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    Kaplan and Rosengren, Fed Presidents Under Fire for Trades, Will Step Down

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    Robert S. Kaplan will exit his role as head of the Federal Reserve Bank of Dallas next month. Eric S. Rosengren, the head of the Federal Reserve Bank of Boston, is also retiring earlier than planned.Eric S. RosengrenSteven Senne/Associated PressRobert S. KaplanAnn Saphir/ReutersTwo Federal Reserve officials embroiled in controversy for trading securities that could have benefited from the central bank’s 2020 intervention in financial markets announced on Monday that they would leave their positions.Robert S. Kaplan, who heads the Federal Reserve Bank of Dallas, will retire on Oct. 8, according to a statement released Monday afternoon. Mr. Kaplan’s statement acknowledged the controversy as the reason for his departure. Eric S. Rosengren, the president of the Boston Fed, will retire this Thursday, accelerating his planned retirement by nine months. Mr. Rosengren cited health reasons for his early departure.The resignations followed the Fed’s announcement this month that Chair Jerome H. Powell had ordered a review of the central bank’s ethics rules in light of the concern surrounding the trades. When asked about his confidence in Mr. Kaplan and Mr. Rosengren during a news conference last week, Mr. Powell expressed displeasure with what had happened.“No one on the F.O.M.C. is happy to be in this situation, to be having these questions raised,” Mr. Powell said, referring to the policy-setting Federal Open Market Committee. He added, “This is an important moment for the Fed and I’m determined that we will rise to the moment.”Mr. Kaplan noted in his statement that it was his decision to leave the Fed, and that “the recent focus on my financial disclosure risks becoming a distraction” to the central bank’s economic work.Mr. Kaplan drew scrutiny for buying and selling millions of dollars in individual stocks, among other investments, last year — trading first reported on by The Wall Street Journal on Sept. 7. He has maintained that his trades were consistent with Fed ethics rules.Mr. Rosengren announced on Monday morning that he was retiring earlier than planned to try to prevent a kidney condition from worsening, in the hopes of staving off dialysis. The Boston Fed president came under criticism because he held stakes in real estate investment trusts, which invest in and sometimes manage properties, and listed purchases and sales in those in 2020. He spent last year warning publicly about risks in the commercial real estate market, and was helping to set Fed policy on mortgage-backed security purchases, which can help the housing market by improving financing conditions.Both presidents had previously announced that they would convert their financial holdings into broad-based indexes and cash by Sept. 30.Mr. Powell offered statements of support for both of the retiring officials in the news releases announcing their exit.But the controversy has pushed him into a delicate position. His own term as Fed chair expires early next year, and the White House is actively considering whether to reappoint him. A scandal at his central bank is sure to draw questions from senators when he testifies this week, and could even hurt his reappointment chances.As chair, Mr. Powell has also focused on shoring up public support in the central bank and explaining its role. He holds frequent news conferences, aims to speak in simpler language, and championed a series of “Fed Listens” events where top central bank officials meet and hear from community members whom they might not otherwise interact with — from community college students to local food pantry staff.The 2020 trading disclosures, which are shaping up to be the most headline-grabbing scandal the central bank has faced in years, risk chipping away at the widespread trust he has been working to build.Responses to Mr. Kaplan and Mr. Rosengren’s trading disclosures have been swift, and scathing. The group Better Markets had been calling for the Fed to fire both presidents if they did not resign. Other progressive groups had called for at least one of them to be ousted, and ethics watchdogs have said that the rules that had enabled their trades needed to be revisited.After the resignation announcements on Monday, Wall Street promptly began to assess what the departures would mean for monetary policy. Both officials have tended to worry about financial stability, and for that reason were likely to favor removing monetary policy support sooner than some of their colleagues — a stance often referred to as being hawkish.“Their exit will take out two of the nine more hawkish Fed officials who saw a 2022 rate hike as of the September F.O.M.C. meeting last week and remove important voices on financial stability issues in particular,” Krishna Guha at Evercore ISI wrote in a note to clients shortly after the announcement.Mr. Rosengren has been president of the Boston Fed since 2007, and his retirement was previously planned for June. The Fed’s 12 regional members rotate in and out of voting seats, and Mr. Rosengren would have had a vote on monetary policy next year. Mr. Kaplan would have voted in 2023.Kenneth C. Montgomery, the Boston Fed’s first vice president, will serve as interim president at that bank. The Boston Fed’s board members — excluding bank representatives — will need to select a permanent pick for president, subject to approval from the Fed’s Board of Governors in Washington.A longtime Fed employee who worked in research and bank supervision before becoming president, Mr. Rosengren played a key role in the 2020 crisis response. His regional Fed ran both the money market mutual fund and Main Street lending backstop programs that the Fed rolled out last year.The Boston Fed noted in the release that Mr. Rosengren hoped that his health condition would improve, and that he would be able to “explore areas of professional interest” in the future.Mr. Kaplan has been at the head of the Dallas Fed since late 2015, before which he taught at Harvard University and had a long career at Goldman Sachs. Meredith Black, that bank’s first vice president who had planned to retire, will serve as interim president until a successor is named, the Dallas Fed said. More

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    Top Fed officials say the labor market needs more time to heal.

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    Top Federal Reserve officials emphasized on Monday that the labor market was far from completely healed, underlining that the central bank will need to see considerably more progress before it will feel ready to raise interest rates.“We still have a long way to go until we achieve the Federal Reserve’s maximum employment goal,” John C. Williams, the president of the Federal Reserve Bank of New York, said in a speech Monday afternoon.Leading Fed officials — including Mr. Williams, Lael Brainard and Jerome H. Powell, the Fed chair — have given similar assessments of the outlook in recent days and weeks. They have pointed out that the economy is swiftly healing, bringing back jobs and normal business activity, and that existing disruptions to supply chains and hiring issues will not last forever.But they say that the recovery is incomplete and that it’s worth being modest about the path ahead, especially as the Delta variant demonstrates the coronavirus’s ability to disrupt progress.“Delta highlights the importance of being attentive to economic outcomes and not getting too attached to an outlook that may get buffeted by evolving virus conditions,” Ms. Brainard, a Fed governor, said on Monday.Those comments came on the heels of the Fed’s September meeting, at which the central bank’s policy-setting committee clearly signaled that officials could begin to pare back their vast asset-purchase program as soon as November. They have been buying $120 billion in government and government-backed securities each month.The speeches on Monday emphasized that as officials prepare to make that first step away from full-fledged economic support, they are trying to separate the decision from the Fed’s path for its main policy interest rate, which is set to zero.Central bankers have said they want to see the economy return to full employment and inflation on track to average 2 percent over time before lifting rates away from rock bottom.That makes the debate over the labor market’s potential a critical part of the Fed’s policy discussion.Some regional Fed presidents, including James Bullard at the Federal Reserve Bank of St. Louis and Robert S. Kaplan at the Federal Reserve Bank of Dallas, have suggested that the labor market may be tighter than it appears, citing data including job openings and retirements.But Mr. Williams said on Monday that the job market still had substantial room to improve. While the unemployment rate has fallen from its pandemic high, he said the Fed was looking at more than just that number, which tracks only people who are actively looking for work. The Fed also wants the employment rate to rebound. He pointed out that a high level of job openings is not a clear signal that the job market has healed.“Even if job postings are at a record high, job postings are not jobs,” Mr. Williams said. “These vacancies won’t be filled instantly.”Although Mr. Williams said he had been watching the impact of school reopenings on the labor market, he said he did not think they would cause a huge surge in people returning to work this month or in October.“It may take quite a bit longer for the labor supply to come fully back,” he said.Ms. Brainard batted back the idea that labor force participation — the share of adults who are working or looking for jobs — might not return to its prepandemic level.“The assertion that labor force participation has moved permanently lower as a result of a downturn is not new,” she said. A similar debate played out following the 2008 financial crisis and labor force participation ultimately rebounded, especially for people in their prime working years.Ms. Brainard warned that Delta was slowing job market progress. Last week there were more than 2,000 virus-tied school closures across nearly 470 school districts, she said, and “the possibility of further unpredictable disruptions could cause some parents to delay their plans to return to the labor force.” More

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    The Fed will re-examine ethics rules after trades by two officials drew scrutiny.

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    The Federal Reserve is poised to overhaul the rules regarding what its officials are allowed to invest in and trade after disclosures last week showed that two of the central bank’s officials were active in markets in 2020, drawing an outcry.Robert S. Kaplan, the president of the Federal Reserve Bank of Dallas, and Eric Rosengren, the president of the Boston Fed, bought and sold stocks and real estate-tied assets last year.Those transactions complied with Fed guidelines, but they involved securities that could have been affected by Fed decisions and communications during a year in which it was actively supporting a broad swathe of financial markets amid the pandemic. Policy researchers and even some former Fed employees were upset by the disclosures.In response to the scrutiny, both regional presidents announced that they would sell their holdings and move them to cash and broad-based funds. Still, the episode highlighted that the Fed’s rules governing its officials’ financial activity — although in line with what much of the government uses, and in some cases stricter — allow for considerable individual discretion. The central bank said on Thursday that it would re-examine those policies at the direction of Jerome H. Powell, the Fed chair.“Because the trust of the American people is essential for the Federal Reserve to effectively carry out our important mission, Chair Powell late last week directed board staff to take a fresh and comprehensive look at the ethics rules around permissible financial holdings and activities by senior Fed officials,” a Fed representative said in a statement.“This review will assist in identifying ways to further tighten those rules and standards,” the representative added. “The board will make changes, as appropriate, and any changes will be added to the Reserve Bank Code of Conduct.”The statement came about an hour after Senator Elizabeth Warren, a Massachusetts Democrat, announced that she had sent letters to the Fed’s 12 regional banks urging them to adopt tougher restrictions.“The controversy over asset trading by high-level Fed personnel highlights why it is necessary to ban ownership and trading of individual stocks by senior officials who are supposed to serve the public interest,” Ms. Warren wrote in the letters. More

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    Should Biden Reappoint Jerome Powell? It Depends on His Theory of Change.

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    Lael Brainard is more aligned with the president, so picking her may please Democrats. Powell may have a more bipartisan seal of approval.President Biden is facing a big decision, and deep divides among his allies. Should he reappoint Jerome Powell to lead the Federal Reserve when Mr. Powell’s term ends early next year, or select a replacement who is more fully aligned with the Democratic policy agenda?Pro-Powell forces argue that he has proved exceptionally committed to generating a robust job market that will lead to better conditions for American workers. Those who argue against reappointment say that he has been too soft a regulator of banks and other financial institutions, and that he is insufficiently committed to using the Fed’s powers to combat climate change.But there is a more fundamental question for President Biden: What is his theory of how change happens?Lael Brainard, a Fed governor and a leading candidate for the job, and the Fed chair, Jerome Powell.Ann Saphir/ReutersOne theory of change is that, when a party wins the presidency and the Senate (however narrowly), it should put in place appointees who are fully fledged adherents of its agenda. These appointees will then push that agenda with every possible tool at their disposal. If they make lots of enemies, or see their more aggressive actions struck down by courts — or generally emerge as polarizing forces — so be it.If Mr. Biden were to take this approach, he might seek a firebrand for the top job at the Fed, betting that the nominee could both secure confirmation in a closely balanced Senate and steer the nation’s central bank toward a more activist stance on a range of liberal priorities.A reappointment of Mr. Powell would follow the opposite theory of change. In this version, there is great value in appointees who have the biography and political skill to make urgent policy changes seem sensible and reasonable, not scary. This strategy, the logic goes, will make more aggressive policy action achievable. And it could also make it more durable in the face of court challenges and changes in the control of government.Another leading candidate for the job, Lael Brainard, 59, would essentially split the difference between those approaches. She has been a Fed governor for the last seven years, collaborating closely with Mr. Powell and other top leaders of the central bank.She is hardly a firebrand; her speeches are carefully crafted and her positions well within the economics mainstream. But she is a Democrat who donated to Hillary Clinton’s presidential campaign in 2016 and who dissented on numerous actions to loosen bank regulations championed by Trump appointees. She has also expressed public alarm about the economic implications of climate change.It is a distinctly different background and persona from Mr. Powell, a 68-year-old Princeton graduate who worked as a Wall Street dealmaker and private equity executive. He served in the George H.W. Bush administration, and was appointed to lead the central bank by President Donald J. Trump.He has also become, in recent years, a full-fledged convert to the religion of full employment. This is the view that the Fed should allow the economy to run hot enough that opportunity opens to people across American society, including historically marginalized groups.This view is more commonly embraced on the political left. But Mr. Powell came to it over the second half of the 2010s, as the labor market improved to levels far beyond what the Fed’s own economic models had envisioned without spurring unwelcome inflation.His stewardship of the Fed is, in that sense, the 21st-century American embodiment of the concept of “Tory men, Whig measures.”The phrase, from a 19th-century novel by Benjamin Disraeli, who would go on to become British prime minister, refers to a government in which hardheaded conservatives (the Tories) nevertheless carry out ideas that originated in left-of-center (Whig) circles, aimed at improving life for the masses.What would that mean if Mr. Powell were to be appointed to a second term as Fed chair starting in early 2022?It would mean that the major rethinking of the Fed’s approach to the labor market would continue to be led by a registered Republican whom 84 senators voted to confirm in 2018. Ms. Brainard was confirmed with 61 votes in 2014, including 11 Republicans.Part of the case for reappointing Mr. Powell is that his mere presence — his credibility on both sides of the aisle in Congress and on Wall Street — would be an asset to the administration’s broader economic project at a time of surging inflation and bubbly financial markets. The fact that he is not a Biden ally, or a Democrat at all, becomes a feature rather than a bug.“Part of the Biden mantra has been to restore civility and downplay partisan tensions,” said Sarah Binder, a George Washington University professor who has written extensively on the Fed’s place in American politics. “It’s somewhat fortuitous for Biden that if he wants to reappoint Powell he can do it under the guise of restoring the independence of the Fed even though Powell thoroughly fits his views on monetary policy.”During Mr. Powell’s chairmanship, the Fed has weakened several restrictions on big banks, loosening the capital and liquidity requirements placed on them, among other steps. It has also allowed several large bank mergers to occur.Ms. Brainard’s dissents from regulatory actions were unusual for the consensus-driven Fed. When she was the lone vote against one action in 2018, no governor had dissented from one in seven years. She would go on to dissent 20 times over the next three years.In regulatory policy, Fed leaders traditionally defer to elected leaders while aiming to maintain a wall of independence around monetary policymaking. And that has been enough to make presidents willing to reappoint Fed leaders from the other party even when they have disagreements over regulatory approach.The Fed chair Ben Bernanke, for example, was a Bush appointee. He was supportive of regulatory changes put in by the Obama-appointed Fed governor Dan Tarullo, and President Obama went on to reappoint Mr. Bernanke. Notably, as a Fed governor, Mr. Powell did not dissent from any regulatory steps championed by Mr. Tarullo.And while those cross-party reappointments have parallels to this moment — see also Ronald Reagan/Paul Volcker and Bill Clinton/Alan Greenspan — there may be an even closer historical parallel.In the 1930s, Franklin Delano Roosevelt turned not to any of the bright New Deal economists who were advising him on policy, but to a Utah banker named Marriner S. Eccles.Mr. Eccles embraced deficit spending and loose monetary policy to help propel the nation out of the Great Depression, but presented himself as merely a pragmatic businessman recommending a sensible course. He distanced himself from the more academic intellectuals tied to the administration.“Eccles served a very important purpose for the Roosevelt administration because he was a millionaire who espoused policies that were friendly to what Roosevelt wanted to do,” said Eric Rauchway, a historian at the University of California, Davis, and author of “Why the New Deal Matters.”In public appearances, Mr. Eccles emphasized that he arrived at his views not by reading John Maynard Keynes or other influential intellectuals of the era, but by working through things on his own. And while Mr. Eccles was closely aligned with the Roosevelt inner circle on macroeconomic management, he was more wary of other administration policies that involved expansive government control of the economy. And that, Mr. Rauchway said, was why he was placed at the Fed instead of the White House or Treasury.Mr. Biden is weighing a decision that will shape the economic backdrop of the remainder of his term. The question is whether the political logic that led Mr. Roosevelt to Mr. Eccles — and that led several other presidents to reappoint central bankers from the opposite party — applies in a world of high polarization and exceptionally high stakes. More

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    Fed Officials’ Trading Draws Outcry, and Fuels Calls for Accountability

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    Central bank regional presidents traded securities in markets in which Fed choices mattered in 2020. Here’s why critics find that troubling.Federal Reserve officials traded stocks and other securities in 2020, a year in which the central bank took emergency steps to prop up financial markets and prevent their collapse — raising questions about whether the Fed’s ethics standards have become too lax as its role has vastly expanded.The trades appeared to be legal and in compliance with Fed rules. Million-dollar stock transactions from the Dallas Fed president, Robert S. Kaplan, have drawn particular attention, but none took place when the central bank was most actively backstopping financial markets in late March and April.However, the mere possibility that Fed officials might be able to financially benefit from information they learn through their positions has prompted criticism of perceived shortcomings in the institution’s ethics rules, which were forged decades ago and are now struggling to keep up with the central bank’s 21st century function.“What we have now is an ethics system built on a very narrow conception of what a central bank is and should be,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania.On Thursday, Mr. Kaplan and Eric Rosengren, president of the Federal Reserve Bank of Boston, said they would sell all the individual stocks they own by Sept. 30 and move their financial holdings into passive investments.“While my financial transactions conducted during my years as Dallas Fed president have complied with the Federal Reserve’s ethics rules, to avoid even the appearance of any conflict of interest, I have decided to change my personal investment practices,” Mr. Kaplan said in a statement. He added that “there will be no trading in these accounts as long as I am serving as president of the Dallas Fed.”Mr. Rosengren, who had drawn criticism for trading in securities tied to real estate, also said he would divest his stock holdings and expressed regret about the perception of his transactions.“I made some personal investment decisions last year that were permissible under Fed ethics rules,” he said in a statement. “Regrettably, the appearance of such permissible personal investment decisions has generated some questions, so I have made the decision to divest these assets to underscore my commitment to Fed ethics guidelines. It is extremely important to me to avoid even the appearance of a conflict of interest, and I believe these steps will achieve that.”It was unclear on Thursday evening whether those moves would be enough to stop the groundswell of criticism as economists, academics and former employees asked why Fed officials are allowed to invest so broadly.The Fed has gone from serving as a lender of last resort mostly to banks to, at extreme moments in both 2008 and 2020, using its tools to rescue large swaths of the financial system. That includes propping up the market for short-term corporate debt during the Great Recession and backstopping long-term company debt and enabling loans to Main Street businesses during the 2020 pandemic crisis.That role has helped to make the Fed and its officials privy to information affecting every corner of finance.Yet central bankers can still actively buy and sell most stocks and some types of bonds, subject to some limitations. They have long been barred from owning and trading the securities of supervised banks, in a nod to the Fed’s pivotal role in bank oversight, but those clear-cut restrictions have not widened alongside the Fed’s influence.“Just as there is a set of rules for bank stocks, why not look to see if it is valuable to expand that to other assets that are directly affected by Fed policy?” said Roberto Perli at Cornerstone Macro, a former Fed Board employee himself. “There are plenty of people out there who think the Fed does nefarious things, and these headlines may contribute to that perception.”The 2020 batch of disclosures has received extra attention because the Fed spent last year unveiling never-before-attempted programs to save a broad array of financial markets from pandemic fallout. Regional Fed presidents like Mr. Kaplan did not vote on the backstops, but they were regularly consulted on their design.Critics said that raised the possibility — and risked creating the perception — that Fed presidents had access to information that could have benefited their personal trading.Mr. Kaplan made nearly two dozen stock trades of $1 million or more last year, a fact first reported by The Wall Street Journal. Those included transactions in companies whose stocks were affected by the pandemic — such as Johnson & Johnson and several oil and gas companies — and in firms whose bonds the Fed eventually bought in its broad-based program.None of those transactions took place between late March and May 1, a Fed official said, which would have curbed Mr. Kaplan’s ability to use information about the coming rescue programs to earn a profit.But the trades drew attention for other reasons. Mr. Conti-Brown pointed out that Mr. Kaplan was buying and selling oil company shares just as the Fed was debating what role it should play in regulating climate-related finance. And everything the Fed did in 2020 — like slashing rates to near zero and buying trillions in government-backed debt — affected the stock market, sending equity prices higher.“It’s really bad for the Fed, people are going to seize on it to say that the Fed is self-dealing,” said Sam Bell, a founder of Employ America, a group focused on economic policy. “Here’s a guy who influences monetary policy, and he’s making money for himself in the stock market.”Mr. Perli noted that Mr. Kaplan’s financial activity included trading in a corporate bond exchange-traded fund, which is effectively a bundle of company debt that trades like a stock. The Fed bought shares in that type of fund last year.Other key policymakers, including the New York Fed president, John C. Williams, reported much less financial activity in 2020, based on disclosures published or provided by their reserve banks. Mr. Williams told reporters on a call on Wednesday that he thought transparency measures around trading activity were critical.“If you’re asking should those policies be reviewed or changed, I think that’s a broader question that I don’t have a particular answer for right now,” Mr. Williams said.Washington-based board officials reported some financial activity, but it was more limited. Jerome H. Powell, the Fed chair, reported 41 recorded transactions made by him or on his or his family’s behalf in 2020, but those were typically in index funds and other relatively broad investment strategies. Randal K. Quarles, the Fed’s vice chair for supervision, recorded purchases and sales of Union Pacific stock last summer. Those stocks were assets of Mr. Quarles’s wife and he had no involvement in the transactions, a Fed spokesman said.The Fed system is made up of a seven-seat board in Washington and 12 regional reserve banks. Board members — called governors — are politically appointed and answer to Congress. Regional officials — called presidents — are appointed by their boards of directors and confirmed by the Federal Reserve Board, and they do not answer to the public directly. Regional branches are chartered as corporations, rather than set up as government entities.The most noteworthy 2020 transactions happened at the less-accountable regional banks, which could call attention to Fed governance, said Sarah Binder, a political scientist at George Washington University and the author of a book on the politics of the Fed.“It highlights the crazy, weird, Byzantine nature of the Fed,” Ms. Binder said. “It’s just almost impossible to keep the rules straight, the lines of accountability straight.”The board and the regional banks abide by generally similar ethics agreements. Employees are prohibited from using nonpublic information for gain. Officials cannot trade in the days around Fed meetings and face 30-day holding periods for many securities. Regional banks have their own ethics officers who regularly consult with ethics officials at the Fed’s Board, and presidents and governors alike disclose their financial activity annually.Even with Mr. Kaplan and Mr. Rosengren’s individual responses, pressure could grow for the Fed to adopt more stringent rules, recognizing the special role the central bank plays in markets. That could include requiring officials to invest in broad indexes. The Fed could also apply stricter limits to how much officials can change their investment portfolios while in office, or expand formal limitations to ban trading in a broader list of Fed-sensitive securities, legal experts and former Fed employees suggested in interviews.Fed-related financial activity has drawn other negative attention recently. Janet L. Yellen, the former central bank chair, faced criticism when financial documents filed as part of her nomination for Treasury secretary showed that she had received more than $7 million in bank and corporate speaking fees in 2019 and 2020, after leaving her top central bank role.The Federal Reserve Act limits governors’ abilities to go straight to bank payrolls if they leave before their terms lapse, but speaking fees from the finance industry are permitted.Defenders of the status quo sometimes argue that the Fed would struggle to attract top talent if it curbed how much current and former officials can participate in markets and the financial industry. They could face big tax bills if they had to turn financial holdings into cash upon starting central bank jobs. Because Fed officials tend to have financial backgrounds, banning financial sector work after they leave government could limit their options.But few if any argue that former officials would command such large speaking fees if they had never held central bank leadership positions. And it is widely accepted that the ability to trade while in office as a Fed president raises issues of perception.“People will ask, fairly or otherwise, about the extent to which his views about the balance sheet are interest rates are influenced by his personal investments in the stock market,” Ms. Binder said of Mr. Kaplan’s trades, speaking before his Thursday announcement. “That is not good for the Fed.” More

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    Powell Signals Fed Could Start Removing Economic Support

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    The Fed chair warned that the Delta variant remained a risk and suggested that a rate increase was not on the table for some time.Speaking virtually at an annual conference, Jerome H. Powell, the Federal Reserve chair, said that the economy had made significant gains and that the Fed had made sufficient progress in forestalling inflation.Kevin Lamarque/ReutersEighteen months into the pandemic, Jerome H. Powell, the Federal Reserve chair, has offered the strongest sign yet that the Fed is prepared to soon withdraw one leg of the support it has been providing to the economy as conditions strengthen.At the same time, Mr. Powell made clear on Friday that interest rate increases remained far away, and that the central bank was monitoring risks posed by the Delta variant of the coronavirus.The Fed has been trying to bolster economic activity by buying $120 billion in government-backed bonds each month and by leaving its policy interest rate at rock bottom. Officials have been debating when to begin slowing their bond buying, the first step in moving toward a more normal policy setting. They have said they would like to make “substantial further progress” toward stable inflation and full employment before doing so.Mr. Powell, speaking at a closely watched conference that the Kansas City Fed holds each year, used his remarks to explain that he thinks the Fed has met that test when it comes to inflation and is making “clear progress toward maximum employment.”As of the Fed’s last meeting, in July, “I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said.But the Fed is navigating a difficult set of economic conditions. Growth has picked up and inflation is rising as consumers, flush with stimulus money, look to spend and companies struggle to meet that demand amid pandemic-related supply disruptions. Yet there are nearly six million fewer jobs than before the pandemic. And the Delta variant could cause consumers and businesses to pull back as it foils return-to-office plans and threatens to shut down schools and child care centers. That could lead to a slower jobs rebound.Mr. Powell made clear that the Fed wants to avoid overreacting to a recent burst in inflation that it believes will most likely prove temporary, because doing so could leave workers on the sidelines and weaken growth prematurely. While the Fed could start to remove one piece of its support, he emphasized that slowing bond purchases did not indicate that the Fed was prepared to raise rates.“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said in his address to the conference, which was held online instead of its usual venue — Jackson Hole in Wyoming — because of the latest coronavirus wave.The distinction he drew — between bond buying, which keeps financial markets chugging along, and rates, which are the Fed’s more traditional and arguably more powerful tool to keep money cheap and demand strong — sent an important signal that the Fed is going to be careful to let the economy heal more fully before really putting away its monetary tools, economists said.“He’s trying to reassure, in a time of extraordinary uncertainty,” said Diane Swonk, chief economist at the accounting firm Grant Thornton. “The takeaway is: We’re not going to snuff out a recovery. We’re not going to snuff it out too early.”Stocks rose on Friday, with gains picking up steam after Mr. Powell’s comments were released and investors realized that a rate increase was not in sight. Richard H. Clarida, the Fed’s vice chair, agreed with Mr. Powell’s approach, saying in an interview with CNBC that if the labor market continued to strengthen, “I would also support commencing a reduction in the pace of our purchases later this year.”Some Fed policymakers have called for the central bank to slow its purchases soon, and move swiftly toward ending them completely.Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, told CNBC on Friday that he supported winding down the purchases “as quickly as possible.”“Let’s start the taper, and let’s do it quickly,” he said. “Let’s not have this linger.”James Bullard, the president of the Federal Reserve Bank of St. Louis, said on Friday that the central bank should finish tapering by the end of the first quarter next year. If inflation starts to moderate then, the country will be in “great shape,” Mr. Bullard told Fox Business.“If it doesn’t moderate, then I think the Fed is going to have to be more aggressive in 2022,” he said.Central bankers are trying avoid the mistakes of the last expansion, when they raised interest rates as unemployment dropped to fend off inflation — only to have price gains stagnate at uncomfortably low levels, suggesting that they had pulled back support too early. Mr. Powell ushered in a new policy framework at last year’s Jackson Hole gathering that dictates a more patient approach, one that might guard against a similar overreaction.But as Mr. Bullard’s comments reflected, officials may have their patience tested as inflation climbs.The Fed’s preferred price gauge, the personal consumption expenditures index, rose 4.2 percent last month from a year earlier, according to Commerce Department data released on Friday. The increase was higher than the 4.1 percent jump that economists in a Bloomberg survey had projected, and the fastest pace since 1991. That is far above the central bank’s 2 percent target, which it tries to hit on average over time.“The rapid reopening of the economy has brought a sharp run-up in inflation,” Mr. Powell said. A shuttered storefront in New York last week. Economists are not sure how much the Delta variant will slow growth, but many are worried that it could cause consumers and businesses to pull back.Gabriela Bhaskar/The New York TimesPolicymakers at the Fed are debating how to interpret the current price burst. Because it has come from categories of goods and services that have been affected by the pandemic and supply-chain disruptions, including used cars and airplane tickets, most expect inflation to abate. But some worry that the process will take long enough that consumers’ inflation expectations will move up, prompting workers to demand higher wages and leading to faster price gains in the longer run.Other officials worry that today’s hot prices are more likely to give way to slower gains once pandemic-related disruptions are resolved — and that long-run trends that have dragged inflation lower for decades, including population aging, will once again bite. They warn that if the Fed overreacts to today’s inflationary burst, it could wind up with permanently weak inflation, much as Japan and Europe have.White House economists sided with Mr. Powell’s interpretation in a new round of forecasts issued on Friday. In its midsession review of the administration’s budget forecasts, the Office of Management and Budget said it expected the Consumer Price Index inflation rate to hit 4.8 percent for the year. That is more than double the administration’s initial forecast of 2.1 percent.The forecast was an admission of sorts that prices have jumped higher and that the increase has lingered longer than administration officials initially expected. But they still insist that it will be short-lived and foresee inflation dropping to 2.5 percent in 2022. The White House also revised its forecast of growth for the year, to 7.1 percent from 5.2 percent.Slow price gains sound like good news to anyone who buys oat milk and eggs, but they can set off a vicious downward cycle. Interest rates include inflation, so when it slows, Fed officials have less room to make money cheap to foster growth during times of trouble. That makes it harder for the economy to recover quickly from downturns, and long periods of weak demand drag prices even lower — creating a cycle of stagnation.“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Mr. Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”Mr. Powell offered a detailed explanation of the Fed’s scrutiny of prices, emphasizing that inflation is “so far” coming from a narrow group of goods and services. Officials are keeping an eye on data to make sure prices for durable goods like used cars — which have recently taken off — slow and even fall.Mr. Powell said the Fed saw “little evidence” of wage increases that might threaten high and lasting inflation. And he pointed out that measures of inflation expectations had not climbed to unwanted levels, but had instead staged a “welcome reversal” of an unhealthy decline.Still, his remarks carried a tone of watchfulness.“We would be concerned at signs that inflationary pressures were spreading more broadly through the economy,” he said.Jim Tankersley More

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    How Should the Fed Deal With Climate Change?

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    When the economy hits hard times, survey data shows, people are less likely to worry about the environment.The climate crisis is at high risk of becoming an economic crisis.That is an increasingly widespread view among leading economic thinkers — that a range of economic and financial problems could result from a warming planet and humanity’s efforts to deal with it. But if you believe that to be true, what should the United States’ economist-in-chief do about it?That question has taken new urgency as President Biden weighs whether to reappoint Jerome Powell to another term leading the Federal Reserve or choose someone else.Climate activists and others on the left have argued that Mr. Powell should be replaced by someone with stronger credentials as a climate hawk. Demonstrators backing this cause were planning to protest at an annual Fed symposium in Jackson Hole, Wyo., starting Thursday, but the event was made online-only at the last minute because of a rise in coronavirus cases. Among other things, they want the Fed to use its regulatory powers to throttle the flow of bank lending to carbon-producing industries.At the same time, some Republicans are assailing the Fed for mere research efforts involving climate. It is clear there would be a huge outcry on the right if a new Fed chair were to take an activist stance in trying to limit the availability of capital in energy-extraction businesses.So far, Mr. Powell and other leaders at the central bank have taken a middle ground. They’ve committed to studying the ways global warming will affect the economy and the financial system, and they’re factoring those conclusions into their usual jobs of guiding the economy and regulating banks — but not trying to manage how loans and resources are allocated.Arguably, one of the more important things the Fed can do to help fight climate change is to excel at its primary job: maintaining a stable, strong economy. Consider some surprising public opinion data.Since 1989, Gallup has polled Americans about whether climate change worried then personally. The net share of people who have expressed concern — those who have said they worry about climate “a fair amount” or “great deal” versus those who have worried “only a little” or “not at all” — offers a sense of how seriously Americans take the threat.The net share of people worried about climate change reached its peak not in recent years, when the damaging effects have become more visible. The peak was in April 2000, when the share of people worried about the climate was 45 percentage points higher than the share not worried. That was also one of the best months for the U.S. economy in decades, near the peak of the late 1990s boom, with unemployment a mere 3.8 percent.Two of the times when climate worry in the survey hit a low were in 2010 and 2011, in the aftermath of the global financial crisis, when the net shares of those worried versus not worried were only four and three percentage points.Using a broader range of evidence from both the United States and Europe, two political scientists at the University of Connecticut, Lyle Scruggs and Salil Benegal, found that a decline in climate concern in that period was driven significantly by worse economic conditions, which increased worry about more immediate issues. In times of scarcity, people tend to think less of policies with long-term payoffs.“The state of the economy affects people’s sensitivity to the future versus the present,” Professor Scruggs said. “Historically climate change has fallen into the same camp as a lot of other environmental issues, where people’s answers tend to wax and wane with the economy.”If a central bank can achieve consistent prosperity, this research suggests, it may change some political dynamics on aggressive climate action. Prosperity could support branches of government that have more explicit responsibility for curtailing greenhouse gases, building out clean energy capacity, or helping communities adapt to more extreme weather.Not everyone who studies public opinion on climate agrees.Anthony Leiserowitz, director of the Yale Program on Climate Change Communication, attributes the decline in concern about climate change in the early 2010s not to the weak economy, but to widening political polarization and a pivot of conservative media toward climate change denialism.“What we saw was a symbiotic relationship between conservative media, conservative elected officials and the conservative public,” he said. “That drove the shift. It wasn’t the economy.”A paper published this summer by Michael T. Kiley, a Fed staff member, analyzed how temperature variations affect economic performance. It concluded that climate change may not change the typical rate of growth in the economy over time, but could make severe recessions more common. A major crop failure, for example, would lower G.D.P. directly and could simultaneously create economic ripple effects such as bank failures.And Lael Brainard, a Fed governor and potential Biden appointee to become the next chair, has emphasized that the unpredictable nature of climate change could make obsolete the historical models on which economic policy is based.“Unlike episodic or transitory shocks, climate change is an ongoing, cumulative process, which is expected to produce a series of shocks,” she said in a March speech. “Over time, these shocks can change the statistical time-series properties of economic variables, making forecasting based on historical experience more difficult and less reliable.”If Ms. Brainard is correct, it raises a dispiriting possibility: As the planet gets hotter, it could make it harder to keep the economy on an even keel. But the worse the economy performs, the more toxic and dysfunctional climate politics may become. More

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    The Pandemic Is Testing the Federal Reserve’s New Policy Plan

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    Year 1 of the Fed’s framework, unveiled at its Jackson Hole conference in 2020, has included high inflation and job market healing. Now comes the hard part.When Jerome H. Powell speaks at the Federal Reserve’s biggest annual conference on Friday, he will do so at a tense economic moment, as prices rise rapidly while millions of jobs remain missing from the labor market. That combination promises to test the meaning of a quiet revolution the central bank chair ushered in one year ago.Mr. Powell used his remarks at last year’s conference, known as the Jackson Hole economic symposium and held by the Federal Reserve Bank of Kansas City, to announce that Fed officials would no longer raise interest rates to cool off the economy just because joblessness was falling and inflation was expected to heat up. They first wanted proof that prices were climbing sustainably, and they would welcome gains slightly above their 2 percent goal.He was laying groundwork for a far more patient Fed approach, acknowledging the grim reality that across advanced economies, interest rates, growth and inflation had spent the 21st century slipping lower in a strength-sapping downward spiral. The goal was to stop the decline.But a year later, that backdrop has shifted, at least superficially. Big government spending in response to the pandemic has pushed consumption and growth higher in the United States, and inflation has rocketed to levels not seen in more than a decade. The labor market is swiftly healing, though it has yet to fully recover. Now it falls to Mr. Powell to explain why full-blast support from the Fed remains necessary.Investors initially expected Mr. Powell to use Friday’s remarks at the Jackson Hole conference to lay out the Fed’s plan for “tapering” — or slowing down — a large-scale bond buying program it has been using to support the economy. Fed officials are debating the timing of such a move, which will mark their first step toward a more normal policy setting. But after minutes from the central bank’s July meeting suggested that the discussion remained far from resolved, and as the Delta variant pushes coronavirus infections higher and threatens the economic outlook, few now anticipate a clear announcement.“Two to three months ago, people were expecting the whole taper plan at Jackson Hole,” said Priya Misra, head of global rates strategy at TD Securities. “Now, it’s more the economic outlook that people are struggling with.”While Mr. Powell expects price increases to fade, he has been clear that the Fed will act to choke off inflationary pressures if they don’t abate.An Rong Xu for The New York TimesMr. Powell’s speech, which will be virtual, could instead give him a chance to explain how the Fed is thinking about Delta variant risks, recent rapid inflation and labor market progress — and how all three square with the central bank’s policy approach.The Fed is buying $120 billion in government-backed bonds each month, and it has kept its main interest rate near zero since March 2020. Both policies make borrowing cheap, fueling spending by businesses and households and bolstering the labor market.Officials have clearly linked their interest rate plans to their new framework: They said in September that they would not lift rates until the job market reached full employment. Bond buying ties back less directly, but it serves as a signal of the Fed’s continued patience.Critics of the Fed’s wait-and-see stance have questioned whether it is wise for the Fed to buy mortgage-backed and Treasury debt at a rapid clip when home prices have soared and inflation has been taking off. Republican lawmakers and some prominent Democrats alike have worried that the Fed is being insufficiently nimble as economic conditions change.“They chose a framework that was designed to provide a commitment to a highly dovish policy,” said Lawrence H. Summers, a Treasury secretary in the Clinton administration and an economist at Harvard University. “The problem morphed into overheating being the big concern, rather than underheating.”Inflation jumped to 4 percent in June, based on the Fed’s preferred measure. Most economists expect rapid price gains to fade as pandemic-related supply bottlenecks clear up, but it is unclear how quickly and fully that will happen.And while there are still nearly seven million fewer jobs than there were before the pandemic, unfilled positions have jumped, wages for lower earners are taking off, and employers widely complain about being unable to hire enough workers. If labor costs remain higher, that, too, could cause longer-lasting inflation pressures.Some Fed officials would prefer to slow bond purchases soon, and fast, so that the central bank is in a position to raise interest rates next year if price pressures do become pernicious.Other policymakers see today’s rising prices and job openings as trends that are destined to abate. Companies will work through supply-chain disruptions, and consumers will spend away savings they amassed from government stimulus checks and months stuck at home. Workers will settle into jobs. When things return to normal, they reason, the tepid inflation of years past will probably return.Given that view, and the fact that the labor market is still missing so many positions, they argue that the Fed’s new policy paradigm calls for patience.At the central bank’s meeting in late July, minutes showed, a few officials fretted that the Fed “would need to be mindful of the risk that a tapering announcement that was perceived to be premature could bring into question the committee’s commitment to its new monetary policy framework.”Mr. Powell typically tries to balance both concerns in his public remarks, acknowledging that inflation could remain elevated and pledging that the Fed will react if it does. But he has also emphasized that recent price pops are more likely to fade and that the central bank would prefer to remain helpful as the labor market healed.But in the months ahead, the Fed will need to make actual decisions, putting the meaning of its new framework to a very public test. Economists generally expect the central bank to announce a plan to slow its bond purchases in November or December.Once that taper is underway, attention will turn to interest rates, most likely with inflation still above 2 percent and the labor market recovery still at risk. When the Fed lifts rates will determine just how transformative the new policy framework has been.As of the Fed’s June economic forecasts, most officials did not expect to raise borrowing costs from rock bottom until 2023. If that transpires, it will be a notable shift from years past, one that allows the labor market to heal much more completely before significantly removing monetary help.In 2015, when the Fed last lifted interest rates from near zero, the joblessness rate was 5 percent and 77 percent of people between the ages of 25 and 54 worked. Already, joblessness is 5.4 percent and 78 percent of prime-age adults work.In fact, Fed officials projected that rates would remain on hold even as joblessness fell to 3.8 percent by the end of next year — below their estimate of the rate consistent with full employment in the longer run, which is about 4 percent.“That’s the most exciting part of what’s changed: They’re shooting for an ambitious prepandemic labor market,” said Skanda Amarnath, executive director of Employ America, a group that tries to persuade economic policymakers to focus on jobs. “Some fig leaf of progress is not enough.”But risks loom in both directions.If inflation remains high and an overly sanguine Fed has to rapidly reverse course to try to contain it, that could precipitate a painful recession.But if the Fed withdraws support unnecessarily, the labor market could take longer to heal, and investors might see the changes that Mr. Powell announced last year as a minor tweak rather than a meaningful commitment to raising inflation and fostering a more inclusive labor market.In that case, the economy might plunge back into a cycle of long-run stagnation, much like the one that has confronted Japan and much of Europe.“This is going to be an episode that will test the patience and credibility of the Federal Reserve,” said David Wilcox, a former Fed staff official who is now director of U.S. economics research at Bloomberg Economics. 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