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    Central Banks Accept Pain Now, Fearing Worse Later

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    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

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    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

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    What Comes Next in the Fed’s Fight Against Inflation?

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    Wall Street will watch the central bank’s economic forecasts closely on Wednesday, when another jumbo-size rate increase is expected.The Federal Reserve is expected to deliver a third straight supersize interest rate increase this week as it wages its most aggressive fight against inflation since the 1980s — and it could signal even more to come.Central bankers are widely expected to raise interest rates three-quarters of a percentage point at their meeting on Wednesday, and investors think there is even a small chance of a full percentage-point move.But Wall Street is more focused on what comes next. Officials will release updated economic forecasts for the first time since June after their two-day meeting this week. Those are expected to show a more forceful path ahead for rates than Fed officials previously anticipated as rapid inflation continues to plague America. The question is just how much more assertive the Fed will be.Central bankers have already raised interest rates considerably in an attempt to slow the economy and temper price increases. Business activity is slowing in response, but it is not falling off a cliff: Employers continue to hire, wages are rising, and inflation has remained stubbornly quick.That has prompted officials to reinforce in speeches that they are serious about getting price increases under control, even if doing so comes at a cost to growth and the labor market. It’s an inflation-focused tone that many on Wall Street refer to as “hawkish.”The economic projections could give policymakers the chance to underline that commitment.“Things are not quite evolving as they had expected — they’re having trouble slowing the economy,” said Gennadiy Goldberg, a U.S. rates strategist at TD Securities. “At the end of the day, there is very little they can do this week but sound hawkish.”Jerome H. Powell, the Fed chair, will hold a news conference after the release, and is likely to echo his pledge late last month to do what it takes to wrestle prices lower.That could be a painful process, Mr. Powell has acknowledged. Higher interest rates temper inflation by making it more expensive to borrow money, discouraging both consumption and business expansions. That weighs on wage growth and can even push unemployment higher. Firms cannot charge as much in a slowing economy, and inflation cools down.“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Mr. Powell said last month. He later added, “We will keep at it until we are confident the job is done.”If the Fed continues raising rates along the trajectory that economists and investors increasingly expect, the fallout could be painful. In the early 1980s, the last time inflation was as high as it is today, the central bank under Paul A. Volcker jerked borrowing costs sharply higher and mired the economy in a recession that sent joblessness to double-digit levels. Homebuilders mailed Mr. Volcker two-by-fours from buildings they could not build; car dealers sent keys from cars they could not sell.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Fed Officials May Be Encouraged by the Latest Labor Data

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    Federal Reserve officials are likely to see the August jobs numbers as a sign their policies are working — though not that their job is done.Policymakers are closely parsing labor market data as they try to figure out how much underlying momentum the economy has and how much they need to raise interest rates to restrain growth and lower inflation.Fed officials have raised rates to a range of 2.25 to 2.5 percent in July from near zero in March, but they are still waiting for signs that those higher borrowing costs are cooling consumer spending and business expansions, lowering demand and giving supply a chance to catch up. So far, the evidence of a major slowdown has been spotty.In that context, the data released on Friday was encouraging. Job growth slowed, but not by so much that it suggested a recession was imminent. The unemployment rate rose, but mostly because more people joined the labor force, which should make it easier for companies to fill open positions. Wage growth slowed.“Overall there’s a lot to like if you’re a Fed official right now,” said Sarah House, an economist at Wells Fargo. “Hiring remains robust but on a more sustainable basis. Yes, unemployment was up, but it was for all the right reasons. We saw a surge in job seekers.”Still, Ms. House said, one good report will not convince the Fed that it is time to back off its efforts to tame inflation.Central bankers have been clear that they are carefully watching data on both employment and inflation — which is showing hopeful, but not yet conclusive, signs of slowing — as they decide how quickly to raise interest rates. Fed officials are contemplating an increase of either a half percentage point or three-quarters of a point at their meeting on Sept. 20-21.Higher interest rates work to counter inflation partly by weighing on the labor market. As businesses face steeper borrowing costs, they grow less and cut back on hiring. As job opportunities dwindle, competition for workers eases and wage growth slows — reining in consumer spending. As demand wanes, companies become less able to raise prices, lowering inflation.That process can push unemployment up and prove painful as people lose or struggle to find jobs. But Fed officials have argued that getting inflation under control is critical — and that delaying the tough choices now would only make the situation worse down the road. More

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    The Fed’s favorite inflation gauge cooled in July.

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    The Federal Reserve’s preferred measure of inflation eased in July as gas prices fell following a sharp run-up earlier in the summer, a widely expected moderation that could nevertheless provide policymakers positive news as they battle the most rapid price gains in decades.The Personal Consumption Expenditures index, which the Fed tries to keep climbing at a 2 percent annual rate on average over time, was up by 6.3 percent in July compared to a year earlier. While that is still far more inflation than the central bank wants, it is a slowdown from 6.8 percent increase over the year through June.And on a monthly basis, the price index declined by 0.1 percent, an even bigger pullback than economists had expected.Because part of the decline was a result of falling gas prices, which are volatile and could jump again, officials may not take the cool-down in headline inflation alone as a major signal. But economists closely watch a so-called core inflation measure that strips out fuel and food prices to get a better sense of underlying price pressures, and that measure also offered some encouraging news.Core inflation slowed to a 4.6 percent annual increase, compared with 4.8 percent in June. And on a monthly basis, the core index slowed to a 0.1 percent gain, a pullback from the prior month and less than the 0.2 percent economists in a Bloomberg survey had expected.Inflation F.A.Q.Card 1 of 5Inflation F.A.Q.What is inflation? More

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    At the Fed’s Big Conference, Investors Will Grasp for Hints About Rate Path

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    The most anticipated economic event of the summer is set to happen on Friday, when Jerome H. Powell, the Federal Reserve chair, provides an update on the economic outlook that could detail how the central bank is thinking about inflation and the path ahead for interest rates.Mr. Powell’s speech at the Federal Reserve Bank of Kansas City’s annual conference near Jackson, Wyo., is always closely watched. But it is getting special scrutiny this year as investors grasp for any hint at what might come next for the Fed, which has been raising rates rapidly in its campaign to tamp down the fastest rate of inflation in 40 years. Markets are trying to guess when the central bank, which raised rates by an unusually quick three-quarters of a percentage point at each of its last two meetings, will slow down.Inflation has shown some early signs of moderating, which could point toward a less aggressive Fed policy path. But prices are still increasing at more than three times the pace the Fed aims for, creating a pressing challenge for consumers who are struggling to afford day-to-day necessities like rent and food as wages fail to keep up.As officials weigh both glimmers of hope and a still-worrying pace of inflation, they are attempting to achieve a delicate balancing act. The Fed is trying to avoid restricting the economy so much that it plunges the United States into an unnecessary recession, while restraining it enough to bring price increases fully and firmly back under control.Mr. Powell has historically used his remarks at the conference, colloquially called Jackson Hole for the area where it is held, to detail big ideas. He laid out a new framework for monetary policy at the gathering in 2020 and in 2021 provided reasons — which have since failed to pan out — for why inflation might fade.Inflation F.A.Q.Card 1 of 5Inflation F.A.Q.What is inflation? More

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    Good News on Jobs May Mean Bad News Later as Hiring Spree Defies Fed

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    Employers hired rapidly and paid more in July, suggesting the Federal Reserve may have to remain aggressive in its effort to cool the economy.America’s job market is remarkably strong, a report on Friday made clear, with unemployment at the lowest rate in half a century, wages rising fast and companies hiring at a breakneck pace.But the good news now could become a problem for President Biden later.Mr. Biden and his aides pointed to the hiring spree as evidence that the United States is not in a recession and celebrated the report, which showed that employers added 528,000 jobs in July and that pay picked up by 5.2 percent from a year earlier. But the still-blistering pace of hiring and wage growth means the Federal Reserve may need to act more decisively to restrain the economy as it seeks to wrestle inflation under control.Fed officials have been waiting for signs that the economy, and particularly the job market, is slowing. They hope that employers’ voracious need for workers will come into balance with the supply of available applicants, because that would take pressure off wages, in turn paving the way for businesses like restaurants, hotels and retailers to temper their price increases.The moderation has remained elusive, and that could keep central bankers raising interest rates rapidly in an effort to cool down the economy and restrain the fastest inflation in four decades. As the Fed adjusts policy aggressively, it could increase the risk that the economy tips into a recession, instead of slowing gently into the so-called soft landing that central bankers have been trying to engineer.“We’re very unlikely to be falling into a recession in the near term,” said Michael Gapen, head of U.S. economics research at Bank of America. “But I’d also say that numbers like this raise the risk of a sharper landing farther down the road.”Interest rates are a blunt tool, and historically, big Fed adjustments have often set off recessions. Stock prices fell after Friday’s release, a sign that investors are worried that the new figures increased the odds of a bad economic outcome down the line.Even as investors zeroed in on the risks, the White House greeted the jobs data as good news and a clear sign that the economy is not in a recession even though gross domestic product growth has faltered this year.“From the president’s perspective, a strong jobs report is always extremely welcome,” Jared Bernstein, a member of the White House Council of Economic Advisers, said in an interview. “And this is a very strong jobs report.”Still, the report appeared to undermine the administration’s view of where the economy is headed. Mr. Biden and White House officials have been making the case for months that job growth would soon slow. They said that deceleration would be a welcome sign of the economy’s transition to more sustainable growth with lower inflation.The lack of such a slowdown could be a sign of more stubborn inflation than administration economists had hoped, though White House officials offered no hint Friday that they were worried about it.“We think it’s good news for the American people,” the White House press secretary, Karine Jean-Pierre, told reporters in a briefing. “We think we’re still heading into a transition to more steady and stable growth.”The State of Jobs in the United StatesEmployment gains in July, which far surpassed expectations, show that the labor market is not slowing despite efforts by the Federal Reserve to cool the economy.July Jobs Report: U.S. employers added 528,000 jobs in the seventh month of the year. The unemployment rate was 3.5 percent, down from 3.6 percent in June.Care Worker Shortages: A lack of child care and elder care options is forcing some women to limit their hours or has sidelined them altogether, hurting their career prospects.Downsides of a Hot Market: Students are forgoing degrees in favor of the attractive positions offered by employers desperate to hire. That could come back to haunt them.Slowing Down: Economists and policymakers are beginning to argue that what the economy needs right now is less hiring and less wage growth. Here’s why.The Fed, too, had been counting on a cool-down. Before July’s employment report, a host of other data points had suggested that the job market was decelerating: Wage growth had been moderating fairly steadily; job openings, while still elevated, had been declining; and unemployment insurance filings, while low, had been edging higher.The Fed had welcomed that development — but the new figures called the moderation into question. Average hourly earnings have steadily risen since April on a monthly basis, and Friday’s report capped a streak of hiring that means the job market has now returned to its prepandemic size.“Reports like this emphasize just how much more the Fed needs to do to bring inflation down,” said Blerina Uruci, a U.S. economist at T. Rowe Price. “The labor market remains very hot.”Central bankers have raised borrowing costs three-quarters of a percentage point at each of their last two meetings, an unusually rapid pace. Officials had suggested that they might slow down at their meeting in September, lifting rates by half a point — but that forecast hinged partly on their expectation that the economy would be cooling markedly.Instead, “I think this report makes three-quarters of a point the base case,” said Omair Sharif, founder of Inflation Insights, a research firm. “The labor market is still firing on all cylinders, so this isn’t the kind of slowdown that the Fed is trying to generate to alleviate price pressures.”Fed policymakers usually embrace strong hiring and robust pay growth, but wages have been climbing so fast lately that they could make it difficult to slow inflation. As employers pay more, they must either charge their customers more, improve their productivity or take a hit to their profits. Raising prices is typically the easiest and most practical route.The blistering pace of hiring means the Federal Reserve may need to act more decisively to tame inflation.Scott McIntyre for The New York TimesPlus, as inflation has soared, even robust wage growth has failed to keep up for most people. While wages have climbed 5.2 percent over the past year, far faster than the 2 percent to 3 percent gains that were normal before the pandemic, consumer prices jumped 9.1 percent over the year through June.Fed officials are trying to steer the economy back to a place where both pay gains and inflation are slower, hoping that once prices start to climb gradually again, workers can eke out wage gains that leave them better off in a sustainable way.“Ultimately, if you think about the medium and longer term, price stability is what makes the whole economy work,” Jerome H. Powell, the Fed chair, said at his July news conference, explaining the rationale.Some prominent Democrats have questioned whether the United States should be relying so heavily on Fed policies — which work by hurting the labor market — to cool inflation. Senators Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, both Democrats, have been among those arguing that there must be a better way.But most of the changes that Congress and the White House can institute to lower inflation would take time to play out. Economists estimate that the Biden administration’s climate and tax bill, the Inflation Reduction Act, would have a minor effect on price increases in the near term, though it may help more with time.While the White House has avoided saying what the Fed should do, Mr. Bernstein from the Council of Economic Advisers suggested that Friday’s report could give the Fed more cushion to raise rates without harming workers.“The depth of strength in this labor market is not just a buffer for working families,” he said. “It also gives the Fed room to do what they need to do while trying to maintain a strong labor market.”Still, the central bank could find itself in an uncomfortable spot in the months ahead.An inflation report scheduled for release on Wednesday is expected to show that consumer price increases moderated in July as gas prices came down. But fuel prices are volatile, and other signs that inflation remains out of control are likely to persist: Rents are climbing swiftly, and many services are growing more expensive.And the still-hot labor market is likely to reinforce the view that conditions are not simmering down quickly enough. That could keep the Fed working to restrain economic activity even as overall inflation shows early, and perhaps temporary, signs of pulling back.“We’re going to get inflation slowing in the next couple of months,” Mr. Sharif said. “The activity part of the equation is not cooperating right now, even if inflation overall does cool off.”Isabella Simonetti More