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    Lael Brainard, Nominee for Fed Vice Chair, Calls Inflation ‘Too High’

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    Lael Brainard, a Federal Reserve governor whom President Biden has nominated to be the central bank’s new vice chair, plans to tell lawmakers that the central bank will use its policies to wrestle inflation under control when she testifies at her confirmation hearing.Ms. Brainard, who will face vetting before the Senate Banking Committee at 10 a.m. on Thursday, is likely to garner considerable support among Democrats and may pick up some Republican votes, though how many are unclear at this point.Her nomination — and her new role at the Fed if the Senate confirms her — comes at a challenging economic moment. While unemployment is falling rapidly, inflation has taken off, with a report on Wednesday showing that a key price index rose in December at the fastest pace since 1982.“We are seeing the strongest rebound in growth and decline in unemployment of any recovery in the past five decades,” Ms. Brainard will say, according to her prepared remarks. “But inflation is too high, and working people around the country are concerned about how far their paychecks will go.”Ms. Brainard will also tell lawmakers that the Fed’s policies are “focused on getting inflation back down to 2 percent while sustaining a recovery that includes everyone,” calling that the central bank’s “most important task.”After nearly two years of propping up a virus-stricken economy by keeping interest rates at rock bottom and buying government-backed debt, Fed officials began to slow their large bond purchases late last year. That program is on track to end in March. Officials have signaled in recent weeks that they also expect to lift interest rates to make borrowing more expensive, slowing demand and helping to cool the economy.Markets increasingly expect four rate increases in 2022, which would put the Fed’s short-term policy interest rate just above 1 percent.“Today the economy is making welcome progress, but the pandemic continues to pose challenges,” Ms. Brainard will say. “Our priority is to protect the gains we have made and support a full recovery.”Ms. Brainard has been at the Fed since 2014, spanning the Obama, Trump and Biden administrations. Before that, she was a top international official at the Treasury Department. An economist and a Democrat, she had been seen as a potential contender to be Treasury secretary or Fed chair during the Biden administration.She has a good working relationship with Jerome H. Powell, the Fed chair, whom Mr. Biden has renominated for a second term. She will use her prepared statement to emphasize that she has worked for many administrations in Washington — Democrats and Republicans alike — while pledging to take the Fed’s mission to fight inflation and its independence from partisan wrangling seriously.“I will bring a considered and independent voice to our deliberations,” she will say. More

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    As Unemployment Falls, Interest Rate Increases Creep Nearer

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    New data showing that the unemployment rate is falling and wages are rising is expected to cement — and maybe even hasten — the Federal Reserve’s plan to begin raising interest rates this year as it tries to put a lid on high inflation.The jobless rate fell to 3.9 percent in December, based on data collected during a period that largely predated the worst of the Omicron-driven virus surge.Unemployment peaked at 14.8 percent in April 2020, and had hovered around 3.5 percent for months before the onset of the pandemic. The fact that it is returning so rapidly to near-normal levels has caused many central bankers to determine that the United States is nearing what they estimate to be “full employment,” even though millions of former employees have yet to return to the job market.“This affirms the Fed’s conclusion,” Diane Swonk, chief economist at Grant Thornton, said after the report. “This is a hot labor market.”Signs abound that jobs are plentiful but that workers are hard to find: Job openings are at elevated levels, and the share of people quitting their jobs just touched a record. Employers complain they are struggling to hire, and a shortfall of workers has caused many businesses to curtail hours or services.As a result, employers have begun to pay more to retain their employees and lure in new applicants. Average hourly earnings climbed 4.7 percent in the year through December, faster than economists in a Bloomberg survey had expected and much more quickly than the typical pace of progress before the pandemic, which oscillated around 3 percent.Those quick pay gains are a signal to Fed officials that people who want jobs and are available to work are generally able to find it — that the job market is what economists call “tight” and would-be workers are relatively scarce — and that wages might begin to feed into prices. When companies pay more, they may also charge their customers more to cover their costs.The Status of U.S. JobsMore Workers Quit Than Ever: A record number of Americans — more than 4.5 million people — ​​voluntarily left their jobs in November.Jobs Report: The American economy added 210,000 jobs in November, a slowdown from the prior month.Analysis: The number of new jobs added in November was below expectations, but the report shows that the economy is on the right track.Jobless Claims Plunge: Initial unemployment claims for the week ending Nov. 20 fell to 199,000, their lowest point since 1969.Some Fed officials are worried that rising wages and limited production could help sustain elevated inflation — now at nearly a 40-year high. The combination of a healing job market and the threat that price increases will jump out of control has prompted central bankers to speed up their plans to withdraw policy help from the economy.Fed officials are already slowing the big bond purchases they had been using to support the economy. In addition to that, they could raise rates three times in 2022, based on their estimates, and economists think those increases could begin as soon as March. That would make borrowing for cars, houses and business expansions more expensive, slowing spending, hiring and growth.“It makes sense to get going sooner rather than later,” James Bullard, president of the Federal Reserve Bank of St. Louis, said during a call with reporters on Thursday, suggesting that the moves could come very soon. “I think March would be a definite possibility.”And officials have signaled that once rate increases start, they could promptly begin to shrink their balance sheet — where they hold the bonds they have purchased to stoke growth throughout the pandemic downturn. Doing that would help to lift longer-term interest rates, reinforcing rate increases and helping to further slow lending and spending.Economists speculated after the jobs report that the new figures made an imminent rate increase even more likely, and that the central bank might even be prodded to remove its economic support more quickly as wages take off.“We think that today’s report adds to the case for the Fed to kick off its hiking cycle in March,” researchers at Bank of America wrote. “The economy appears to be operating below maximum employment and inflation remains sticky-high.”Krishna Guha, an economist at Evercore ISI, argued that the combination of rapidly declining unemployment and heady wages might even prompt central bankers to increase interest rates faster than once every three months — the fastest pace in their last set of interest rate increases, which took place from 2015 to 2018.“The Fed might end up having to hike at a pace faster than the baseline one hike per quarter,” Mr. Guha wrote.Fresh data out next week could further intensify that pressure: The Consumer Price Index is expected to surge to 7 percent in the year through December, based on a Bloomberg survey of economists, which would be the fastest pace of increase since June 1982.The White House is doing what it can to promote competition, disentangle supply chains and lower prices at the margin, but controlling inflation falls mainly to the Fed, a fact President Biden underlined at a news conference on Friday.“I’m confident the Federal Reserve will act to achieve their dual goals of full employment and stable prices, and make sure the price increases do not become entrenched over the long term,” Mr. Biden said.Investors will get a chance to hear from key Fed officials themselves next week. Jerome H. Powell, whom Mr. Biden has renominated as Fed chair, has a confirmation hearing on Tuesday before the Senate Banking Committee. Lael Brainard, now a Fed governor and Mr. Biden’s pick to be vice chair, has a hearing on Thursday.Both are likely to emphasize the unevenness of the recovery and acknowledge that millions of workers remain out of the job market thanks to caregiving responsibilities, virus fears and other pandemic barriers, as they have throughout the downturn.They will probably also note that overall hiring slowed in December: Employers added 199,000 jobs, the weakest performance all year, as they struggled to find workers. And Omicron poses a risk of further retrenchment, because the November data came before the recent surge in virus cases that has kept restaurant diners at bay and shut down live performances.But at the end of the day, it is the falling jobless rate that is likely to remain in focus for the Fed as it contemplates its next steps, economists think.“A March rate hike seems pretty likely at this stage,” said Julia Coronado, founder of the research firm MacroPolicy Perspectives. Asked if there was one overarching takeaway from the new data, she said: “It’s just a tightening labor market. That’s it.” More

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    Fed Officials Discussed Raising Rates Sooner and Faster, Minutes Show

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    Federal Reserve officials suggested that they might withdraw support for the economy more quickly than policymakers had previously expected, minutes from their December meeting showed, as a moment of uncomfortably high inflation forces them to reorient their policy path.Central bankers projected last month that they would raise interest rates three times in 2022 as the economy healed and inflation remained above the Fed’s target. Economists and investors think that those increases could begin as soon as March, which is when the Fed is now expected to wrap up the large-scale bond buying program it has been using in tandem with low rates to stoke the economy.Fed officials pointed to a stronger outlook for economic growth and the labor market as well as continuing inflation, saying that “it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” according to the minutes, which were released Wednesday.Officials might then move to further cool off the economy by reducing the size of their balance sheet — where the bonds they bought are held. That could help to push up longer-term interest rates, which would make borrowing for many types of purchases more expensive and further weaken demand.“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes stated.Markets reacted swiftly to the news. The major stock benchmarks, which had been slightly lower on Wednesday, dropped sharply after the Fed published the document at 2 p.m. The S&P 500 fell 1.9 percent, its biggest drop in weeks.Government bond yields, a proxy for investor expectations about interest rates, jumped. The yield on 10-year Treasury notes climbed as high as 1.71 percent, its highest since April.What to Know About Inflation in the U.S.Inflation, Explained: What is inflation, why is it up and whom does it hurt? We answered some common questions.The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.The Fed’s big asset purchases had been adding juice to the economy and markets with each passing month, so cutting them off will provide less momentum. Raising interest rates could do even more to slow growth: By making borrowing costs for houses, cars and credit cards more expensive, higher rates should slow spending, weigh on investment and eventually hold back hiring and tamp down prices.The Fed faces trade-offs as it contemplates the path ahead. Higher interest rates could weaken a job market that is still pulling people back from the sidelines after 2020 pandemic lockdowns. But if the Fed waits too long or moves too slowly, businesses and consumers could begin to adjust their behavior to the very high inflation that has dogged the economy much of the past year. That could make it harder to bring price gains back under control — forcing more drastic, and potentially even recession-causing, rate increases down the road.The minutes showed that both considerations weighed on policymakers’ minds as they considered their future actions, but as the labor market has healed swiftly, they have begun turning their attention decisively toward the threat of too-high inflation. The Fed is tasked with two main jobs, fostering maximum employment and keeping prices relatively stable.“Several participants remarked that they viewed labor market conditions as already largely consistent with maximum employment,” the minutes said. At the same time, some officials noted that it might be smart to raise rates even if the job market was not fully recovered if inflation showed signs of jumping out of control.“It does cement that they’re definitely pivoting strongly toward rate hikes,” Michael Feroli, chief U.S. economist at J.P. Morgan, said after the release. Although it’s hard to pin down the timing, he said, “they are moving toward putting policy in a more restrictive setting.”There’s a reason for the Fed’s active stance. Inflation has been alarmingly high for much longer than central bankers expected. Last year, policymakers expected prices to pop temporarily as pandemic-affected sectors like airlines and restaurants recovered, then return to normal.Instead, prices through November climbed the most since 1982, and monthly gains remained brisk. Factory shutdowns and tangled shipping lines have made it hard for suppliers to catch up with booming consumer demand for goods, forcing costs up. Price gains have also begun to spread: Rents are increasing more quickly, which could make high inflation more persistent.Inflation is broadly expected to fade this spring, as prices are measured against relatively high levels from a year earlier. Prices may also decelerate as producers catch up with demand, officials hope. But policymakers lack certainty about when that will happen.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Democrats Blast Corporate Profits as Inflation Surges

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    Politicians are placing more blame on greedy companies as prices stay high. But booming consumer demand is enabling firms to charge more.Inflation remains rapid as the economy enters 2022, and Democrats have begun pointing to a new culprit for the high and lasting price increases: Greedy corporations.Senator Sherrod Brown of Ohio, Senator Elizabeth Warren of Massachusetts, and the White House spokeswoman, Jen Psaki, have been among those pointing to excessive profits in certain industries as one thing jacking up costs for consumers. They don’t blame overall inflation on price-gouging businesses — but the implication is that higher prices are partly the product of corporate opportunism.The explanation for inflation is the latest in a string Democrats have offered since price gains shot up to uncomfortably high levels last year. It is partly grounded in economic reality, partly in political necessity: Rising prices are burdening and unsettling consumers, making them a liability for a party with a tenuous hold on Congressional control headed into 2022 midterm elections.Prices are increasing at the fastest pace since 1982, and while inflation is broadly expected to fade in the year ahead, the speed and extent of that moderation is uncertain. Even if price gains slow down, they could remain a headache for the Biden administration if they continue to rise more rapidly than was normal before the pandemic — which is what economists increasingly expect. They had hovered around or below 2 percent for years, but Federal Reserve officials think they will reach an average of 2.6 percent by the end of this year.The administration has limited power over prices: It is making tweaks around the edges to help to tamp them down, but keeping a lid on inflation is mostly the job of the Fed, which has signaled it expects to begin raising interest rates this year to help control it.Still, as consumers feel the pinch of higher prices for food, gas and household goods, it’s creating a political messaging problem for Democrats. Lawmakers and the White House had initially argued that fast inflation was a sign that airfares and hotel rates were bouncing back and would fade quickly, but supply chain snarls and booming consumer demand for goods kept them elevated throughout 2021. More recently, price pressures have begun to broaden to service categories, like rent, in which increases tend to be long-lasting — and as wages climb swiftly, it raises the possibility that companies will keep lifting prices to cover their costs.As inflation proves stubbornly sticky, administration officials and prominent lawmakers have refined their message to focus more blame on corporations, especially those in concentrated industries with a handful of powerful firms, like meat processing or gas.Many companies — from car dealerships to beauty stores and beef sellers — are raking in bigger profits as they successfully raise their prices or discount less while still managing to sell as much or more. But economists have pointed out that in many cases, blaming big firms for worsening inflation is overly simplistic. Industries have been relatively concentrated for years, but businesses now have the wherewithal to charge more because consumers are spending strongly. That owes partly to government stimulus checks and other benefits that have put more money in shoppers’ pockets.“It’s what you would fully expect when demand goes up,” said Jason Furman, a Harvard economist and a former chairman of the White House Council of Economic Advisers during the Obama administration.The laws of supply and demand have not stopped many on the political left from calling companies out.What to Know About Inflation in the U.S.Inflation, Explained: What is inflation, why is it up and whom does it hurt? We answered some common questions.The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.“Profits at the biggest U.S. companies shot above $3 trillion this year, and the margins keep growing,” Mr. Brown, chairman of the Senate Banking Committee, said during a recent hearing. “Mega corporations would rather pass higher costs on to consumers than cut into their profits.”Ms. Warren has pointed to robust corporate profits as a sign that companies are partly to blame for rising costs.“Corporations are exploiting the pandemic to gouge consumers with higher prices on everyday essentials, from milk to gasoline,” she posted on Twitter on Nov. 26. “American families shouldn’t be bankrolling corporate America’s record-high profits.”And White House economic advisers have pointed to what they have called price gouging behavior in a few specific, concentrated industries. Mr. Biden has publicly encouraged an examination of oil company pricing, and the administration has announced measures to try to combat price fixing in meat processing, pointing out that four large companies control 85 percent of the beef market.“When too few companies control such a large portion of the market, our food supply chains are susceptible to shocks,” the administration said in a Jan. 3 release, repeating an argument administration officials have increasingly highlighted. “Mega corporations would rather pass higher costs on to consumers than cut into their profits,” Senator Sherrod Brown has said.Tom Brenner for The New York Times“I would say there are some areas where we have seen corporations benefit, profit from the pandemic,” Ms. Psaki said at a news conference in December.It is the case that big company profits are surging across many industries, a sign that companies are either selling more goods and services or are managing to eke more profit out of each unit that they are selling thanks to higher prices or better productivity. Based on corporate earnings calls and a spate of data, it’s likely a combination of those factors.Using data reported by Standard & Poor’s, the market analyst Edward Yardeni estimates that 2021 was a year of robust profit margins — the amount companies earn after subtracting their costs. After contracting sharply early in the pandemic, margins jumped to a record-high 13.7 percent in the second quarter before ticking down to 13.6 percent in the third.He thinks that owes partly to efficiency improvements, and partly to the fact that some firms have raised prices by more than their costs have climbed, something that they had previously struggled to do without losing customers.“It kind of became culturally acceptable to raise prices,” Mr. Yardeni said. “Consumers could understand that many corporations are under pressure to pass on their costs.”Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Lingering Virus, Lasting Inflation: A Fed Official Explains Her Pivot

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    Mary Daly, president of the Federal Reserve Bank of San Francisco, wanted to withdraw economic help slowly. Now, she might support a rate increase as soon as March.SAN FRANCISCO — Mary C. Daly was in line behind a woman in her neighborhood Walgreens in Oakland, Calif., this fall when she witnessed an upsetting consequence of inflation. The shopper, who was older, was shuffling uncomfortably as the clerk rang up her items.“She starts ruffling in her pockets, and in her purse,” Ms. Daly said in an interview. “And she says: This is a lot more expensive than it usually is. I buy these things — these are my monthly purchases.”The woman had to put something back — she chose potato chips — because she couldn’t afford everything in her basket.It would have been sobering to watch for anyone, but the moment hit especially hard for Ms. Daly, who is president of the Federal Reserve Bank of San Francisco. As one of the Fed’s 18 top officials, she is one of the people who sets economic policy to help to ensure a strong job market and to keep prices for goods and services stable.Like many of her colleagues, Ms. Daly initially expected inflation to fade relatively quickly in 2021 as the economy reopened and got back to normal. But continued waves of virus that have interrupted and complicated the recovery and increasingly broad price increases have made central bankers nervous that rapid inflation and pandemic-caused labor shortages might linger.Those risks have prompted the Fed to speed up its plans to pull back policies meant to stimulate the economy. Officials had previously suggested that they would keep interest rates low for a long time to allow more people who lost or quit their jobs during the pandemic to return to the job market. But in recent weeks, they announced a plan to more rapidly scale back their other main policy to boost the economy — large-scale bond purchases that have kept long-term borrowing costs low and kept money flowing around the financial system. Concluding that program promptly could put them in position to raise interest rates as soon as March.Ms. Daly, who spoke to The New York Times in two interviews in November and December, has shifted her tone particularly dramatically in recent weeks. How she came to change her mind highlights how policymakers have been caught off guard by the persistence of high inflation and are now struggling to strike the right balance between addressing it while not harming the labor market.As recently as mid-November, she had argued that the Fed should be patient in removing its support, avoiding an overreaction to inflation that might prove temporary and risk unnecessarily slowing the recovery of the labor market. But incoming data have confirmed that employers are still struggling to hire even as consumer prices are rising at the fastest clip in nearly 40 years. Rising rents and tangled supply chains could continue to push up inflation. And she’s running into more people like that woman in Walgreens.“My community members are telling me they’re worried about inflation,” Ms. Daly said last week. “What influenced me quite a lot was recognizing that the very communities we’re trying to serve when we talk about people sidelined” from the labor market “are the very communities that are paying the largest toll of rising food prices, transportation prices and housing prices.”Ms. Daly said she supported ending bond buying quickly so that officials were in a position to begin raising interest rates. A higher Fed policy rate would percolate through the economy, lifting the costs of mortgages, car loans and even credit cards and cooling off consumer and business demand. That would eventually tamp down inflation, while also likely slowing job growth.Ms. Daly said it was too early to know when the first rate increase would be warranted, but suggested she could be open to having the Fed begin raising rates as soon as March.“I’m comfortable with saying that I expect us to need to raise rates next year,” Ms. Daly said last week. “But exactly how many will it be — two or three — and when will that be — March, June, or in the fall? For me it’s just too early to know, and I don’t see the advantage of a declaration.”Many investors and economists now expect the Fed to lift rates from their current near-zero level in March, and Christopher Waller, a Fed governor, suggested last week that he could support a move then.That higher rates could be coming so soon is a big change from what officials were signaling — and what people who watch the Fed closely were expecting — until very recently.Fed officials have long said they want the economy to return to full employment before they lift interest rates. Early in the pandemic, many policymakers suggested that they would like to see the number of people with jobs rebound to levels approaching those that prevailed in early 2020, suggesting a long period of low rates would be needed.But increasingly, officials have argued that the economy is close to achieving their employment target by focusing on the overall unemployment rate and the rates for different racial groups.The jobless rate has fallen to 4.2 percent, and Fed officials expect it to drop to 3.5 percent next year. That would match the rate that prevailed before the pandemic, and would be a marked improvement from a pandemic high of 14.8 percent in April 2020. Black unemployment is dropping swiftly, too.“The economy has been making rapid progress toward maximum employment,” Jerome H. Powell, the Fed chair, said during a news conference this month.Yet that unemployment rate tells just part of the story, because it counts only people who are actively applying for jobs. The share of people in their prime employment ages, between 25 and 54, who are either working or looking for work has dropped notably, and is only starting to recover. Ms. Daly said she was thinking about the Fed’s full employment target in terms of what is achievable in the short term, as the coronavirus keeps many workers at home, and in the longer term, when more employees may be able to return because the virus is more under control.“There’s the labor market we can get eventually, after Covid,” she said. “And there’s the labor market that we have to deal with today.”For now, job openings far exceed the number of people applying for positions, and wages are climbing briskly, two signs that suggest that workers are — at least temporarily — scarce.It may be the case that “in the short run, this is all the workers we have,” Ms. Daly said. “But in the long run, we expect more workers to come.”Retailers in her area are cutting hours on busy shopping days because they can’t hire enough staff. Production lines are shuttered. And with virus infections rising again and the new Omicron variant spreading rapidly, there is no immediate end in sight.“If we get past Covid, inflation comes down, the labor supply recovers — then definitely we want more patience, because we want time for that to work itself through,” she said. “But we have Covid, and it won’t go away.” More

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    Omicron Is an Economic Threat, but Inflation Is Worse, Central Bankers Say

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    Within 24 hours, the Federal Reserve, Bank of England and European Central Bank all stepped forward to deal with price increases.There is still a lot scientists do not know about Omicron. There is cautious optimism — but no certainty — about the effectiveness of vaccines against this fast-spreading variant of the coronavirus, and experts do not fully understand what it means for public health or the economy.But central banks have concluded they don’t have the luxury of waiting to find out.Facing surging inflation, three of the world’s most influential central banks — the Federal Reserve, Bank of England and European Central Bank — took decisive steps within 24 hours of each other to look past Omicron’s economic uncertainty. On Thursday, Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying program in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the wind down its own bond-buying program.The perception that the Bank of England would “view the outbreak of the Omicron variant with greater concern than it actually did” caused the surprise in financial markets, ” Philip Shaw, an economist at Investec in London, wrote in a note to clients. The Fed also “carried on regardless” with its tightening plans, he added.Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job — and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.It is still unknown how Omicron will affect the economic recovery. Vaccine makers are still testing their shots against the variant.Alessandro Grassani for The New York TimesThe heads of all three central banks have separately decided that the price gains won’t be as temporary as they once thought, as supply chains take a while to untangle and energy prices pick up again.Andrew Bailey, the governor of the Bank of England, said that policymakers in Britain were seeing things that could threaten inflation in the medium-term. “So that’s why we have to act,” he said on Thursday.“We don’t know, of course, a lot about Omicron at the moment,” he added. It could slow the economy, and already there are canceled holiday parties, fewer restaurant bookings, less retail foot traffic and signs that more people are staying home. But Omicron could also worsen inflationary pressures, he said. “And that’s, I’m afraid, a very important factor for us.”Already, price gains have popped higher this year as snarled supply chains and goods shortages have raised shipping and manufacturing costs. Depending on the severity of Omicron and how governments react, the variant could cause factories to shut down and could keep supply chains in disarray and workers at home, prolonging goods and labor shortages and pushing inflation higher.At the same time, policymakers are assuming the impact on the economy will be milder than previous waves of the virus. With each surge in cases and reintroduction of restrictions, the dent to the economy has gotten smaller and smaller. This would lessen the risk that the central banks end up tightening monetary policy into a downturn.Still, it is an awkward balancing act. On the same day the Bank of England raised rates, its staff cut half a percentage point from their growth forecasts for the final three months of the year. By the end of 2021, the British economy will still be 1.5 percent smaller than its prepandemic size, the bank estimated.Christine Lagarde, the president of the European Central Bank, said Omicron had created uncertainty in the face of a strong recovery.Pool photo by Ronald Wittek“From a macroeconomic perspective, it’s unlikely that the fourth wave is going to have as meaningful an impact as we’ve seen even during last winter,” said Dean Turner, an economist at UBS Global Wealth Management.The economic recoveries from the pandemic, though bumpy, haven’t been derailed yet. Unemployment rates are falling in Europe and the United States, and businesses are complaining that is difficult to hire staff. That, combined with the burst of inflation, was enough to bolster the case for some monetary tightening.“There’s a lot of uncertainty with the new variant, and it’s not clear how big the effects would be on either inflation or growth or hiring,” Jerome H. Powell, the Fed chair, said on Wednesday. But there is a “real risk” inflation could be more persistent, he also said, which was part of the reason the bank sped up its plans to taper its bond purchases.Ending the Fed’s bond purchases sooner would give the central bank room to react to a wider range of economic outcomes next year, Mr. Powell said.“The data is pretty glaring,” Mr. Turner of UBS said of recent statistics on inflation and employment. “There’s only so much caution you can get away with,” before central banks need to take action, he said.Omicron has created uncertainty in the face of a strong recovery, Christine Lagarde, the president of the European Central Bank said on Thursday after she outlined how the bank would end its largest pandemic-era stimulus measure.Vaccine-makers are still testing their shots against Omicron and medical officials are encouraging restraint when it comes to socializing rather than implementing new lockdowns, but central bankers are marching ahead because time isn’t on their side. The effect of monetary policy decisions on the wider economy isn’t immediate.The Bank of England is forecasting that inflation will peak at 6 percent in April, three times the central bank’s target. Within such a short time frame, there is little policymakers can do to stop that from happening, but they can try to signal to businesses and unions setting wages that they will act to stop higher inflation from becoming entrenched, said Paul Mortimer-Lee, the deputy director of the National Institute of Economic and Social Research in London. This may prevent higher prices from spilling over into significantly higher wages, which could cause businesses to raise prices even more.While all three central banks are facing similar problems with high inflation and are keeping watch over wage negotiations, their future challenges are different.The Federal Reserve and Bank of England are worried about the persistence of high inflation. For the European Central Bank, inflation in the medium term is too low, not too high. It is still forecasting inflation to be below its 2 percent target in 2023 and 2024. To help reach that target in coming years, the central bank will increase the size of an older bond-buying program beginning in April, after purchases end in the larger, pandemic-era program. This is to avoid “a brutal transition,” Ms. Lagarde said.She warned against drawing strong comparisons between Britain, the United States and the eurozone economies.“Those three economies are at a completely different states of the cycle,” she said. “We are in a different universe and environment,” even though there might be some spillover effects across countries from the actions each central bank takes.Melissa Eddy More

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    Fed Could Raise Rates 3 Times in 2022 and Speeds End of Bond-Buying

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    With the economy healing, but price gains pinching consumers, officials are dialing back bond purchases and getting in position to raise interest rates (three are possible next year).Federal Reserve policymakers moved into inflation-fighting mode on Wednesday, saying they would cut back more quickly on their pandemic-era stimulus at a moment of rising prices and strong economic growth, capping a challenging year with a policy shift that could usher in higher interest rates in 2022.The central bank’s policy statement set up a more rapid end to the monthly bond-buying program that the Fed has been using throughout the pandemic to keep money chugging through markets and to bolster growth. A fresh set of economic projections released on Wednesday showed that officials expect to raise interest rates, which are now set near-zero, three times next year.“Economic developments and changes in the outlook warrant this evolution,” Jerome H. Powell, the Fed chair, said of the decision to pull back on bond purchases more quickly.By tapering off its bond buying faster, the Fed is doing less to stimulate the economy with each passing month, and putting the program on track to end completely in March.That would place Fed policymakers in a position to raise interest rates — their more traditional and more powerful tool — sooner. The Fed has made clear it wants to end its bond-buying program before it raises rates, which would cool off demand by making it more expensive to borrow for a home, a car or expanding a business. That would in turn weigh on growth and, eventually, price gains. The Fed’s new economic projections suggested rates, which have been at rock-bottom since March 2020, might rise to 2.1 percent by the end of 2024. More

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    What Causes Inflation and Should I Worry About It?

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    What is inflation, why is it up and whom does it hurt? A run through common questions about the ongoing price burst.Inflation has become central to the American zeitgeist in 2021 in a way that it hadn’t been for decades. Google searches are up. Supply chain issues feature into popular Instagram posts. The satire website The Onion warned in a recent headline that “higher prices may force Americans to eat reasonable portions on Thanksgiving.”Even as inflation hits its highest level since 1982 and inserts itself as a topic of popular discussion, trying to understand it can be a mind-bending task. Some people who have studied markets and the economy for years often do not know the ins and outs of how inflation is calculated. Its aftereffects on society — from who wins and who loses to whether it is good or bad news — are nuanced.Here’s a guide to help explain what inflation is, including how it is measured and what it means for your economic security and savings.What is inflation?Inflation is a loss of purchasing power over time: It means your dollar will not go as far tomorrow as it did today.Inflation is typically expressed as the annual change in prices for a basket of goods and services. In the United States, there are two main inflation gauges.One, the Consumer Price Index or C.P.I., measures the cost of things urban consumers buy out of pocket. The other, the Personal Consumption Expenditures index, or P.C.E., is released at more of a lag and measures things people consume, including things they do not pay for directly — notably health care, which insurance and government benefits help to cover. The two indexes are also built slightly differently.The Federal Reserve, America’s central bank and the institution in charge of keeping prices from increasing too rapidly, targets 2 percent annual increases in the P.C.E. index on average over time. A little bit of consumer price inflation is generally viewed as desirable, in part because it gives companies room to adjust to a changing economy — one where labor and commodities might cost more — without being forced out of business.What causes inflation?In the short term, high inflation can be the result of a hot economy — one in which people have a lot of surplus cash or are accessing a lot of credit and want to spend. If consumers are buying goods and services eagerly enough, businesses may need to raise prices because they lack adequate supply. Or companies may choose to charge more because they realize they can raise prices and improve their profits without losing customers.But inflation can — and often does — rise and fall based on developments that have little to do with economic conditions. Limited oil production can make gas expensive. Supply chain problems can keep goods in short supply, pushing up prices.The inflationary burst America has experienced this year has been driven partly by quirks and partly by demand.What to Know About Inflation in the U.S.The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.Who’s to Blame for Rising Prices?: Here are the most obvious candidates — and where the evidence looks strongest.The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.On the quirk side, the coronavirus has caused factories to shut down and has clogged shipping routes, helping to limit the supply of cars and couches and pushing prices higher. Airfares and rates for hotel rooms have rebounded after dropping in the depths of the pandemic. Gas prices have also contributed to heady gains recently.But it is also the case that consumers, who collectively built up big savings thanks to months in lockdown and repeated government stimulus checks, are spending robustly and their demand is driving part of inflation. They are continuing to buy even as costs for exercise equipment or outdoor furniture rise, and they are shouldering increases in rent and home prices. The indefatigable shopping is helping to keep price increases brisk.Where is inflation headed and should I be worried?Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly: The C.P.I. measure rose by 6.8 percent in the year through November, the fastest pace since 1982.There are plenty of reasons to believe that the price burst will fade. Much of the increase this year owes to shortages of goods — from bicycles to cars and beds — that are likely to eventually ease as companies figure out how to produce and transport what people want to buy in a pandemic-altered economy. Many households also have built up savings, in part because of repeated stimulus payments, but they eventually could exhaust those.Plus, before the pandemic, aging demographics and high inequality in income and wealth had combined to drag inflation steadily lower for years as people preferred to save money instead of spending it, and those basic economic building blocks haven’t changed.But there are concerning signs that inflation is becoming stickier, meaning that it might last rather than fading with time. Rents have picked up sharply as home prices have risen and would-be buyers have found themselves locked out of ownership. Consumers are slowly starting to anticipate higher prices, though long-term inflation expectations have yet to jump drastically higher.In the longer term, the (sometimes contested) theory goes, high inflation can become entrenched if workers begin to expect it and can successfully negotiate wage increases to cover their climbing costs. Companies, facing higher labor bills, may manage to pass the costs onto consumers — and voilà, you have a situation where pay and prices push one another steadily upward.Is inflation bad?Whether inflation is “bad” depends on the circumstances.Most everyone agrees that super fast price increases — often called hyperinflation — spell trouble. They destabilize political systems, turn middle-class workers into paupers overnight, and make it impossible for businesses to plan. Weimar Germany, where hyperinflation helped to usher Adolf Hitler into power, is often cited as a case in point.Moderate price gains, even ones a bit above the Fed’s official goal, are a topic of more-serious debate. Slightly higher inflation can be good for people who owe money at fixed interest rates. If I sell coconuts for $1 and owe my bank $200 today, but next year I am suddenly able to charge $1.05 for my coconuts, my debt becomes easier for me to pay back: Now I only have to sell a little bit over 190 coconuts plus interest.But inflation can be tough for lenders. The bank to whom I owe my $200 is obviously not happy to get 190 coconuts worth of money instead of 200 coconuts worth. While politicians and the public rarely cry for bankers, the same is true for people with savings that bear low interest: Their holdings will not go as far. Inflation can be especially tough for people on fixed incomes, like students and many retirees.For workers taking home paychecks, whether inflation is a good or bad thing hinges on what happens with wages. If a worker’s pay goes up faster than prices increase, they can still find themselves better off in a high-inflation environment.Wages are growing quickly right now, especially for lower earners, but some measures suggest the growth is not keeping pace with inflation as it picks up steeply. Still, many households are also receiving transfers from the government — including an expanded Child Tax Credit — which could keep some families’ financial situations from deteriorating.How does inflation affect the poor?High or unpredictable inflation that isn’t outmatched by wage gains can be especially hard to shoulder for poor people, simply because they have less wiggle room.Poor households spend a bigger chunk of their budgets on necessities — food, housing and especially gas, which is often a contributor to bouts of high inflation — and less on discretionary expenditures. If rich households face high inflation and their wages do not keep up, they may have to cut back on vacations or dining out. A poor family may be forced to cut back on essentials, like food.“For lower income households, price increases eat up more of their budget,” said Laura Rosner-Warburton, a senior economist at MacroPolicy Perspectives, pointing out that some research suggests that poor people may even end up paying comparatively more for the same products. That may be partly because they lack the free cash to take advantage of temporary discounts.Around the world, poor people historically have reported greater concern around inflation, and that is also the case in the United States in the current episode.How does inflation affect the stock market?Really high inflation typically spells trouble for stocks, said Aswath Damodaran, who teaches corporate finance and valuation at New York University’s Stern School of Business. Financial assets in general have historically fared badly during inflation booms, Mr. Damodaran said, while real assets like houses have better held their value.The reason is simple.“You need to make higher returns to break even,” he explained. While it might have been attractive to invest money for a 3 percent annual payback before an inflationary burst, once inflation has taken off to 4 percent, your investment would actually be declining in terms of real-world purchasing power.Plus, inflation can be tough on the underlying business. Companies that lack pricing power — meaning that they cannot easily pass costs on to customers — suffer the worst, because they are forced to absorb input cost increases by taking a hit to their profit margin.High inflation can also spur the Federal Reserve to increase interest rates as it tries to cool off the economy and slow demand. If the central bank does so drastically, it could even plunge the economy into a recession, which would also be bad for stocks — along with everyone else.“The worse inflation is, the more severe the economic shutdown has to be to break the back of inflation,” Mr. Damodaran said. More