fed’s vice chair, agreed with Mr. Powell’s approach, saying in an interview with CNBC that if the labor market continued to strengthen, “I would also support commencing a reduction in the pace of our purchases later this year.”Some Fed policymakers have called for the central bank to slow its purchases soon, and move swiftly toward ending them completely.Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, told CNBC on Friday that he supported winding down the purchases “as quickly as possible.”“Let’s start the taper, and let’s do it quickly,” he said. “Let’s not have this linger.”James Bullard, the president of the Federal Reserve Bank of St. Louis, said on Friday that the central bank should finish tapering by the end of the first quarter next year. If inflation starts to moderate then, the country will be in “great shape,” Mr. Bullard told Fox Business.“If it doesn’t moderate, then I think the Fed is going to have to be more aggressive in 2022,” he said.Central bankers are trying avoid the mistakes of the last expansion, when they raised interest rates as unemployment dropped to fend off inflation — only to have price gains stagnate at uncomfortably low levels, suggesting that they had pulled back support too early. Mr. Powell ushered in a new policy framework at last year’s Jackson Hole gathering that dictates a more patient approach, one that might guard against a similar overreaction.But as Mr. Bullard’s comments reflected, officials may have their patience tested as inflation climbs.The Fed’s preferred price gauge, the personal consumption expenditures index, rose 4.2 percent last month from a year earlier, according to Commerce Department data released on Friday. The increase was higher than the 4.1 percent jump that economists in a Bloomberg survey had projected, and the fastest pace since 1991. That is far above the central bank’s 2 percent target, which it tries to hit on average over time.“The rapid reopening of the economy has brought a sharp run-up in inflation,” Mr. Powell said. A shuttered storefront in New York last week. Economists are not sure how much the Delta variant will slow growth, but many are worried that it could cause consumers and businesses to pull back.Gabriela Bhaskar/The New York TimesPolicymakers at the Fed are debating how to interpret the current price burst. Because it has come from categories of goods and services that have been affected by the pandemic and supply-chain disruptions, including used cars and airplane tickets, most expect inflation to abate. But some worry that the process will take long enough that consumers’ inflation expectations will move up, prompting workers to demand higher wages and leading to faster price gains in the longer run.Other officials worry that today’s hot prices are more likely to give way to slower gains once pandemic-related disruptions are resolved — and that long-run trends that have dragged inflation lower for decades, including population aging, will once again bite. They warn that if the Fed overreacts to today’s inflationary burst, it could wind up with permanently weak inflation, much as Japan and Europe have.White House economists sided with Mr. Powell’s interpretation in a new round of forecasts issued on Friday. In its midsession review of the administration’s budget forecasts, the Office of Management and Budget said it expected the Consumer Price Index inflation rate to hit 4.8 percent for the year. That is more than double the administration’s initial forecast of 2.1 percent.The forecast was an admission of sorts that prices have jumped higher and that the increase has lingered longer than administration officials initially expected. But they still insist that it will be short-lived and foresee inflation dropping to 2.5 percent in 2022. The White House also revised its forecast of growth for the year, to 7.1 percent from 5.2 percent.Slow price gains sound like good news to anyone who buys oat milk and eggs, but they can set off a vicious downward cycle. Interest rates include inflation, so when it slows, Fed officials have less room to make money cheap to foster growth during times of trouble. That makes it harder for the economy to recover quickly from downturns, and long periods of weak demand drag prices even lower — creating a cycle of stagnation.“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Mr. Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”Mr. Powell offered a detailed explanation of the Fed’s scrutiny of prices, emphasizing that inflation is “so far” coming from a narrow group of goods and services. Officials are keeping an eye on data to make sure prices for durable goods like used cars — which have recently taken off — slow and even fall.Mr. Powell said the Fed saw “little evidence” of wage increases that might threaten high and lasting inflation. And he pointed out that measures of inflation expectations had not climbed to unwanted levels, but had instead staged a “welcome reversal” of an unhealthy decline.Still, his remarks carried a tone of watchfulness.“We would be concerned at signs that inflationary pressures were spreading more broadly through the economy,” he said.Jim Tankersley More

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

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    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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    Fed Minutes July 2021: Officials Debated Timing of Taper

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    Federal Reserve officials are preparing to slow the central bank’s large purchases of government-backed bonds, the first step toward a more normal monetary policy setting as the economy heals from the pandemic — but when they met last month, they remained starkly divided over just when the pullback should happen.Minutes from the central bank’s July 27-28 gathering showed that Fed officials generally thought they would soon meet their standard for slowing bond purchases, which they had previously established as “substantial further progress” toward the central bank’s maximum employment and inflation goals.“Most” of the officials “judged that the standard set out in the committee’s guidance regarding asset purchases could be reached this year,” the release showed. But precisely when to begin remained a matter of active debate.Some officials wanted to slow bond purchases soon to guard against the risk of higher inflation, and “a few” were worried that continued big purchases could lead to financial system risks, the account of the meeting released Wednesday showed.But a few others argued for a slower process, stressing that rising Delta variant coronavirus cases posed risks to the economic outlook, and several worried that in coming years inflation — though high today — could dip to uncomfortably low levels again. Several of the officials also pointed to big lingering uncertainties, like when workers would return to jobs.The snapshot of Federal Open Market Committee deliberations comes ahead of the central bank’s most closely watched annual gathering, an economic symposium in Jackson Hole in Wyoming that will take place next week. Jerome H. Powell, the Fed’s chair, will deliver a speech at the event, and many investors expect he could provide hints or details about the central bank’s coming policy move.Mr. Powell and his colleagues are working against a complicated backdrop as the economy grows rapidly and as inflation and asset prices pop, but the labor market recovery remains incomplete, with nearly 7 million jobs still missing compared with employment levels at the start of the pandemic.The Fed is still holding interest rates near zero and plans to do so until the labor market is more fully healed, which means monetary policy will continue to support the economy even once the bond buying begins to slow. Fed officials have suggested that they may favor raising interest rates by late 2022 or — more popularly — 2023.Some officials who are eager to start to slow bond purchases soon have emphasized that moving early and quickly would allow the Fed to be more flexible when it comes to raising borrowing costs. The Fed is buying $120 billion in Treasury and mortgage-backed debt each month, and officials have said they would prefer to bring that policy to a close before lifting the federal funds rate.The debate over timing was still unresolved in July.“Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” the minutes released on Wednesday said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”How quickly the slowdown in buying will happen was also up for discussion, and participants expressed “a range of views on the appropriate pace of tapering asset purchases.”The last Fed meeting came before the Labor Department reported that hiring in July was strong, creating a sunnier snapshot of the job market’s recovery.“Since the July F.O.M.C. meeting, the probability of a September announcement and an October or November start date to tapering those purchases has increased considerably, in our view,” Bob Miller, the head of fundamental fixed income in the Americas for BlackRock, wrote following the release.But the minutes also came before infections from the Delta variant of the coronavirus surged so drastically.“The uncertainty created by Delta, as well as the uncertainty over the post-summer labor market and the path of inflation, all reinforce our view that a tapering announcement is not imminent,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a research note. “We think it will come in November, and even that is contingent on the Delta wave clearly subsiding before then.”The Fed meets next on Sept. 21-22. More

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    This Is a Terrible Time for Savers

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

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    Big Economic Challenges Await Biden and the Fed This Fall

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

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

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

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

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    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

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    Fed Considers Tapering Bond Purchases as Economy Grows

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    Federal Reserve officials are gathering in Washington this week with monetary policy still set to emergency mode, even as the economy rebounds and inflation accelerates.Economists expect the central bank’s postmeeting statement at 2 p.m. Wednesday to leave policy unchanged, but investors will keenly watch a subsequent news conference with the Fed chair, Jerome H. Powell, for any hints at when — and how — officials might begin to pull back their economic support.That’s because Fed policymakers are debating their plans for future “tapering,” the widely used term for slowing down monthly purchases of government-backed debt. The bond purchases are meant to keep money chugging through the economy by encouraging lending and spending, and slowing them would be the first step in moving policy toward a more normal setting.Big and often conflicting considerations loom over the taper debate. Inflation has picked up more sharply than many Fed officials expected. Those price pressures are expected to fade, but the risk that they will linger is a source of discomfort, ramping up the urgency to create some sort of exit plan. At the same time, the job market is far from healed, and the surging Delta coronavirus variant means that the pandemic remains a real risk. Policy missteps could prove costly.The Fed’s balance sheet has grown, thanks to bond-buying.The Federal Reserve has swollen its balance sheet by buying bonds to bolster the economy during the pandemic, making it a bigger player in markets.

    Source: Federal ReserveBy The New York TimesHere are a few key things to know about the bond-buying, and key details that Wall Street will be watching:The Fed is buying $120 billion in government backed bonds each month — $80 billion in Treasury debt and $40 billion in mortgage-backed securities.Economists mostly expect the central bank to announce plans to slow those purchases this year, perhaps as soon as August, before actually dialing them back late this year or early next. That slowdown is what Wall Street refers to as a “taper.”There’s a hot debate among policymakers about how that taper should play out. Some officials think the Fed should slow mortgage debt buying first because the housing market is booming. Others have said mortgage security buying has little special effect on the housing market. They have hinted or said they would favor tapering both types of purchases at the same speed.The Fed is moving cautiously, and for a reason: Back in 2013, markets convulsed when investors realized that a similar bond-buying program after the financial crisis would slow soon. Mr. Powell and crew do not want to stage a rerun.Bond-buying is just one of the Fed’s policy tools, and is used to lower longer-term interest rates and to get money chugging around the economy. The Fed also sets a policy interest rate, the federal funds rate, to keep borrowing costs low. It has been near zero since March 2020.Central bankers have been clear that tapering off bond purchases is the first step toward moving policy away from an emergency setting. Increases in the funds rate remain off in the distant future. More