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    Workers Expect Fast Inflation Next Year. Could That Make It a Reality?

    The Federal Reserve chair is eyeing near-term inflation expectations, which might shape wages — and help keep prices rising rapidly.Amitis Oskoui, a consultant who works mostly with nonprofits and philanthropies, has not had a wage increase since inflation began to noticeably eat away at her paycheck early this year. What she has had are job offers.Ms. Oskoui, 36, has tried to leverage those prospects to argue for a raise as the rising cost of food, child care and life in general in Orange County, Calif., has cut into her family budget.“Generally, in the past, it was taboo to say: I need it to survive, and I know what I’m worth on the market,” she said. “In this environment, I think it’s more acceptable. Inflation is so front of mind, and it’s a big part of the public conversation about the economy.”That logic, reasonable at an individual level, is making the Federal Reserve nervous as it echoes across America.When employees successfully push for raises to cover their cost of living, companies face higher wage bills. To offset those expenses, firms may lift prices, creating a cycle in which fast inflation today begets fast — and maybe even faster — inflation tomorrow.So far, Fed officials do not think that wage growth has been a primary driver of America’s rapid inflation, Jerome H. Powell, the Fed chair, said on Wednesday.But an employment report set for release Friday is likely to show that average hourly earnings climbed 4.7 percent over the past year, economists predict. That is far faster than the 3 percent pace that prevailed before the pandemic, and is so quick that it could make it difficult for inflation to fully fade. Plus, policymakers remain anxious that today’s pressures could yet turn into a spiral in which wages and prices chase each other higher.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Fed Faces Tough Decisions as Inflation Lingers and Economic Risks Loom

    The central bank is expected to raise rates three-quarters of a point today, but what it says about its next steps will be even more important.The Federal Reserve is expected to continue its fight against the fastest inflation in 40 years on Wednesday by raising rates three-quarters of a percentage point for the fourth time in a row. What officials signal about the central bank’s future plans is likely to be even more important.Jerome H. Powell, the Fed chair, and his colleagues have been rapidly increasing interest rates this year to try to wrestle inflation lower. Rates, which were near zero as recently as March, are expected to stand around 3.9 percent after this meeting.Wednesday’s move would be the sixth consecutive rate increase by the Fed. The last time it moved this quickly was during the 1980s, when inflation peaked at 14 percent and interest rates rose to nearly 20 percent. Fed officials have suggested that at some point it will be appropriate to dial back their increases to allow the full economic effect of these rapid moves to play out. The question now is when that slowdown might happen.The Fed’s most recent economic projections, released in September, suggested that it could begin next month. But prices have remained uncomfortably high since those estimates were published. That could make it difficult for Mr. Powell and his colleagues to explain why backing down in December makes sense — even if they think it still does.Officials do not want investors to conclude that the Fed is easing up on its inflation fight, because market conditions could become more friendly to lending and economic growth as a result. That would be the opposite of what central bankers are aiming for: They are trying to slow conditions down so companies will lose their ability to charge more.“There are good reasons to believe that the Fed should pause relatively soon,” Tiffany Wilding, a U.S. economist at PIMCO. “There are going to be communication challenges to manage with this.”It’s a challenge that could be on full display when the Fed releases its rate decision at 2 p.m. and Mr. Powell holds his news conference at 2:30 p.m.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Jerome Powell Is Popular. His War on Inflation Could Change That.

    Jerome H. Powell, who is well liked across the political spectrum, is presiding over the fastest interest rate increases in generations, with another one expected this week.Jerome H. Powell has for years enjoyed something rare in a politically divided Washington: widespread popularity.While officially a Republican, Mr. Powell, the Federal Reserve chair, is a political centrist who has been nominated to prominent jobs at the central bank by President Biden as well as Presidents Barack Obama and Donald J. Trump. When Mr. Trump attacked Mr. Powell on Twitter in 2018 and 2019, criticizing him for not doing enough to stimulate the economy, liberal and conservative commentators rushed to his defense. When he was up for renomination, people across the political spectrum argued his case.The acclaim has extended beyond the capital. After delivering an economics-heavy speech on the labor market to a crowd of businesspeople in Rhode Island in 2019, Mr. Powell received a standing ovation — not a typical response to central bank oration.But the applause could soon stop.That is because Mr. Powell, who is in his fifth year of leading the world’s most important central bank, is presiding over the fastest interest rate increases in generations as the Fed tries to wrestle rapid inflation under control. The Fed is expected to raise rates by another three-quarters of a percentage point on Wednesday. And by next year, borrowing costs are expected to climb to nearly 5 percent, up from near zero as recently as March.The last time the central bank adjusted policy that quickly, in the 1980s, it inflicted economic pain that inspired intense backlash against the sitting chair, Paul A. Volcker. And while the rate increases were more extreme back then, the Fed’s moves were under far less public scrutiny than they are today, when global financial markets hang on every word coming from the central bank.Mr. Powell, 69, is acutely aware of his own reputation and that of the institution he leads. He reads four newspapers every morning, along with a set of news clips about the Fed that his staff sends him by 6 a.m. He keeps a careful eye on the debate economists are having on central bank policy, including the recent back-and-forth on Twitter between Lawrence H. Summers, a former Treasury secretary, and Paul Krugman, a New York Times columnist, about whether inflation is poised to subside so much that the Fed risks overdoing it.His consciousness of how the Fed’s moves are being received has at times prompted Mr. Powell to adjust course. He pivoted toward a gentler policy stance in early 2019 after markets reacted sharply to his Dec. 19, 2018, news conference, at which the Fed forecast that it would keep removing its support from the economy. And his awareness has shaped his communication style: Mr. Powell has tried to reach ordinary Americans, delivering plain-spoken remarks that acknowledge how economic developments shape their lives.Mr. Powell’s responsiveness has often been viewed as one of his strengths — but it is now prompting some economists and investors to question whether he will be able to stick by the central bank’s plan to wrangle inflation.Once today’s rate increases translate into palpable financial or economic pain, criticism is likely to come in hard and fast as recession risks intensify and as everyday Americans find their jobs at risk and their wage growth slowing. Already, some lawmakers and progressive economists are urging Mr. Powell to stop his rate campaign for the good of the American worker.Fed policy is made by committee, but the chair is the central bank’s most visible and powerful policymaker, and complaints are likely to be lobbed at Mr. Powell personally. As markets and the public react, some Fed watchers think he will back off before inflation is well and truly stamped out of the system.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    With So Much Riding on the Fed’s Moves, It’s Hard to Know How to Invest

    Where the markets go from here depends on whether and how deftly the Federal Reserve pivots from its hawkish stance.Making money was easy for investors when they could still plausibly believe that the Federal Reserve might back down on its aggressive campaign to subdue inflation at any cost. But harsh words from the Fed chairman, Jerome H. Powell, backed by a string of large interest rate increases, finally convinced markets that the central bank meant business, sending stock and bond prices tumbling.A nervous confidence returned as October began, with stocks experiencing a big two-day rally, but then prices sank anew. Investors at first seemed more confident that the Fed would reverse course, but anxiety returned as they worried about how much damage would be inflicted before that happened. Where the markets go from here, and how to position an investment portfolio, depends on whether and how deftly the Fed changes its strategy.“A crescendo of factors is coming together that makes me think we’re going to have another few weeks of pain before the Fed capitulates,” said Marko Papic, chief strategist at the Clocktower Group.Mr. Papic thinks a dovish turn may come soon, as the Fed signals that it would settle for inflation two or three percentage points above its 2 percent target.Others think more pain lies ahead, maybe a lot more. A prerequisite for a pivot might be a “credit event,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies, meaning a default by a large investment firm or corporate or government borrower, often with severe consequences. Mutual FundsA glance at mutual fund performance in the third quarter. More

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    Labor Hoarding Could be Good News for the Economy

    PROVO, Utah — Chad Pritchard and his colleagues are trying everything to staff their pizza shop and bistro, and as they do, they have turned to a new tactic: They avoid firing employees at all costs.Infractions that previously would have led to a quick dismissal no longer do at the chef’s two places, Fat Daddy’s Pizzeria and Bistro Provenance. Consistent transportation issues have ceased to be a deal breaker. Workers who show up drunk these days are sent home to sober up.Employers in Provo, a college town at the base of the Rocky Mountains where unemployment is near the lowest in the nation at 1.9 percent, have no room to lose workers. Bistro Provenance, which opened in September, has been unable to hire enough employees to open for lunch at all, or for dinner on Sundays and Mondays. The workers it has are often new to the industry, or young: On a recent Wednesday night, a 17-year-old could be found torching a crème brûlée.Down the street, Mr. Pritchard’s pizza shop is now relying on an outside cleaner to help his thin staff tidy up. And up and down the wide avenue that separates the two restaurants, storefronts display “Help Wanted” signs or announce that the businesses have had to temporarily reduce their hours.Provo’s desperation for workers is an intense version of the labor crunch that has plagued employers nationwide over the past two years — one that has prompted changes in hiring and layoff practices that could have big implications for the U.S. economy. Policymakers are hoping that after struggling through the worst labor shortages America has experienced in at least several decades, employers will be hesitant to lay off workers even when the economy cools.Mr. Pritchard cannot hire enough employees to open the bistro for lunch at all, or for dinner on Sundays or Mondays.That may help prevent the kind of painful recession the Federal Reserve is hoping to avoid as it tries to combat persistent inflation. America’s economy is facing a marked — and intentional — slowdown as the Fed raises interest rates to chill demand and drive down price increases, the kind of pullback that would usually result in notably higher unemployment. But officials are still hoping to achieve a soft landing in which growth moderates without causing widespread job losses. A few have speculated that today’s staffing woes will help them to pull it off, as companies try harder than they have in the past to weather a slowdown without cutting staff.“Businesses that experienced unprecedented challenges restoring or expanding their work forces following the pandemic may be more inclined to make greater efforts to retain their employees than they normally would when facing a slowdown in economic activity,” Lael Brainard, the Fed’s vice chair, said in a recent speech. “This may mean that slowing aggregate demand will lead to a smaller increase in unemployment than we have seen in previous recessions.”For now, the job market remains strong. Employers added 263,000 workers in September, fewer than in recent months but more than was normal before the pandemic. Unemployment is at 3.5 percent, matching the lowest level in 50 years, and average hourly earnings picked up at a solid 5 percent clip compared with a year earlier.But that is expected to change. When the Fed raises interest rates and slows down the economy, it also weakens the labor market. Wage gains slow, paving the way for inflation to cool down, and in the process, unemployment rises — potentially, significantly.The State of Jobs in the United StatesEconomists have been surprised by recent strength in the labor market, as the Federal Reserve tries to engineer a slowdown and tame inflation.September Jobs Report: Job growth eased slightly in September but remained robust, indicating that the economy was maintaining momentum despite higher interest rates.A Cooling Market?: Unemployment is low and hiring is strong, but there are signs that the red-hot labor market may be coming off its boiling point.Factory Jobs: American manufacturers have now added enough jobs to regain all that they shed during the pandemic — and then some.Missing Workers: The labor market appears hot, but the supply of labor has fallen short, holding back the economy. Here is why.In the 1980s, when inflation was faster than it is now and entrenched, the Fed lifted rates drastically to roughly 20 percent and sent unemployment to above 10 percent. Few economists expect an outcome that severe this time since today’s inflation burst has been shorter-lived and rates are not expected to climb nearly as much.Mr. Pritchard demonstrated how to stretch pizza dough in Fat Daddy’s Pizzeria, his other restaurant in Provo.Many of the workers Mr. Pritchard and his business partner, Janine Coons, have hired are new to the industry or young.Still, Fed officials themselves expect unemployment to rise nearly a full percentage point to 4.4 percent next year — and policymakers have admitted that is a mild estimate, given how much they are trying to slow down the economy. Some economists have penciled in worse outcomes. Deutsche Bank, for instance, predicts 5.6 percent joblessness by the end of 2023.Labor hoarding offers a glimmer of hope that could help the Fed’s more benign unemployment forecast to become reality: Employers who are loath to jettison workers may help the labor market to slow down and wage growth to moderate without a spike in joblessness.“Companies are still confronting this enormous churn and losing people, and they don’t know what to do to hang on to people,” said Julia Pollak, chief economist at the career site ZipRecruiter. “They’re definitely hanging on to workers for dear life just because they’re so scarce.”When the job market slows, employers will have recent, firsthand memories of how expensive it can be to recruit, and train, workers. Many employers may enter the slowdown still severely understaffed, particularly in industries like leisure and hospitality that have struggled to hire and retain workers since the start of the pandemic. Those factors may make them less likely to institute layoffs.And after long months of very tight labor markets — there are still nearly two open jobs for every unemployed worker — companies may be hesitant to believe that any uptick in worker availability will last.“There’s a lot of uncertainty about how big of a downturn are we facing,” said Benjamin Friedrich, an associate professor of strategy at Northwestern University’s Kellogg School of Management. “You kind of want to be ready when opportunities arise. The way I think about labor hoarding is, it has option value.”Employers in Provo, where unemployment is near the lowest in the nation at 1.9 percent, have no room to lose workers.Instead of firing, businesses may look for other ways to trim costs. Mr. Pritchard in Provo and his business partner, Janine Coons, said that if business fell off, their first resort would be to cut hours. Their second would be taking pay cuts themselves. Firing would be a last resort.The pizzeria didn’t lay off workers during the pandemic, but Mr. Pritchard and Ms. Coons witnessed how punishing it can be to hire — and since all of their competitors have been learning the same lesson, they do not expect them to let go of their employees easily even if demand pulls back.“People aren’t going to fire people,” Mr. Pritchard said.But economists warned that what employers think they will do before a slowdown and what they actually do when they start to experience financial pain could be two different things.The idea that a tight labor market may leave businesses gun-shy about layoffs is untested. Some economists said that they could not recall any other downturn where employers broadly resisted culling their work force.“It would be a pretty notable change to how employers responded in the past,” said Nick Bunker, director of North American economic research for the career site Indeed.And even if they do not fire their full-time employees, companies have been making increased use of temporary or just-in-time help in recent months. Gusto, a small-business payroll and benefits platform, conducted an analysis of its clients and found that the ratio of contractors per employee had increased more than 60 percent since 2019.If the economy slows, gigs for those temporary workers could dry up, prompting them to begin searching for full-time jobs — possibly causing unemployment or underemployment to rise even if nobody is officially fired.Policymakers know a soft landing is a long shot. Jerome H. Powell, the Fed chair, acknowledged during his last news conference that the Fed’s own estimate of how much unemployment might rise in a downturn was a “modest increase in the unemployment rate from a historical perspective, given the expected decline in inflation.”But he also added that “we see the current situation as outside of historical experience.”Bistro Provenance opened in September.Dinner service at the restaurant.The reasons for hope extend beyond labor hoarding. Because job openings are so unusually high right now, policymakers hope that workers can move into available positions even if some firms do begin layoffs as the labor market slows. Companies that have been desperate to hire for months — like Utah State Hospital in Provo — may swoop in to pick up anyone who is displaced.Dallas Earnshaw and his colleagues at the psychiatric hospital have been struggling mightily to hire enough nurse’s aides and other workers, though raising pay and loosening recruitment standards have helped around the edges. Because he cannot hire enough people to expand in needed ways, Mr. Earnshaw is poised to snap up employees if the labor market cools.“We’re desperate,” Mr. Earnshaw said.But for the moment, workers remain hard to find. At the bistro and pizza shop in downtown Provo, what worries Mr. Pritchard is that labor will become so expensive that — combined with rapid ingredient inflation — it will be hard or impossible to make a profit without lifting prices on pizzas or prime rib so much that consumers cannot bear the change.“What scares me most is not the economic slowdown,” he said. “It’s the hiring shortage that we have.” More

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    Central Banks Accept Pain Now, Fearing Worse Later

    Federal Reserve officials and their counterparts around the world are trying to defeat inflation by rapidly raising interest rates. They know it will come at a cost.A day after the Federal Reserve lifted interest rates sharply and signaled more to come, central banks across Asia and Europe followed suit on Thursday, waging their own campaigns to crush an outbreak of inflation that is bedeviling consumers and worrying policymakers around the globe.Central bankers typically move slowly. That’s because their policy tools are blunt and work with a lag. The interest rate increases taking place from Washington to Jakarta will need months to filter out across the global economy and take full effect. Jerome H. Powell, the Fed chair, once likened policymaking to walking through a furnished room with the lights off: You go slowly to avoid a painful outcome.Yet officials, learning from a history that has illustrated the perils of taking too long to stamp out price increases, have decided that they no longer have the luxury of patience.Inflation has been relentlessly rapid for a year and a half now. The longer that remains the case, the greater the risk that it is going to become a permanent feature of the economy. Employment contracts might begin to factor in cost-of-living increases, companies might begin to routinely raise prices and inflation might become part of the fabric of society. Many economists think that happened in the 1970s, when the Fed tolerated out-of-control price increases for years — allowing an “inflationary psychology” to take hold that later proved excruciating to crush.But the aggressiveness of the monetary policy action now underway also pushes central banks into new and risky territory. By tightening quickly and simultaneously when growth in China and Europe is already slowing and supply chain pressures are easing, global central banks risk overdoing it, some economists warn. They may plunge economies into recessions that are deeper than necessary to curb inflation, sending unemployment significantly higher.“The margin of error now is very thin,” said Robin Brooks, chief economist at the Institute of International Finance. “A lot of this comes down to judgment, and how much emphasis to put on the 1970s scenario.”In the 1970s, Fed policymakers did lift interest rates in a bid to control inflation, but they backed off when the economy began to slow. That allowed inflation to remain elevated for years, and when oil prices spiked in 1979, it reached untenable levels. The Fed, under Paul A. Volcker, ultimately raised rates to nearly 20 percent — and sent unemployment soaring to more than 10 percent — in an effort to wrestle the price increases down.That example weighs heavily on policymakers’ minds today.“We think that a failure to restore price stability would mean far greater pain later on,” Mr. Powell said at his news conference on Wednesday, after the Fed raised rates three-quarters of a percentage point for a third straight time. The Fed expects to raise borrowing costs to 4.4 percent next year in the fastest tightening campaign since the 1980s.The Bank of England raised interest rates half a point to 2.25 percent on Thursday, even as it said the United Kingdom might already be in a recession. The European Central Bank is similarly expected to continue raising rates at its meeting in October to combat high inflation, even as Russia’s war in Ukraine throws Europe’s economy into turmoil.As the major monetary authorities lift borrowing costs, their trading partners are following suit, in some cases to avoid big moves in their currencies that could push up local import prices or cause financial instability. On Thursday, Indonesia, Taiwan, the Philippines, South Africa and Norway lifted rates, and a large move by Switzerland’s central bank ended the era of below-zero interest rates in Europe. Japan has comparatively low inflation and is keeping rates low, but it intervened in currency markets for the first time in 24 years on Thursday to prop up the yen in light of all of the action by its counterparts.The wave of central bank action is expected to have consequences, working by design to sharply slow both interconnected commerce and national economies. The Fed, for instance, sees its moves pushing U.S. unemployment to 4.4 percent in 2023, up from the current 3.7 percent.A housing development in Phoenix. Climbing interest rates are already making it more expensive to borrow money to buy a car or purchase a house in many nations.Adriana Zehbrauskas for The New York TimesAlready, the moves are beginning to have an impact. Climbing interest rates are making it more expensive to borrow money to buy a car or a house in many nations. Mortgage rates in the United States are back above 6 percent for the first time since 2008, and the housing market is cooling down. Markets have swooned this year in response to the tough talk coming from central banks, reducing the amount of capital available to big companies and cutting into household wealth.Yet the full effect could take months or even years to be felt.Rates are rising from low levels, and the latest moves have not yet had time to fully play out. In continental Europe and Britain, the war in Ukraine rather than monetary tightening is pushing economies toward recession. And in the United States, where the fallout from the war is far less severe, hiring and the job market remain strong, at least for now. Consumer spending, while slowing, is not plummeting.That is why the Fed believes it has more work to do to slow the economy — even if that increases the risk of a downturn.“We have always understood that restoring price stability while achieving a relatively modest increase in unemployment, and a soft landing, would be very challenging,” Mr. Powell said on Wednesday. “No one knows whether this process will lead to a recession, or if so, how significant that recession would be.”Many global central bankers have painted today’s inflation burst as a situation in which their credibility is on the line.“For the first time in four decades, central banks need to prove how determined they are to protect price stability,” Isabel Schnabel, an executive board member of the European Central Bank, said at a Fed conference in Wyoming last month.A FedEx worker making deliveries in Miami Beach. Consumer spending in the United States, while slowing, is not plummeting.Scott McIntyre for The New York TimesBut that does not mean that the policy path the Fed and its counterparts are carving out is unanimously agreed upon — or unambiguously the correct one. This is not the 1970s, some economists have pointed out. Inflation has not been elevated for as long, supply chains appear to be healing and measures of inflation expectations remain under control.Mr. Brooks at the Institute of International Finance sees the pace of tightening in Europe as a mistake, and thinks that the Fed, too, could overdo it at a time when supply shocks are fading and the full effects of recent policy moves have yet to play out.Maurice Obstfeld, an economist at the Peterson Institute for International Economics and a former chief economist of the International Monetary Fund, wrote in a recent analysis that there is a risk that global central banks are not paying enough attention to one another.“Central banks clearly are scrambling to raise interest rates as inflation runs at levels not seen for nearly two generations,” he wrote. “But there can be too much of a good thing. Now is the time for monetary policymakers to put their heads up and look around.”Still, at many central banks around the world — and clearly at Mr. Powell’s Fed — policymakers are treating it as their duty to remain resolute in the fight against price increases. And that is translating into forceful action now, regardless of the imminent and uncertain costs.Mr. Powell may have once warned that moving quickly in a dark room could end painfully. But now, it’s as if the room is on fire: The threat of a stubbed toe still exists, but moving slowly and cautiously risks even greater peril. More

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    The Fed Intensifies Its Battle Against Inflation

    Federal Reserve officials made another large rate increase and signaled more to come, pledging to quash inflation despite expected pain.The Federal Reserve raised interest rates by three-quarters of a percentage point in an attempt to lower inflation back to 2 percent.Drew Angerer/Getty ImagesFederal Reserve officials, struggling to contain the most rapid inflation in 40 years, delivered a third big rate increase on Wednesday and projected a more aggressive path ahead for monetary policy, one that would lift interest rates higher and keep them elevated longer.The Fed raised its policy interest rate by three-quarters of a percentage point, boosting it to a range of 3 to 3.25 percent. That’s a significant jump from as recently as March, when the federal funds rate was set at near-zero, and the increases since then have made for the Fed’s fastest policy adjustment since the 1980s.Even more notably, policymakers predicted on Wednesday that they would raise borrowing costs to 4.4 percent by the end of the year and forecast markedly higher interest rates in the years to come than they had previously expected. Jerome H. Powell, the Fed chair, warned that those moves would be painful for the U.S. economy — but said curbing growth to contain price increases was essential.“We have got to get inflation behind us,” Mr. Powell said during his post-meeting news conference. “I wish there were a painless way to do that; there isn’t.”Together, the Fed’s stark projections and the Fed chair’s comments amounted to a declaration: The central bank is determined to crush inflation, even if doing so comes at a cost to the economy in the near term. That message got through to markets, which slumped in reaction to the news, with the S&P 500 index closing down 1.7 percent.“We want to act aggressively now, and get this job done, and keep at it until its done,” Mr. Powell explained.His stern remarks reflect a challenging reality for the Fed. Inflation has been stubbornly rapid, and it is proving difficult to wrestle back under control.Prices continue to increase at more than three times the central bank’s target rate of 2 percent, making everyday life hard to afford as everything from rent to food to household goods continues to grow more expensive. The jump in inflation, which is being felt globally, stems partly from supply chain disruptions caused by the pandemic and war in Ukraine. But the price pressures also come from sustained consumer demand, which has allowed companies to charge more without losing customers.In fact, people have continued to buy cars, retail goods and dinners out even as the central bank has begun to sharply raise interest rates. Companies have continued to rake in big profits while hiring at a rapid clip, lifting wages as they compete for scarce workers — and sending prices relentlessly higher.The Fed is trying to change that, a statement the central bank delivered clearly on Wednesday.“It’s consistent with the message that inflation is public enemy No. 1: They have to keep going,” said Priya Misra, head of global rates research at T.D. Securities.What the Fed’s Rate Increases Mean for YouCard 1 of 4A toll on borrowers. More