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    If the Economy Overheats, How Will We Know?

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    We asked some prominent participants in the Great Overheating Debate of 2021 to explain what inflationary trends they’re afraid of (or not, as the case may be).“It is strange to me that for years economists pined for a better mix of monetary and fiscal policy, and now we have it and there is a narrative among some that it has to end in disaster,” one economist said.Olivier Douliery/Agence France-Presse — Getty ImagesSome big-name economists argue that the economy will soon overheat because of the Biden administration’s $1.9 trillion pandemic relief and other spending measures.They worry that the economy is being flooded with too much money, a fear only heightened by news that the administration will seek $3 trillion more to build infrastructure, cut carbon emissions and reduce inequality.But in this debate, what overheating would mean — exactly how much inflation, with what kinds of side effects for the economy — has often been vague. So The New York Times asked some prominent participants in the Great Overheating Debate of 2021 to lay out in more detail what they are afraid of, and how we will know if their fears have been realized. See their full answers here.It turns out that the two sides — the overheating worriers and those who think those concerns are misplaced — agree on many points. They have common ground on what a bad outcome might look like, and agree that it will take some time to know whether a problematic form of inflation is really taking root. The differences are in how likely they consider it to happen.The core dispute, one with big consequences for the future of the economy and for the Biden administration, is over the nature of the inflation that is to come.As the economy reopens and Americans spend their stimulus checks and the money they saved during the pandemic, demand for certain goods and services will outstrip supply, driving up prices. That is now pretty much an inevitability.The Biden administration and its allies are betting this will be a one-time event: that prices will recalibrate, industries will adjust and unemployment will fall. By next year they expect a booming economy with inflation back at low, stable levels.The overheating worriers, who include prominent Clinton-era policymakers and many conservatives, believe there is a more substantial chance that one of two more pessimistic scenarios will come true. As vast federal spending keeps coursing through the economy, they fear that high inflation will come to be seen as the new normal and that behavior will adjust accordingly.If people believe we are entering a more inflationary era — after more than a decade when inflation has been persistently low — they could alter their behavior in self-fulfilling ways. Businesses would be quicker to raise prices and workers to demand raises. The purchasing power of a dollar would fall, and the bond investors who lend to the government would demand higher interest rates, making financing the budget deficit trickier.“I don’t think anyone will be too surprised to see massive airfare inflation” in the short term, for example, as the economy reopens, said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution. “Instead, I worry if we start to see signs that people, businesses and financial markets are responding to the level of overheating as if it were permanent.”That situation would leave policymakers, especially at the Federal Reserve, faced with two bad choices: Allow inflation to take off in an upward spiral, or stop it by raising interest rates and quite possibly causing a recession.“Ultimately we’re worried about an outcome in the real economy, which is rapid growth in 2021 followed by a significant reversal in 2022 or 2023 with anything like a recession, negative growth or a sizable increase in the unemployment rate,” said Jason Furman, a former Obama administration economic adviser. “Much of what we call ‘overheating’ is mostly a concern insofar as it triggers that outcome.”Mr. Furman says annual inflation rates of 3.5 percent or higher in late 2021 or 2022 would “create a substantial risk of macroeconomic reactions that create genuine instability and problems in the economy,” and that even a notch lower than that, 2.5 percent to 3.5 percent, could create some problems.Julia Coronado, president of MacroPolicy Perspectives, by contrast, argues that it would take several years of inflation at 3 percent or higher — not just a bump in 2021 or 2022 — before she would worry that inflation expectations could become unmoored, leading to either an inflation-tamping recession or a 1970s-style vicious cycle of ever-higher prices.“It is strange to me that for years economists pined for a better mix of monetary and fiscal policy, and now we have it and there is a narrative among some that it has to end in disaster,” Ms. Coronado said. “I am more optimistic about the macro outlook than I have been in a long time and am far more focused on how quickly the labor market returns to health than any threat from inflation.”As economists view it, inflation — at least the kind worth worrying about — isn’t a one-time event so much as a process.When demand for goods and services expands faster than the supply of them, consumers simply bid up the price of finite goods, and businesses bid up wages to try to keep up. This begins a cycle of higher wages fueling higher prices, which in turn fuels higher wages.Such a process began in the mid-1960s and culminated in double-digit inflation in the 1970s. But there are important differences between then and now. For one thing, unions then were more powerful and demanded steep wage increases. For another, a series of one-off events made inflation worse, including the breakdown of the Bretton Woods international currency arrangements and oil embargoes that sent fuel prices soaring.Those were also years when the Fed responded inadequately to rising inflation pressures — it was a series of errors the central bank made, not just one. That experience would suggest that the Fed, having learned the lessons of that era, could nip any new inflationary outburst in the bud..css-yoay6m{margin:0 auto 5px;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}@media (min-width:740px){.css-yoay6m{font-size:1.25rem;line-height:1.4375rem;}}.css-1dg6kl4{margin-top:5px;margin-bottom:15px;}.css-k59gj9{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-flex-direction:column;-ms-flex-direction:column;flex-direction:column;width:100%;}.css-1e2usoh{font-family:inherit;display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-box-pack:justify;-webkit-justify-content:space-between;-ms-flex-pack:justify;justify-content:space-between;border-top:1px solid #ccc;padding:10px 0px 10px 0px;background-color:#fff;}.css-1jz6h6z{font-family:inherit;font-weight:bold;font-size:1rem;line-height:1.5rem;text-align:left;}.css-1t412wb{box-sizing:border-box;margin:8px 15px 0px 15px;cursor:pointer;}.css-hhzar2{-webkit-transition:-webkit-transform ease 0.5s;-webkit-transition:transform ease 0.5s;transition:transform ease 0.5s;}.css-t54hv4{-webkit-transform:rotate(180deg);-ms-transform:rotate(180deg);transform:rotate(180deg);}.css-1r2j9qz{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-e1ipqs{font-size:1rem;line-height:1.5rem;padding:0px 30px 0px 0px;}.css-e1ipqs a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;}.css-e1ipqs a:hover{-webkit-text-decoration:none;text-decoration:none;}.css-1o76pdf{visibility:show;height:100%;padding-bottom:20px;}.css-1sw9s96{visibility:hidden;height:0px;}#masthead-bar-one{display:none;}#masthead-bar-one{display:none;}.css-1cz6wm{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;font-family:’nyt-franklin’,arial,helvetica,sans-serif;text-align:left;}@media (min-width:740px){.css-1cz6wm{padding:20px;width:100%;}}.css-1cz6wm:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1cz6wm{border:none;padding:20px 0 0;border-top:1px solid #121212;}Frequently Asked Questions About the New Stimulus PackageThe stimulus payments would be $1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for the full $1,400, a single person would need an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income would need to be $112,500 or below, and for married couples filing jointly that number would need to be $150,000 or below. To be eligible for a payment, a person must have a Social Security number. Read more. Buying insurance through the government program known as COBRA would temporarily become a lot cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally lets someone who loses a job buy coverage via the former employer. But it’s expensive: Under normal circumstances, a person may have to pay at least 102 percent of the cost of the premium. Under the relief bill, the government would pay the entire COBRA premium from April 1 through Sept. 30. A person who qualified for new, employer-based health insurance someplace else before Sept. 30 would lose eligibility for the no-cost coverage. And someone who left a job voluntarily would not be eligible, either. Read moreThis credit, which helps working families offset the cost of care for children under 13 and other dependents, would be significantly expanded for a single year. More people would be eligible, and many recipients would get a bigger break. The bill would also make the credit fully refundable, which means you could collect the money as a refund even if your tax bill was zero. “That will be helpful to people at the lower end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Read more.There would be a big one for people who already have debt. You wouldn’t have to pay income taxes on forgiven debt if you qualify for loan forgiveness or cancellation — for example, if you’ve been in an income-driven repayment plan for the requisite number of years, if your school defrauded you or if Congress or the president wipes away $10,000 of debt for large numbers of people. This would be the case for debt forgiven between Jan. 1, 2021, and the end of 2025. Read more.The bill would provide billions of dollars in rental and utility assistance to people who are struggling and in danger of being evicted from their homes. About $27 billion would go toward emergency rental assistance. The vast majority of it would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed through state, local and tribal governments, according to the National Low Income Housing Coalition. That’s on top of the $25 billion in assistance provided by the relief package passed in December. To receive financial assistance — which could be used for rent, utilities and other housing expenses — households would have to meet several conditions. Household income could not exceed 80 percent of the area median income, at least one household member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced financial hardship (directly or indirectly) because of the pandemic. Assistance could be provided for up to 18 months, according to the National Low Income Housing Coalition. Lower-income families that have been unemployed for three months or more would be given priority for assistance. Read more.Larry Summers, Treasury secretary to President Clinton and a top adviser to President Obama, kicked off the overheating debate with an op-ed in The Washington Post. He says an effort by the Fed to rein in overheating would be unlikely to be painless.“We have an experience like most of the recessions prior to 1990, when expansions were murdered by the Fed with inflation control as the motive,” he said, adding: “In the past it has proven impossible to generate a soft landing. I can’t think of a time when we have experienced a big downshift without having a recession.”He now assigns roughly equal odds to three possibilities: that everything goes according to plan, with inflation returning to normal after a one-time surge; that a cycle of ever-rising inflation develops; or that the Fed ultimately causes a steep downturn to prevent that inflationary cycle.So given that the real risk is not so much inflation in 2021, but what happens beyond the immediate future, how would we know it?Greg Mankiw, a Harvard economist who has warned of overheating, said there would be an “ongoing overheating problem” only if consumer prices were rising by more than 3 percent a year and bond prices were to shift in ways that suggested investors expected 3 percent or higher annual inflation for the next five years.Michael Strain of the American Enterprise Institute also emphasized these inflation “break-evens,” which capture bond investors’ views of future inflation based on the gap between inflation-protected and regular securities. Like Mr. Mankiw, he said that break-evens suggesting 3 percent or higher annual inflation over the next five years would be worrying, as would 2.5 percent or higher inflation expected for the period five to 10 years from now.Another place to look for evidence of overheating will be whether inflation merely rises or keeps accelerating.If the overheating warnings are correct, “it should start accelerating,” said Austan Goolsbee, an economist at the University of Chicago who has been sharply critical of the overheating thesis. “It should be 3, then 4, then 5 percent and so on. Basically they are predicting a 1970s repeat, so just go look at how inflation accelerated in the 1970s.”How will Americans interpret price rises during the post-pandemic boom? Might it jolt them out of the low-inflation psychology that has prevailed for nearly four decades, making businesses more confident about raising prices and workers faster to demand raises?The answer will determine whether the years ahead represent a pleasant warming trend or a red-hot caldron that leaves everybody burned. More

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    Fed Projects Patience Even as Economic Outlook Brightens

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    The Federal Reserve’s economic estimates show rates at near zero for years, along with faster growth and higher inflation.The Federal Reserve Chair, Jerome H. Powell, said on Wednesday that he expects the economy to continue improving this year but plans to keep interest rates near zero until employment increases.Jim Wilson/The New York TimesFederal Reserve officials signaled on Wednesday that they are in no rush to dial back support for a pandemic-damaged economy, releasing a fresh set of projections that showed the central bank’s policy interest rate on hold at near zero for years to come — even as the outlook rapidly improves.After a painful 2020 in which the Fed pledged to do whatever it took to prevent lasting virus-inflicted economic damage, the decision underscored that the policy response has moved into a new stage: As long as it takes.Fed officials, who cut their policy rate to near zero last March, maintained that setting on Wednesday, as was widely expected. Keeping it at rock bottom lowers borrowing costs across the economy, fueling demand and stoking growth.But their new forecasts sent a remarkably patient message about the path ahead. Most policymakers expected interest rates to remain near zero through 2023, even as they penciled in faster growth, rapidly falling unemployment and inflation rising above 2 percent.By promising continued help in the face of a brightening outlook, the central bank underlined its key priorities, which center on coaxing the job market back to full health while nudging prices — which have been sluggish for years — sustainably higher. And it made clear that it is more concerned with standing by the fledgling rebound than with warnings that inflation could get out of control.“We’re committed to giving the economy the support that it needs to return as quickly as possible to a state of maximum employment and price stability,” Jerome H. Powell, the Fed chair, said during a news conference on Wednesday. That help will continue “for as long as it takes.”Fed officials noted in their postmeeting statement that some parts of the economy were improving, and Mr. Powell said Covid-19 vaccines and fiscal stimulus had driven his colleagues’ sunnier economic expectations. But he also pointed out that the unemployment rate remained elevated, and that 9.5 million jobs that had disappeared during the pandemic were still missing from the economy.“It’s just a lot of people who need to get back to work, and it’s not going to happen overnight, — it’s going to take some time,” Mr. Powell said. “The faster, the better. We’d love to see it come sooner rather than later.”Fed officials now think that unemployment will fall to 4.5 percent this year as growth surges, a quicker decline than previously anticipated, and that inflation will pop to 2.4 percent in 2021 before easing. They see it hovering around 2.1 percent by the end of 2023.That they are willing to allow inflation to move higher without reacting backs up the central bank’s new approach to monetary policy. The Fed said last year that it would stop raising rates pre-emptively to choke off coming inflation and would aim for 2 percent as an average goal — meaning it welcomes periods of slightly faster price gains.“You look at their economic forecasts, they are all better,” said Priya Misra, head of global rates strategy at TD Securities. “They’re telling the market that they will let inflation go above 2 percent.”Wednesday’s release of economic projections was closely watched on Wall Street, in part because the central bank had a lot of new information to digest and incorporate into its policy guidance.Since the Fed last updated its economic projections three months ago, Congress and the White House have passed two large spending packages — a $900 billion bill in December and a $1.9 trillion measure this month. That huge infusion of government cash will put money in consumer bank accounts and could help to avert economic damage that Fed officials had worried about, like bankruptcies and evictions.The Treasury Department said on Wednesday that 90 million direct checks to individuals, totaling more than $242 billion, had already been disbursed.Americans are also receiving vaccinations at a steady pace, spurring hope that the pandemic might abate enough to allow hard-hit service industry companies to reopen more fully at some point this year.To add to those positive developments, coronavirus cases have eased, and the unemployment rate suggests that the economy continues to slowly heal. Joblessness fell to 6.2 percent in February, the latest Labor Department data showed, down from a peak of 14.8 percent in April.But there is a long way to go — a broader measure of joblessness that Fed officials often cite is around 9.5 percent — and Mr. Powell pointed out repeatedly that uncertainty remained high.“The path of the virus continues to be very important,” he said, noting that new and virulent strains have emerged. “We’re not done, and I’d hate to see us take our eye off the ball before we actually finish the job.”Congress has tasked the Fed with guiding the economy back to full employment and stable prices. Mr. Powell and his colleagues have been clear that they want to see both a healthy job market and inflation that has risen slightly above 2 percent, and is expected to stay there for some time, before lifting interest rates.The March economic projections showed that officials widely expect the economy to take years to clear those hurdles. Just seven officials penciled in rate increases by the end of 2023, while 11 saw rates remaining on hold.The Fed is also buying $120 billion in bonds per month. It has been less clear about the criteria for slowing those purchases, saying it needs to see “substantial” further progress.Mr. Powell indicated on Wednesday that the Fed was not ready to even start talking about when it might reduce that support. When it is, he said, it will signal so “well in advance of any decision to actually taper.”Markets have been on edge in recent weeks. An improving economic outlook and the prospect of slightly higher inflation have pushed up rates on longer-term Treasury securities. That has at times caused stocks to swoon — share prices tend to fall as interest rates increase — though key indexes remain near record highs.Some of that unease ties directly to Mr. Powell’s central bank. Investors have come to expect that the Fed will be less patient than they previously anticipated against the brightening backdrop, pulling forward estimates of when the Fed might lift interest rates.In fact, some prominent economists and commentators have warned that the government’s big spending, which dwarfs the response to the 2008 crisis, risks pushing prices much higher by pumping so many dollars into an already-healing economy. That could force the Fed to lift rates sharply to control them.But Fed has consistently downplayed those concerns, pointing out that the problem of the modern era has been weak prices — which could risk destabilizing outright price declines, and which saps the Fed’s ability to cut inflation-inclusive interest rates in times of trouble. If prices do take off, officials often say, they have the tools to deal with that.“They want a rapid recovery, even more than usual,” said Diane Swonk, chief economist at Grant Thornton. “The Fed doesn’t want to get in the way of it because of a transitory jump in inflation.” More

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    Jerome Powell Promises Not to Take Away the Punch Bowl

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    If the economy turns into a giant party, the Fed is promising not to be an uptight host.Jerome Powell, the Fed chair, outside the Federal Reserve late last year. One of his big tasks is to convince the financial world that he means what he says.Nate Palmer for The New York TimesIt was once said that the governor of the Bank of England had the power to guide the behavior of Britain’s banks with the mere raise of an eyebrow. For the Federal Reserve in 2021, the equivalent may be Jerome Powell’s chuckle.Mr. Powell, the Fed chair, was asked at a news conference Wednesday whether — in light of its forecast that the economy would recovery quickly in the months ahead — it was time to “start talking about talking about” slowing the central bank’s buying of $80 billion in bonds each month.He let out a half-laugh before answering, “Not yet.”His dismissiveness at the idea that the Fed would even consider slowing its efforts to strengthen the economy was one of many chances he took in Wednesday’s session to convey one simple message: The central bank will not waver in its aggressive efforts to encourage growth until the economy is truly and unquestionably back to health.It almost surely won’t be the last time he faces questions that second-guess that resolve.If the economy evolves as Mr. Powell and most private forecasters think it will, a veritable boom will be underway later this year. As a result, he and his colleagues at the Fed would face a continuing test of their willingness to follow through on the approach they unanimously agreed to last summer. That new policy framework ended an era in which the Fed pre-emptively raised interest rates because falling unemployment risked future inflation.Mr. Powell’s job on Wednesday was to persuade financial markets and everyone who makes economic decisions that the Fed was serious about this plan. That it won’t be swayed by all the things that, based on its history, might cause an increase in interest rates and choke off the expansion prematurely.If prices for certain goods and services were to surge as the economy came back, it would, in this view, be a one-time bulge rather than a continuing rise in inflation to which the Fed might need to respond. The central bank’s officials now project 2.4 percent inflation this year, overshooting their 2 percent target, with a projected return to the target in 2022.An old metaphor holds that the Fed’s job is to take away the punch bowl just as the party gets going. The official view of the central bank’s leaders now is that it has been an overly stingy host, taking away the punch bowl so quickly that parties were dreary, disappointing affairs.The job now is to persuade the world that it really will leave the punch bowl out long enough, and spiked adequately — that it will be a party worth attending. They insist punch bowl removal will be based on actual realized inebriation of the guests, not on forecasts of potential future problematic levels of drunkenness.Mr. Powell’s dismissive chuckle was just one piece of the messaging. It was the prevailing idea that he returned to in multiple ways (emphasis added in these quotations):“We will continue to provide the economy the support that it needs for as long as it takes.”“We’re not going to act pre-emptively based on forecasts for the most part, and we’re going to wait to see actual data. And I think it will take people time to adjust to that, and the only way we can really build the credibility of that is by doing it.”“People start businesses, they reopen restaurants, the airlines will be flying again — all of those things will happen, and it will turn out to be a one-time bulge in prices, but it won’t change inflation going forward.”He also played down the release of the Fed’s “dot-plot” of when to expect it to be time to raise rates. Four of 18 Fed officials thought that rate increases would be warranted by the end of 2022, and seven by the end of 2023. Mr. Powell emphasized that a comfortable majority envisioned no rate increases in the next three years.The questions he faced from the press Wednesday were just the beginning of what figures to be a perennial topic whenever he or other leaders of the central bank face lawmakers, business leaders or the news media. The tone and details may vary, but will all mean: “Are you sure you’re not going to start tightening the money supply?”The questions might tie into inflationary pressures. For example, many conservatives have started to complain about rising gasoline prices. Based on the experience of past Fed leaders, Mr. Powell can expect plenty of questions about that in his next visit to Capitol Hill.Or the questions could focus more on booming financial markets and whether the Fed needs to raise rates to rein in speculation.Moreover, even if Mr. Powell sticks to the plan, the diffuse nature of power within the Federal Reserve system will make it easy for mixed messages to emerge. There are 12 presidents of regional Fed banks and seven governors in Washington (with one slot vacant). This means only a handful need to develop cold feet about the strategy — and start talking about it publicly — to cause markets and businesses to doubt the Fed’s commitment.In many ways, it is the inverse of the situation that Paul Volcker faced as Fed leader in the early 1980s, as he engineered aggressive rate increases to curtail the high inflation of that era. To prevail, he had to resist pressure from fellow Fed appointees who had not fully bought into the strategy, even threatening to resign rather than lose a close vote.The situation is certainly not that dramatic — yet — in 2021, given the unanimous vote on the new policy framework and the apparent strong majority on the committee who believe rates need to stay low.But if history is a guide, and inflation trends and financial markets are as unpredictable in the months ahead as they have been in the recent past, it may take more than a laugh for Mr. Powell to dismiss questions from the tight-money crowd. More

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    How the U.S. Got It (Mostly) Right in the Economy’s Rescue

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    #masthead-section-label, #masthead-bar-one { display: none }Biden’s Stimulus PlanBiden’s AddressWhat to Know About the BillAnalysis: Economic RescueBenefits for Middle ClassShoppers at a mall in Los Angeles. Consumer spending is nearly back to its prepandemic level.Credit…Mark Abramson for The New York TimesAnalysisHow the U.S. Got It (Mostly) Right in the Economy’s RescueThough the recession has been painful, policymakers cushioned the pandemic’s blow and opened the way to recovery.Shoppers at a mall in Los Angeles. Consumer spending is nearly back to its prepandemic level.Credit…Mark Abramson for The New York TimesSupported byContinue reading the main storyMarch 15, 2021Updated 2:31 p.m. ETWhen the coronavirus pandemic ripped a hole in the economy a year ago, many feared that the United States would repeat the experience of the last recession, when a timid and short-lived government response, in the view of many experts, led to years of high unemployment and anemic wage growth.Instead, the federal government responded with remarkable force and speed. Within weeks after the virus hit American shores, Congress had launched a multitrillion-dollar barrage of programs to expand unemployment benefits, rescue small businesses and send checks to most American households. And this time, unlike a decade ago, Washington is keeping the aid flowing even as the crisis begins to ease: On Thursday, President Biden signed a $1.9 trillion aid bill that will pump still more cash into households, businesses, and state and local governments.The Federal Reserve, too, acted swiftly, deploying emergency tools developed in the financial crisis a decade earlier. Those efforts helped safeguard the financial system — and the central bank has pledged to remain vigilant.The result is an economy far stronger than most forecasters expected last spring, even as the pandemic proved much worse than feared. The unemployment rate has fallen to 6.2 percent, from nearly 15 percent in April. Consumer spending is nearly back to its prepandemic level. Households are sitting on trillions of dollars in savings that could fuel an epic rebound as the health crisis eases.Yet not everyone made it into the lifeboats unscathed, if at all. Millions of laid-off workers waited weeks or months to begin receiving help, often with lasting financial consequences. Aid to hundreds of thousands of small businesses dried up long before they could welcome back customers; many will never reopen. Long lines at food banks and desperate pleas for help on social media reflected the number of people who slipped through the cracks.“The damage that has been done has occurred in a disparate fashion,” said Michelle Holder, a John Jay College economist who has studied the pandemic’s impact. “It’s occurred among low-income families. It’s occurred among Black and brown families. It’s certainly occurred among families that did not have a lot of resources to fall back on.”For many white-collar workers, Dr. Holder said, the pandemic recession may one day look like a mere “bump in the road.” But not for those hit hardest.“It wasn’t just a bump in the road if you were a low-wage worker, if you were a low-income family,” she said. “Their ability to recover is just not the same as ours.”Jesus Quinonez lost his job as a manager at a warehouse in the San Diego area early in the pandemic. He quickly found another job — with a company that shut down before he could begin work. He hasn’t worked since.It took Mr. Quinonez, 62, three months to fight his way through California’s overwhelmed unemployment insurance system and begin receiving benefits. Less than two months later, a $600-a-week unemployment supplement from the federal government expired, leaving Mr. Quinonez, his wife and his four children trying to subsist on a few hundred dollars a week in regular unemployment benefits.By January, Mr. Quinonez was four months behind on rent on the one-bedroom trailer he shares with his family. He had raided his 401(k) account, leaving no savings a few years before his intended retirement. Government nutrition assistance kept his family fed, but it didn’t help with the car payment, or pay for toilet paper.“I started falling behind on my bills, plain and simple,” he said.A closed storefront in Newark. Not everyone made it into the lifeboats unscathed.Credit…Bryan Anselm for The New York TimesFor hundreds of thousands of small businesses, government aid dried up long before they could welcome back customers. Many will never reopen.Credit…Bryan Anselm for The New York TimesBut in December, Congress passed a $900 billion aid package, which included a second round of direct checks to households and revived the expanded unemployment programs. By January, Mr. Quinonez was able to pay off at least part of his debt, enough to hold on to the trailer and his car. The next round of aid should carry Mr. Quinonez until he can work again.“As soon as they lift the restrictions and more people get vaccinated, I see things coming back good,” he said. “I expect to get a job, and I expect to continue working until I retire.”Whether Mr. Quinonez’s story — and millions more like it — should count as a success or failure for public policy is partly a matter of perspective. Mr. Quinonez himself is unimpressed: He worked and paid taxes for decades, then found himself subject to a decrepit state computer system and a divided Congress.“Now that we need them, there’s no freaking help,” he said.Research from Eliza Forsythe, an economist at the University of Illinois, found that from June until Feb. 17, only 41 percent of unemployed workers had access to benefits. Some of the rest were unaware of their eligibility or couldn’t navigate the thicket of rules in their states. Others simply weren’t eligible. Asian workers, Black workers and those with less education were disproportionately represented among the nonrecipients.The gaps and delays in the system had consequences.“The impact of that is folks’ having to move out of their apartments because they have this money that’s supposed to be coming but they just haven’t received it,” said Rebecca Dixon, executive director of the National Employment Law Project, a worker advocacy group. Others kept their homes because of eviction bans, but had their utilities shut off, Ms. Dixon added, or turned to food banks to avoid going hungry — measures of food insecurity surged in the pandemic.Still, the federal government did far more for unemployed workers than in any previous recession. Congress expanded the safety net to cover millions of workers — freelancers, part-time workers, the self-employed — who are left out in normal times. At the peak last summer, the state and federal unemployment systems were paying $5 billion a day in benefits — money that helped workers avoid evictions and hunger and that flowed through the economy, preventing an even worse outcome.The record of other federal responses is similarly mixed. The Paycheck Protection Program helped hundreds of thousands of small businesses but was plagued by administrative hiccups and, at least according to some estimates, saved relatively few jobs. Direct checks to households similarly helped keep families afloat, but sent billions of dollars to households that were already financially stable, while failing to reach some of those who needed the help the most — in some cases because they had not filed tax returns or did not have bank accounts.Beyond the successes and failures of specific programs, any evaluation of the broader economy needs to start with a question: Compared with what?Relative to a world without Covid-19, the economy remains deeply troubled. The United States had 9.5 million fewer jobs in February than a year earlier, a hole deeper than in the worst of the last recession. Gross domestic product fell 3.5 percent in 2020, making it among the worst years on record.Relative to the rosy predictions early in the pandemic — when economists hoped a brief shutdown would let the country beat the virus, then get quickly back to work — the downturn has been long and damaging. But those hopes were dashed not by a failure of economic policy but by the virus itself, and the failure to contain it.“If you want to think back on what we got wrong, really the fundamental errors were about the spread of the virus,” said Karen Dynan, a Harvard economist and Treasury Department official during the Obama administration. But relative to the outcome that forecasters feared in the worst moments last spring, the rebound has been remarkably strong. In May, economists at Goldman Sachs predicted that the unemployment rate would be 12 percent at the end of 2020 and wouldn’t fall below 6 percent until 2024. The same team now expects the rate to fall to 4 percent by the end of this year. Other forecasters have similarly upgraded their projections..css-yoay6m{margin:0 auto 5px;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}@media (min-width:740px){.css-yoay6m{font-size:1.25rem;line-height:1.4375rem;}}.css-1dg6kl4{margin-top:5px;margin-bottom:15px;}.css-k59gj9{display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-flex-direction:column;-ms-flex-direction:column;flex-direction:column;width:100%;}.css-1e2usoh{font-family:inherit;display:-webkit-box;display:-webkit-flex;display:-ms-flexbox;display:flex;-webkit-box-pack:justify;-webkit-justify-content:space-between;-ms-flex-pack:justify;justify-content:space-between;border-top:1px solid #ccc;padding:10px 0px 10px 0px;background-color:#fff;}.css-1jz6h6z{font-family:inherit;font-weight:bold;font-size:1rem;line-height:1.5rem;text-align:left;}.css-1t412wb{box-sizing:border-box;margin:8px 15px 0px 15px;cursor:pointer;}.css-hhzar2{-webkit-transition:-webkit-transform ease 0.5s;-webkit-transition:transform ease 0.5s;transition:transform ease 0.5s;}.css-t54hv4{-webkit-transform:rotate(180deg);-ms-transform:rotate(180deg);transform:rotate(180deg);}.css-1r2j9qz{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-e1ipqs{font-size:1rem;line-height:1.5rem;padding:0px 30px 0px 0px;}.css-e1ipqs a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;}.css-e1ipqs a:hover{-webkit-text-decoration:none;text-decoration:none;}.css-1o76pdf{visibility:show;height:100%;padding-bottom:20px;}.css-1sw9s96{visibility:hidden;height:0px;}#masthead-bar-one{display:none;}#masthead-bar-one{display:none;}.css-1cz6wm{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;font-family:’nyt-franklin’,arial,helvetica,sans-serif;text-align:left;}@media (min-width:740px){.css-1cz6wm{padding:20px;width:100%;}}.css-1cz6wm:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1cz6wm{border:none;padding:20px 0 0;border-top:1px solid #121212;}Frequently Asked Questions About the New Stimulus PackageThe stimulus payments would be $1,400 for most recipients. Those who are eligible would also receive an identical payment for each of their children. To qualify for the full $1,400, a single person would need an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income would need to be $112,500 or below, and for married couples filing jointly that number would need to be $150,000 or below. To be eligible for a payment, a person must have a Social Security number. Read more. Buying insurance through the government program known as COBRA would temporarily become a lot cheaper. COBRA, for the Consolidated Omnibus Budget Reconciliation Act, generally lets someone who loses a job buy coverage via the former employer. But it’s expensive: Under normal circumstances, a person may have to pay at least 102 percent of the cost of the premium. Under the relief bill, the government would pay the entire COBRA premium from April 1 through Sept. 30. A person who qualified for new, employer-based health insurance someplace else before Sept. 30 would lose eligibility for the no-cost coverage. And someone who left a job voluntarily would not be eligible, either. Read moreThis credit, which helps working families offset the cost of care for children under 13 and other dependents, would be significantly expanded for a single year. More people would be eligible, and many recipients would get a bigger break. The bill would also make the credit fully refundable, which means you could collect the money as a refund even if your tax bill was zero. “That will be helpful to people at the lower end” of the income scale, said Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting. Read more.There would be a big one for people who already have debt. You wouldn’t have to pay income taxes on forgiven debt if you qualify for loan forgiveness or cancellation — for example, if you’ve been in an income-driven repayment plan for the requisite number of years, if your school defrauded you or if Congress or the president wipes away $10,000 of debt for large numbers of people. This would be the case for debt forgiven between Jan. 1, 2021, and the end of 2025. Read more.The bill would provide billions of dollars in rental and utility assistance to people who are struggling and in danger of being evicted from their homes. About $27 billion would go toward emergency rental assistance. The vast majority of it would replenish the so-called Coronavirus Relief Fund, created by the CARES Act and distributed through state, local and tribal governments, according to the National Low Income Housing Coalition. That’s on top of the $25 billion in assistance provided by the relief package passed in December. To receive financial assistance — which could be used for rent, utilities and other housing expenses — households would have to meet several conditions. Household income could not exceed 80 percent of the area median income, at least one household member must be at risk of homelessness or housing instability, and individuals would have to qualify for unemployment benefits or have experienced financial hardship (directly or indirectly) because of the pandemic. Assistance could be provided for up to 18 months, according to the National Low Income Housing Coalition. Lower-income families that have been unemployed for three months or more would be given priority for assistance. Read more.The recovery proved so strong in part because businesses were able to adapt better — and Americans, for better or worse, were willing to take more risks — than many people expected, allowing a faster rebound in activity over the summer. But the biggest factor was that Congress responded more quickly and forcefully than in any past crisis — a particularly remarkable outcome given that both the White House and Senate were controlled by Republicans, a party traditionally skeptical of programs like unemployment insurance.Millions of laid-off workers waited weeks or months to begin receiving help, a lag that often left financial consequences.Credit…Bryan Woolston/ReutersLong lines at food banks provided a hint of the number of people who slipped through the cracks.Credit…Tamir Kalifa for The New York Times“The dominant narrative about Washington and about legislating and public policy is one of dysfunction, one of not being able to rise to meet challenges, one of not being able to get it together to address glaring problems, and I think it’s a well-earned narrative,” said Michael R. Strain, an economist at the American Enterprise Institute. “But when I look back over the last year, that is just not what I see.”Congress didn’t prevent a recession. But its intervention, along with aggressive action from the Federal Reserve, may have prevented something much worse.“We could have experienced another Great Depression-like event that took years and years to recover from, and we didn’t,” Dr. Strain said.Washington’s moment of unity didn’t last. Democrats pushed for another multitrillion-dollar dose of aid. Republicans, convinced that the economy would rebound largely on its own once the pandemic eased, wanted a much smaller package. The stalemate lasted months, allowing aid to households and businesses to lapse. Economists are still debating the long-term impact of that delay, but there is little doubt it resulted in thousands of business failures.“We had this grand success that policymakers acted so quickly in passing two significant pieces of legislation early in the pandemic, and then they flailed through the whole fall in just the most frustrating of ways,” said Wendy Edelberg, director of the Hamilton Project, an economic-policy arm of the Brookings Institution. “That was just such an unforced error and created confusion and needless panic.”But unlike in 2009, when Republican opposition prevented any significant economic aid after President Barack Obama’s first few months in office, Congress did eventually provide more help. The $900 billion in aid passed in late December prevented millions of people from losing unemployment benefits, and helped sustain the recovery at a moment when it looked like it was faltering.The $1.9 trillion plan that Democrats pushed through Congress this month could help the United States achieve something it failed to do after the last recession: ensure a robust recovery.If that happens, it could fundamentally shift the narrative around the pandemic recession. The damage was deeply unequal, and the economic response, though it helped many families weather the storm, didn’t come close to overcoming that inequity. But a recovery that restores jobs quickly could help workers like Mr. Quinonez get back on track.“It’s just a bad year, and you just close the page and move on and try to make the best of the new days and new years,” he said. “Things are going to get better.”AdvertisementContinue reading the main story More

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    Fed Chair Powell Offered a Patient Message. Markets Quivered Anyway.

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    #masthead-section-label, #masthead-bar-one { display: none }Biden’s Stimulus PlanWhat’s NextReconciliation, ExplainedFact Check$15 Minimum WageWhere Trump Voters StandAdvertisementContinue reading the main storySupported byContinue reading the main storyFed Chair Powell Offered a Patient Message. Markets Quivered Anyway.Stocks fell and bond yields rose after the Fed leader reiterated that the central bank did not plan to pull back policy support soon.Federal Reserve Chair Jerome Powell in Washington in December.Credit…Al Drago for The New York TimesMarch 4, 2021Updated 5:41 p.m. ETJerome H. Powell, the chair of the Federal Reserve, said he and his colleagues have a “high standard” for what full employment means, underscoring that the central bank is likely to be patient in removing its support for the economy.Mr. Powell pointed out that the virus has pushed many people out of the job market and said that “4 percent would be a nice unemployment rate to get to, but it will take more than that to get to maximum employment.” It is unlikely the job market will return to full speed this year, he added, speaking in an online question-and-answer session hosted by The Wall Street Journal.In fact, Mr. Powell’s entire message on Thursday centered on how cautious the central bank plans to be in dialing back economic policies — low interest rates and large-scale bond buying — that are meant to help the economy recover from the painful coronavirus shock.But antsy markets appeared unconvinced: Rates jumped and stocks slumped as the Fed chair spoke. The S&P 500 index, which had been up more than half a percent earlier in the day, fell into negative territory — eventually closing with its third consecutive day of decline.Investors have begun to pencil in faster growth and higher inflation in recent weeks, betting that a cocktail of big government spending, widespread vaccinations and rock-bottom interest rates are setting the stage for rapid growth and faster price gains. Market players have begun to speculate that the Fed might lift interest rates earlier than expected, even as the central bank’s top officials pledge patience.“The message, which he sent very clearly, was lower for longer,” said Subadra Rajappa, head of rates strategy at Société Générale. “It was the market reaction I was quite surprised by.”Ms. Rajappa said investors might have expected Mr. Powell to signal that the Fed was prepared to counteract recent market moves — perhaps by shifting toward longer-term bond purchases, among other policy options. He may have disappointed them by declining to tee up such a change.The yield on the 10-year Treasury note, an important benchmark that influences the cost of borrowing for companies and households alike, crept higher as the Fed chair spoke. It ended the day at 1.55 percent.Stock indexes fell as that happened. Higher interest rates can weigh on stock prices by making bond investing more comparatively attractive — higher yields can mean higher investment returns for buyers — and by nibbling into corporate profits.The Fed chair did acknowledge on Thursday that the Fed was watching the market fluctuations, saying that sharp bond market moves last week were “notable” and caught his attention and that he “would be concerned” by disorderly conditions or a persistent change that makes credit expensive and threatens the Fed’s goals.He rejected the idea that the central bank was poised to remove its policy support soon, saying at one point that the Fed was committed to “staying on the playing field, with our tools, until the job is really done” and the economy is healed.“My best guess is that he was trying to push back against the expectations of early rate hikes that have dominated the markets this year,” Roberto Perli, a partner and economist at Cornerstone Macro, said in an email. “What he said was no different from what he said so far, and the market needs something more convincing.”The central bank is currently buying $120 billion in government debt and mortgage-backed securities each month, and officials have said that they need to see “substantial further progress” before slowing that pace.Love’s Furniture and Mattresses in Warren, Mich., advertised its closing on Monday.Credit…Elaine Cromie for The New York TimesMr. Powell reiterated on Thursday that the Fed would communicate “well in advance” when it thinks it is reaching that threshold, while declining to put a date on when that might happen.“There’s reason to think that we’ll begin to make more progress, soon,” Mr. Powell acknowledged. “But even if that happens, as now seems likely, it will take some time to achieve ‘substantial’ further progress.”When it comes to lifting shorter-term interest rates, their classic policy tool, officials have been clearer about precisely what they want to accomplish before adjusting their cheap-money stance.“That’s going to depend entirely upon the path of the economy,” Mr. Powell said of the plan for interest rates. He said the country had to get to maximum employment, inflation must sustainably reach 2 percent, and those price gains must be on track to exceed 2 percent for some time.“Those are the conditions,” he said. “When they arrive, we will consider raising interest rates. We’re not intending to raise interest rates until we see those conditions fulfilled.”Even as many analysts anticipate higher inflation this year after very weak price increases in 2020, Mr. Powell was careful to draw a distinction between a short-term pop and a sustained acceleration.“If we do see what we believe is likely a transitory increase in inflation” then “I expect that we will be patient,” Mr. Powell said. “There’s a difference between a one-time surge in prices and ongoing inflation.”And when it comes to the job market, he pointed out that American employers now report 10 million fewer jobs than before the pandemic, leaving a lot of room for a labor rebound. The unemployment rate, which will be updated Friday, stood at 6.3 percent in January — still well above its 3.5 percent rate last year. And that understates the pandemic’s labor market cost, since many people have stopped looking for work altogether and are not counted into the official jobless number.Initial jobless claims increased last week after a big drop the prior week, the latest report showed, showing that the labor market’s recovery remains rocky for now, though a better performance might lie ahead as vaccines allow the economy to reopen more fully.“There’s good reason to expect job creation to pick up in coming months,” Mr. Powell said. “We need that.”Mr. Powell, whose term as Fed chair ends early next year, declined to comment on whether he would like another term. He was originally appointed as a governor by President Barack Obama, then elevated to chair by President Donald J. Trump. He said he was focused on the job at hand.“There’s a lot left to, we have a lot of ground left to cover,” he said. But given the advent of widespread vaccinations, there’s “good reason for optimism.”Matt Phillips contributed reporting.AdvertisementContinue reading the main story More

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    Investors Are Focused on Treasurys. Here’s What the Fed Could Do.

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    AdvertisementContinue reading the main storySupported byContinue reading the main storyInvestors Are Focused on Treasurys. Here’s What the Fed Could Do.Central bankers have said they aren’t worried about a pop in longer-term bond yields. If they do become concerned, they have some options.The Federal Reserve chair, Jerome H. Powell, may be asked about higher bond yields during a scheduled event on Thursday.Credit…Al Drago for The New York TimesMarch 4, 2021, 5:00 a.m. ETLonger-term interest rates have jumped in recent weeks, a move that has been broadly interpreted as a sign that investors are betting higher growth and slightly faster inflation may be right around the corner.Federal Reserve officials have mostly brushed off the increase to date, saying it is a signal of economic optimism. But many investors have wondered whether the central bank might feel a need to intervene. The adjustment has at times roiled stock markets, which tend to sink when interest rates increase, and it could weigh on consumer spending and growth if it is sustained and borrowing becomes more expensive.Jerome H. Powell, the Fed’s chair, is set to speak at noon on Thursday at a Wall Street Journal event, where he may be asked to address the recent bond activity.Many on or adjacent to Wall Street have begun to put forward a two-part question: They are curious whether the Fed will step in to keep rates low and, if so, how. Below, we run through a few of the most likely options, along with plain-English explainers of what they mean and how they work.First, a little background.The yield on a 10-year Treasury note, a reference point for the cost of many types of borrowing, has popped since the start of the year. After dropping as low as about 0.5 percent in 2020, the yield jumped to 1.6 percent during the day last Thursday. It hovered around 1.5 percent by Wednesday.That is still very low by historical standards: The 10-year yield was above 3 percent as recently as 2018, and in the 1980s it was double digits. But a rapid adjustment in longer-term rates around the world has drawn attention. Global officials like Christine Lagarde, head of the European Central Bank, have voiced concern about the increases.U.S. officials have generally painted the adjustment as a sign that investors are growing more optimistic about growth as millions of Americans begin receiving Covid-19 vaccines and the government supports the economy with spending. And while markets appear to be penciling in slightly higher inflation, Fed officials had been hoping to push price expectations — which had been slipping — a little bit higher.“If you look at why they’re moving up, it’s to do with expectations of a return to more normal levels, more mandate-consistent levels of inflation, higher growth, an opening economy,” Mr. Powell said of rates during a hearing on Feb. 23.But last week’s gyrations prompted U.S. officials to make clear they’re watching to make sure that market moves don’t counteract the Fed’s policies, which make borrowing inexpensive to encourage spending and help the economy recover more quickly.“I am paying close attention to market developments — some of those moves last week and the speed of those moves caught my eye,” Lael Brainard, a Fed governor, said at a Council on Foreign Relations webcast on Tuesday. “I would be concerned if I saw disorderly conditions or persistent tightening in financial conditions that could slow progress toward our goal.”The question is what the Fed could do if rates get too high.Lael Brainard, a Fed governor, said she was monitoring market developments. Credit…Brian Snyder/ReutersBuying longer-term bonds is one option.The Fed’s most obvious choice to push back on a surge in longer-term bond yields is to just buy more of the bonds in question: If the central banks snaps up five-year, 10-year or 30-year securities, the added demand will push up prices, forcing yields — which move in the opposite direction — lower.The Fed is already buying $120 billion in mortgage-backed securities and Treasury bonds each month, a program it started last year both to soothe markets and to make many types of credit cheaper. Right now, it’s purchasing many types of bonds, but it could shake up that approach to focus on longer-term debt.There’s precedent for such a maneuver. The Fed bought long-term bonds to push down interest rates and bolster the economy in 2011. A similar policy was used in the 1960s. Economists and business networks often call such policies either “maturity extension” — shifting future purchases toward longer-dated debt — or “Operation Twist,” which tends to refer to selling short-term notes while buying longer-term bonds.Promising to ‘cap’ certain yields is another.The Fed’s more drastic option is called “yield curve control.” While it sounds nerdy, the approach is simple. The central bank could just pledge to keep a certain rate — say the five-year Treasury yield — below a certain level and buy as many bonds as necessary to keep that cap in place.Other central banks around the world, including the Bank of Japan and the Reserve Bank of Australia, have used yield curve control. But the tool carries risks: For example, it could force the Fed to buy huge sums of bonds and vastly expand its balance sheet in a worst-case scenario. That could matter for perceptions, since politicians sometimes criticize the Fed’s growing holdings, and it might have implications for market functioning.Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, told reporters on Tuesday that she was not worried about the yield curve yet. But she suggested that if the Fed did need to do something, shifting to long-term purchases would probably be preferable.“Right now I don’t think of yield curve control as something we would implement, myself, right away,” she said.The Fed can take several steps to deal with rockiness in the bond markets.Credit…Jim Lo Scalzo/EPA, via ShutterstockAdvertisementContinue reading the main story More

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    Powell Focuses on Economic Need at Key Moment in Markets and Politics

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    AdvertisementContinue reading the main storySupported byContinue reading the main storyPowell Focuses on Economic Need at Key Moment in Markets and PoliticsThe Federal Reserve will continue to support the economy, its chair, Jerome H. Powell, pledged, even as concerns about inflation rise.Jerome H. Powell, chair of the Federal Reserve, during a hearing on Capitol Hill in December. He told lawmakers on Tuesday that America’s economy is a long way from recovered.Credit…Al Drago for The New York TimesFeb. 23, 2021Updated 6:57 p.m. ETThe economy is down nearly 10 million jobs since last February, prospects for a rapid recovery — while brighter — remain far from assured, and as Democrats try to move a $1.9 trillion relief package through Congress, Republicans argue that it’s too big and could lead to inflation that would hurt consumers and businesses.Speaking against that tense backdrop on Tuesday, the chair of the Federal Reserve, Jerome H. Powell, delivered a blunt message to lawmakers that the economic outlook remains wildly uncertain and that the central bank must continue its extraordinary efforts to support the economy.It’s a pledge Mr. Powell has made many times in the last 11 months, but it also resonated through financial markets, which had begun to quiver as investors worried that a rapidly improving economy would prompt the Fed to pull back on its efforts to bolster growth.In testimony before the Senate Banking Committee, Mr. Powell declined to weigh in on the Biden administration’s spending plans but pushed back on the idea raised by multiple Republican senators that the economy is on the cusp of running too hot and sparking inflation.“The economic recovery remains uneven and far from complete, and the path ahead is highly uncertain,” Mr. Powell said. “There is a long way to go.”To bolster growth, the Fed plans to encourage lending and spending by holding interest rates near zero, where they have been since March, and by continuing to buy large quantities of bonds to keep money pumping through the financial system. Investors have grown concerned that the Fed might slow those bond purchases sooner rather than later if inflation begins to rise.Those worried investors had driven down stocks for five consecutive days. On Tuesday, the S&P 500 fell nearly 2 percent before snapping back after Mr. Powell’s remarks.In the bond market, interest rates on longer-term government debt have been climbing, reaching their highest point in a year this week. Those rates are the basis for corporate borrowing and mortgages, and their rise contributed to the stock market’s jitters.“We’re in one of these market mania moments in which there’s an intense focus on inflation,” and “he was very sanguine, very calm,” said Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist. “He kept turning attention back to the labor market.”Mr. Powell reiterated that the Fed plans to keep buying bonds until it sees “substantial further progress” toward its twin goals of full employment and stable inflation. America can “expect us to move carefully, and patiently, and with a lot of advance warning” when it comes to slowing that support, Mr. Powell said.Joblessness has come down sharply after surging last year, but the official unemployment rate remains nearly double its February 2020 level. Job losses have been more acute for members of minority groups and those with less education. Though spending has bounced back, activity in the service industry is still subdued.Vaccines are feeding hopes for a stronger and more complete 2021 rebound. Prices are expected to rise temporarily in the coming months, both compared with the weak readings from last year and, potentially, as consumers spend down savings amassed during the lockdown on restaurant dinners and vacations.But Fed officials have been clear that they do not expect inflation to pick up in a lasting way and that they plan to look past temporary increases when thinking about their policies. Price pressures have been stubbornly tepid, rather than too high, for decades and across many advanced economies.Mr. Powell said that longer-running inflation trends do not “change on a dime” and that if prices start to rise in an alarming way, the Fed has the tools to fight that.“I really do not expect that we’ll be in a situation where inflation rises to troubling levels,” Mr. Powell said. “This is not a problem for this time, as near as I can figure.”He also pushed back on the idea that government spending is poised to send prices rocketing out of control.“There perhaps once was a strong connection between budget deficits and inflation — there really hasn’t been lately,” Mr. Powell said. He noted that while he does expect inflation to jump around in coming months, there is a distinction between a temporary pop in prices and a sustained increase.Still, he declined to weigh in on how much more government support is appropriate.“I, today, will really stay away from fiscal policy,” he said near the very start of the hearing. He went on to tiptoe around or simply decline to answer questions about the minimum wage and the size and various components of the White House’s spending proposal. At one point, he was asked whether he would be “cool” with passing the spending bill or not.“I think by being either cool or uncool, I would have to be expressing an opinion,” Mr. Powell said.The Fed is politically independent and steers away from partisan issues, but it has been providing advice to policymakers in Congress and weighing in on socioeconomic disparities and financial risks tied to climate change over the last year. Some of that outspokenness has drawn Republican attention.Senator Patrick J. Toomey, Republican of Pennsylvania, warned on Tuesday that the central bank should avoid moving beyond its core duties.“As noble as the goals might be, issues such as climate change and racial inequality are simply not the purview of our central bank,” Mr. Toomey said.Mr. Powell did talk about how strong labor markets help people on the margins — those who aren’t trained or those with criminal records — to succeed. He made it clear that the central bank is hoping to return to a strong labor market, like the one that preceded the pandemic.The Fed’s bond purchases can help to bolster the economy by lowering longer-term interest rates and by prodding investors out of safer assets, like government bonds, and into stocks and other more active uses of their cash.Mr. Powell said the economy over the last three months hasn’t “really been making” the substantial progress the Fed is looking for as a precondition for slowing its purchases, as job gains have slowed. But he said there’s an expectation that progress should “pick up as the pandemic subsides.”When it comes to the Fed’s main interest rate, the federal funds rate, which helps to guide borrowing costs across the economy, Mr. Powell also struck a cautious tone. The Fed wants to achieve full employment, hit 2 percent on inflation and believe that the economy is on track for even faster price gains before raising that rate.“Right now, our focus is on providing the economy the support it needs,” Mr. Powell said at one point, summing up his message.Matt Phillips More

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    What the Bond Market Is Telling Us About the Biden Economy

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    AdvertisementContinue reading the main storyUpshotSupported byContinue reading the main storyWhat the Bond Market Is Telling Us About the Biden EconomyA recent rise in interest rates hints that a recovery is on the way, but it could also mean harder choices ahead on spending.Feb. 23, 2021, 5:00 a.m. ETTreasury Secretary Janet Yellen, right, at a White House meeting this month. She has emphasized that interest rates are crucial in determining how much the government should borrow and spend.Credit…Carlos Barria/ReutersWhile Washington debates the size of a new economic rescue plan, the bond market is sending a message: A meaningful acceleration in both growth and inflation in the years ahead looks more likely now than it did just a few weeks ago.That would be mostly good news, suggesting an economy recovering quickly from the pandemic. Interest rates remain very low by historical standards, even for the longest-term securities. Bond prices imply that inflation will be consistent with the Federal Reserve’s target of 2 percent annual rises in consumer prices, not a more worrisome spiral.[embedded content]But the surge in rates has brought an end to a period of several months when borrowing was essentially free, seemingly far into the future. For the Biden administration and the Federal Reserve, that implies that the free-lunch stage of the crisis is ending, and there could be harder questions ahead.In particular, it means that the downside of bad policy — federal spending that doesn’t generate much economic activity, for example — is higher than it was as recently as December.“We’re at a place where the markets are starting to grapple with the question of whether there are trade-offs between more stimulus today and potentially higher rates and more inflation down the road,” said Nathan Sheets, chief economist of PGIM Fixed Income and a former official at the Treasury and the Fed.The yield on 10-year Treasury bonds — the rate the United States government must pay to borrow money for a decade — was 1.37 percent Monday, low by historical standards but well above its recent low of 0.51 percent in August and 0.92 percent at the end of December. Those higher Treasury rates generally translate into higher mortgage rates and corporate borrowing costs, so the surge could take some of the air out of bubbly housing and financial markets.The inflation-adjusted interest rate the United States Treasury must pay to borrow money for 30 years was negative for much of the last year, meaning the government would pay investors back less in inflation-adjusted terms than it borrowed. Last week, the rate rose into positive territory for the first time since June and closed at 0.06 percent Monday. (For shorter time horizons, the “real yield” remains in negative territory.)That’s particularly striking given that Fed officials have repeatedly said they expect the short-term interest rate target they control to be near zero for quite some time — and bond investors appear to believe them. The yield on two-year Treasuries has barely budged in the same span.What is happening is known as a “steepening of the yield curve,” with long-term rates rising as short-term rates hold still. It tends to presage faster economic growth; it is the opposite of a “yield curve inversion,” which is known as a harbinger of recessions.But the flip side is that the moment appears to have passed when bond markets were giving the government an all-clear signal to do whatever was necessary to boost the economy, essentially making endless funding available at extraordinarily low cost. That could have implications for how the Biden administration approaches the rest of its economic agenda.Treasury Secretary Janet Yellen has emphasized that low interest rates, which keep the cost of debt service low, are important in her thinking about how much the government can comfortably borrow and spend.At The New York Times’s DealBook conference on Monday, Ms. Yellen, after noting that the government’s ratio of debt to the size of the economy is much larger than it was before the global financial crisis, said: “Look at a different metric, which is more important, which is what is the cost of that debt. Look for example at interest payments on the debt as a share of G.D.P.,” which is below 2007 levels.“So I think we have more fiscal space than we used to because of the interest rate environment,” Ms. Yellen told the Times’s Andrew Ross Sorkin.By implication, the further that bond yields rise, and inflation expectations along with them, the more the Biden administration would view their potential spending to be constrained. Congress is now at work on a $1.9 trillion pandemic aid package, which Democratic leaders hope to pass in March. They envision a large-scale infrastructure plan after that.Jerome Powell, the Federal Reserve chair, will face questions from Congress on Tuesday about the central bank’s policies. In other recent appearances, he has emphasized the importance of returning the economy to full health above all other goals, and stressed that inflation has been persistently too low rather than too high over the last decade.“Fed Chair Powell has taken each and every opportunity to reassure investors that the Fed would consider near-term inflationary pressure to be transitory,” said Katie Nixon, chief investment officer at Northern Trust Wealth Management. “The market is taking the Fed at its word that short rates will be anchored at zero for a considerable time.”The gap between the prices of regular and inflation-protected bonds as of Friday’s close imply that the Consumer Price Index is expected to rise 2.29 percent a year over the next five years, and 1.99 percent a year for the five years after that. The Fed aims for 2 percent annual inflation as measured by a different index that tends to be somewhat lower, meaning these so-called “inflation break-evens” are broadly consistent with the central bank’s goals.Put it all together, and the surge in rates so far is basically an optimistic sign that the post-pandemic economy will mark the end of a long period of sluggish growth. But the speed of the adjustment is a reminder that the line between too hot and just right is a narrow one.AdvertisementContinue reading the main story More