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    Covid’s effect on the jobs numbers may leave Washington in the dark.

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    Without clarity on how quickly the labor market can shake off Omicron, the Fed will have difficulty applying the data to its interest rate strategy.Jerome H. Powell, the Federal Reserve chair, has compared setting monetary policy to stumbling through an unlit room: You feel your way to the door cautiously to avoid making a painful mistake.The analogy is likely to ring especially true after the Omicron-jumbled job report for January, as the virus obscures the pace of progress in the job market and leaves policymakers in the dark. But the Fed may lack the luxury of creeping slowly through the dinginess this time.Mr. Powell and his colleagues are poised to raise interest rates for the first time since 2018 in March, a move meant to cool off the economy as inflation runs at its fastest pace in nearly 40 years. It will likely be in the uncomfortable position of making that move — and signaling what comes next, as markets are pointing to as many as five 2022 rate increases — at a time when the latest job market data look lackluster at best, bleak at worst.The Fed will look past a few months of virus-depressed job market data as officials try to assess the actual strength of the economic rebound: The Omicron variant is already in retreat in the United States, and there’s little reason to expect an extended lull in hiring after a year of breakneck labor market progress.But the virus flare-up and its economic repercussions underline a challenge that is likely to confront the Fed throughout 2022 as it pares back its support. It’s hard to know what will happen next in a coronavirus-stricken business environment.“We’ll be humble and nimble,” Mr. Powell pledged of the central bank’s policy path, speaking at a news conference last month.The Fed typically navigates by watching incoming labor market data — especially the unemployment rate, lately — and inflation data. But it could take a few months for the jobs picture to clear, and in the meantime, inflation is running hot. Used-vehicle prices, which have been a big driver of overall price increases, might be on the cusp of stabilizing but have yet to cool off notably. Gasoline prices are headed back up, food is costing more and rents have been increasing steeply.That is likely to leave the Fed, which typically takes away its help at moments of strong labor market progress, moving when the job market is hitting a bump.“It’s the Omicron fog,” said Diane Swonk, chief economist for the accounting firm Grant Thornton. “It’s not going to give us visibility.”Fed officials are trying to make sure that they do not fall behind the curve on high inflation, allowing it to become so locked into consumer and business expectations that it becomes a permanent feature of the economic landscape. How the Fed strikes the balance — and how much it slows down the economy with its rate increases this year — could have important political implications, too. Voters are already glum about the economy’s prospects, and President Biden is suffering in the polls. More

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    Fed Signals Rate Increase in March, Citing Inflation and Strong Job Market

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    Federal Reserve officials signaled on Wednesday that they were on track to raise interest rates in March, given that inflation has been running far above policymakers’ target and that labor market data suggests employees are in short supply.Central bankers left rates unchanged at near-zero — where they have been set since March 2020 — but the statement after their two-day policy meeting laid the groundwork for higher borrowing costs “soon.” Jerome H. Powell, the Fed chair, said officials no longer thought America’s rapidly healing economy needed so much support, and he confirmed that a rate increase was likely at the central bank’s next meeting.“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that the conditions are appropriate for doing so,” Mr. Powell said.While he declined to say how many rate increases officials expected to make this year, he noted that this economic expansion was very different from past ones, with “higher inflation, higher growth, a much stronger economy — and I think those differences are likely to be reflected in the policy that we implement.”The Fed was already slowing a bond-buying program it had been using to bolster the economy, and that program remains on track to end in March. The Fed’s post-meeting statements and Mr. Powell’s remarks signaled that central bankers could begin to shrink their balance sheet holdings of government-backed debt soon after they begin to raise interest rates, a move that would further remove support from markets and the economy.Investors have been nervously eyeing the Fed’s next steps, worried that its policy changes will hurt stock and other asset prices and rapidly slow down the economy. Stocks on Wall Street gave up their gains and yields on government bonds rose as Mr. Powell spoke. The S&P 500 ended with a loss of 0.2 percent after earlier rising as much as 2.2 percent. The yield on 10-year Treasury notes, a proxy for investor expectations for interest rates, jumped as high as 1.87 percent.The Fed has pivoted sharply from boosting growth to preparing to cool it down as businesses report widespread labor shortages and as prices across the economy — for rent, cars and couches — soar. Consumer prices are rising at the fastest pace since 1982, eating away at paychecks and creating a political liability for President Biden and Democrats. It is the Fed’s job to keep inflation under control and to set the stage for a strong job market.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.“The Fed has completed its pivot from being patient to panicked on inflation,” Diane Swonk, the chief economist at Grant Thornton, wrote in a research note to clients after the meeting. “Its next move will be to raise rates.”The Fed’s withdrawal of policy support could temper consumer and corporate demand as borrowing money to buy a car, a boat, a house or a business becomes more expensive. Slower demand could give supply chains, which have fallen behind during the pandemic, room to catch up. By slowing down hiring, the Fed’s moves could also limit wage growth, which might otherwise feed into inflation if employers raised prices to cover higher labor costs.Investors nudged up their expectations for rate increases following the meeting and now project the Fed to raise rates five times this year, based on market pricing, and for the Fed’s policy rate to end the year between 1.25 and 1.5 percent. And economists increasingly warn that it is possible central bankers could move quickly — perhaps lifting borrowing costs at each consecutive meeting instead of leaving gaps, or in half-percentage point increases instead of the quarter-point moves that are more typical.But Mr. Powell demurred when asked about the pace of rate increases, saying that it was important to be “humble and nimble” and that “we’re going to be led by the incoming data and the evolving outlook.”“He went out of his way not to commit to a preset course,” said Subadra Rajappa, the head of U.S. rates strategy at Société Générale. The lack of clarity over what happens next “is a setup for a volatile market.”While interest rates are expected to rise over the coming years, most economists and investors do not expect them to return to anything like the double-digit levels that prevailed in the early 1980s. The Fed anticipates that its longer-run interest rate might hover around 2.5 percent.Investors also have been eagerly watching to see how quickly the Fed will shrink its balance sheet of asset holdings. The Fed’s policy committee released a statement of principles for that process on Wednesday, setting out plans to “significantly” reduce its holdings “in a predictable manner” and “primarily” by adjusting how much it reinvests as assets expire.“They are trying, I think, to reduce market uncertainty around the balance sheet — but they’re telling us it’s happening,” said Priya Misra, the global head of rates strategy at TD Securities, adding that the release suggested that the process would begin within a few months.Mr. Powell noted during his news conference that both of the areas the Fed is responsible for — fostering price stability and maximum employment — had prodded the central bank to “move steadily away” from helping the economy so much.“There are many millions more job openings than there are unemployed people,” Mr. Powell said. “I think there’s quite a bit of room to raise interest rates without threatening the labor market.”The unemployment rate has fallen to 3.9 percent, down from its peak of 14.7 percent at the worst economic point in the pandemic and near its February 2020 level of 3.5 percent. Wages are growing at the fastest pace in decades.Inflation F.A.Q.Card 1 of 6What is inflation? More

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

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

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    CPI Report Is Expected to Show Inflation Popped Again

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    Inflation closed out 2021 on a high note, bad news for the Biden White House and for economic policymakers, as rapid price gains erode consumer confidence and cast a shadow of uncertainty over the economy’s future.The Consumer Price Index most likely climbed 7 percent in the year through December, and 5.4 percent after volatile prices such as food and fuel are stripped out, economists in a Bloomberg survey estimated. The last time the main inflation index eclipsed 7 percent was 1982.What to Know About Inflation in the U.S.Inflation, Explained: What is inflation, why is it up and whom does it hurt? We answered some common questions.The Fed’s Pivot: Jerome Powell’s abrupt change of course moved the central bank into inflation-fighting mode.Fastest Inflation in Decades: The Consumer Price Index rose 6.8 percent in November from a year earlier, its sharpest increase since 1982.Why Washington Is Worried: Policymakers are acknowledging that price increases have been proving more persistent than expected.The Psychology of Inflation: Americans are flush with cash and jobs, but they also think the economy is awful.Policymakers have spent months waiting for inflation to fade, hoping that supply chains would catch up with booming consumer demand. Instead, continued waves of coronavirus infections have locked down factories, and shipping routes have struggled to work through extended backlogs as consumers continue to buy goods from overseas at a rapid clip. What happens next may be the biggest economic policy question of 2022.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Jerome Powell Will Acknowledge Inflation’s Toll in Senate Testimony

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    Jerome H. Powell, the Federal Reserve chair whom President Biden has nominated for a second four-year term, is set to tell senators on Tuesday that central bankers will use their economic tools to keep inflation — which has been high — from becoming entrenched.Mr. Powell, who is scheduled to testify before the Senate Banking Committee as he seeks confirmation, faces reappointment at an anxious economic moment. Inflation is running at the fastest pace in nearly 40 years. While economists have hoped for months that it would soon fade, that has yet to happen. Higher prices are chipping away at household incomes, even as wages rise and as companies hire at a solid clip.“We know that high inflation exacts a toll, particularly for those less able to meet the higher costs of essentials like food, housing and transportation,” Mr. Powell will tell lawmakers, according to his prepared remarks. “We are strongly committed to achieving our statutory goals of maximum employment and price stability.”Mr. Powell and his colleagues in recent months have reoriented their policies to pull back on support for the economy in light of the inflationary burst. They are slowing a large bond-buying program they had been using to keep longer-term borrowing cheap and to stoke the economy, and they could raise interest rates as soon as March.“Monetary policy must take a broad and forward-looking view, keeping pace with an ever-evolving economy,” Mr. Powell will tell senators.Economists increasingly expect Fed officials to make three or even four increases this year and eventually to shrink the size of their bond holdings, policies that together will make borrowing more expensive for households and businesses, take juice out of the stock market and slow overall growth.The pivot — which squarely puts the Fed in inflation-fighting mode — could assuage some lawmakers who are worried that the central bank is going to allow inflation to jump out of control. Even so, some may worry what has taken monetary policymakers so long.Others may ask whether the central bank risks overdoing it. Removing support for the economy could slow the job market and curtail hiring while virus concerns and child care issues are keeping many former workers on the labor market’s sidelines.Mr. Powell most likely will also need to address a trading scandal that has rocked the Fed in recent months. Several prominent central bankers traded financial assets for their own portfolios in early 2020, when the Fed was very active in rescuing markets.One, Richard H. Clarida, the vice chair, recently corrected his financial disclosures in a way that made his hot-button transaction — a move into stocks that took place on the eve of a big Fed announcement — look less like the rebalancing that the Fed originally said it had been and more like a response to market conditions.Mr. Clarida announced on Monday that he would resign earlier than planned from the Fed.Mr. Powell did not address that development directly in the prepared remarks, but he pledged to be fair and independent in policy choices.“I am committed to making those decisions with objectivity, integrity and impartiality, based on the best available evidence and in the longstanding tradition of monetary policy independence,” he will say. More

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    Senator Elizabeth Warren Presses Fed for More Information on Officials' Trades

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    Senator Elizabeth Warren, the Massachusetts Democrat, pressed the central bank to provide more information by next Monday.Senator Elizabeth Warren, Democrat of Massachusetts, asked the Federal Reserve in a letter sent Monday to release more information about a series of financial trades that several top officials made in 2020, when the Fed was actively propping up markets.The Fed has become embroiled in a scandal over the transactions, which occurred in the months around its no-holds-barred market rescue at the outset of the pandemic, raising the possibility that policymakers could have financially benefited from the information they held and the decisions they were making. Jerome H. Powell, the Fed chair, has acknowledged that the trades were a problem and acted quickly to overhaul the central bank’s ethics rules.But that has not stemmed the fallout. Mr. Powell, who was nominated for a second term as chair by President Biden, will almost surely face questions about the Fed’s ethics dilemma at his confirmation hearing on Tuesday before the Senate Banking Committee. Ms. Warren, who sits on that committee, is pushing for more details about Fed trading activity and new ethics rules, according to the new letter, which she sent to Mr. Powell. Ms. Warren, who previously requested that the Fed turn over information and documents surrounding the trades, is asking the Fed to “release all available information about the trades” by next Monday.Ms. Warren said in her letter that the central bank had failed to fully respond to her previous requests for information.Ms. Warren, who has criticized Mr. Powell’s tenure as chair, has said she will not support his renomination.Scrutiny of the 2020 trades has intensified after The New York Times reported last week that Richard H. Clarida, the Fed’s vice chair, failed to initially disclose the full extent of his trading in his original financial disclosure. Mr. Clarida amended his disclosures in late December, and the document showed that he had moved out of a stock fund as the markets were plunging during the pandemic. Three days later, he moved back into the same fund, just before Mr. Powell announced that the central bank stood ready to rescue markets.Ethics experts said the new information called into question the central bank’s original explanation that Mr. Clarida’s transaction was a preplanned rebalancing away from bonds and toward stocks, and said more information was needed to understand the trades.The new information “raises suspicions that the Fed may be failing to disclose the full scope of the scandal to the public,” Ms. Warren wrote. “I therefore ask that you respond in full to my request by January 17, 2022.”Mr. Clarida updated his disclosures after noticing “inadvertent errors,” a Fed representative said last week, and the Fed’s ethics officer said the newly noted trades were “in compliance with applicable laws and regulations governing conflicts of interest.” Still, they have drawn scrutiny because the rapid move out of and back into a stock fund at a time of market tumult looked less like a rebalancing toward stocks and more like a possible response to market conditions.“This revelation is just the latest evidence of a deep-rooted ethics failure at the Fed and the urgent need for a comprehensive information release about officials’ trading activity,” Ms. Warren wrote. More