Quantitative Easing

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Fed Meets Amid Worries That Inflation Progress Might Stall

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Inflation had been moderating steadily, but it is now hovering around 3 percent. Will lowering it fully to normal levels prove difficult?Slowing America’s rapid inflation has been an unexpectedly painless process so far. High interest rates are making it expensive to take out a mortgage or borrow to start a business, but they have not slammed the brakes on economic growth or drastically pushed up unemployment.Still, price increases have been hovering around 3.2 percent for five months now. That flatline is stoking questions about whether the final phase in fighting inflation could prove more difficult for the Federal Reserve.Fed officials will have a chance to respond to the latest data on Wednesday, when they conclude a two-day policy meeting. Central bankers are expected to leave interest rates unchanged, but their fresh quarterly economic projections could show how the latest economic developments are influencing their view of how many rate cuts are coming this year and next.The Fed’s most recent economic estimates, released in December, suggested that Fed officials would make three quarter-point rate cuts by the end of 2024. Since then, the economy has remained surprisingly strong and inflation, while still down sharply from its 2022 highs, has proved stubborn. Some economists think it’s possible that officials could dial back their rate cut expectations, projecting just two moves this year.By leaving rates higher for slightly longer, officials could keep pressure on the economy, guarding against the risk that inflation might pick back up.“The Federal Reserve should not be in a race to cut rates,” said Joseph Davis, Vanguard’s global chief economist, explaining that the economy has held up better than would be expected if rates were weighing on growth drastically, and that cutting prematurely risks allowing inflation to run warmer in 2025. “We have a growing probability that they don’t cut rates at all this year.”We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Why Japan’s Sudden Shift on Bond Purchases Dealt a Global Jolt

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    The world has relied on ultralow interest rates in Japan. What will happen if they rise?Japan is the world’s largest creditor. At the end of 2021, it held roughly $3.2 trillion in foreign assets, 30 percent more than No. 2 Germany. As of October, it owned over a trillion dollars of U.S. government debt, more than China. Japanese banks are the world’s largest cross-border lenders, with nearly $4.8 trillion in claims in other countries.Late last month, the world got an unexpected reminder of how integral Japan is to the global economy, when the country’s central bank unexpectedly announced that it was adjusting its stance on bond purchases.To those unversed in the intricacies of monetary policy, the significance of Japan’s decision to raise the ceiling on its 10-year bond yields may not have been immediately clear. But for the finance industry, the surprising change raised expectations that the days of rock-bottom Japanese interest rates could be numbered — potentially further squeezing global credit markets that were already tightening as the world economy slows.Since this summer, the Bank of Japan has been an outlier, keeping its interest rates ultralow even as other central banks raced to keep up with the Federal Reserve, which has ratcheted up lending costs in an effort to tame high inflation.As global rates have diverged from those in Japan, the value of the yen has fallen as investors sought better returns elsewhere. That has put pressure on the Bank of Japan to shift the world’s third-largest economy away from its decade-long commitment to cheap money, a policy known as monetary easing.Japan’s deep integration into global financial networks means that there is a lot of money riding on the timing of any move away from that policy, and investors have spent years fruitlessly waiting for a sign.As of mid-December, the overwhelming expectation was that the bank would hold off on any changes until next spring, when Haruhiko Kuroda, the Bank of Japan’s governor and an architect of its current policies, is set to step down.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Fed Confronts Why It May Have Acted Too Slowly on Inflation

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    Central bankers have been asking whether they should have reacted faster to rising inflation last year — and are learning from the recent past.Some Federal Reserve officials have begun to acknowledge that they were too slow to respond to rapid inflation last year, a delay that is forcing them to constrain the economy more abruptly now — and one that could hold lessons for the policy path ahead.Inflation began to accelerate last spring, but Fed policymakers and most private-sector forecasters initially thought price gains would quickly fade. It became clear in early fall that fast inflation was proving to be more lasting — but the Fed pivoted toward rapidly removing policy support only in late November and did not raise rates until March.Several current and former Fed officials have suggested in recent days that, in hindsight, the central bank should have reacted more quickly and forcefully last fall, but that both profound uncertainty about the future and the Fed’s approach to setting policy slowed it down.Officials had spent years dealing with tepid inflation, which made some hesitant to believe that rapidly rising prices would last. Even as they became more concerned, it took the Fed’s large group of policymakers time to come to an agreement on how to respond. Another complicating factor was that the Fed had made clear promises to markets about how it would remove support for the economy, which made adjusting quickly more difficult.“It was a complicated situation with little precedent — people make mistakes,” Randal K. Quarles, who was the Fed’s vice chair for supervision in 2021, said at a conference last week.Mr. Quarles, who left the Fed at the end of the year, argued that it should have begun to pull back support aggressively after September. He added, however, that the rate increases that central bankers were now making could still fix the situation.Even so, the delay could come with consequences. By the time the Fed completely stopped buying bonds and began raising rates in March, prices were rising 8.5 percent from a year earlier, the fastest rate since 1981. Consumer price increases are expected to remain rapid when fresh data are released Wednesday.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what the increases mean for consumers.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.And as high prices have lingered, inflation expectations have been creeping up, threatening to change household and business behavior in ways that perpetuate the problem.Because inflation is eating away at paychecks and making it more difficult for families to afford groceries and cars, it has emerged as a major political issue for President Biden, whose approval ratings have fallen over concerns about his handling of the economy. During remarks at the White House on Tuesday, Mr. Biden called inflation his “top domestic priority” and said his administration was taking steps to contain it. He also sought to push back on Republicans, who have spent months blaming him for stoking inflation, saying their policy ideas were “extreme” and would hurt working families.“I want every American to know that I’m taking inflation very seriously,” Mr. Biden said, noting that the Fed has the “primary role” in trying to tame price increases.The Fed is now raising rates quickly to wrestle the situation back under control. Officials lifted borrowing costs half a percentage point this month, their biggest increase since 2000, while broadcasting that two more large adjustments could be coming. They are also going to start shrinking their $9 trillion balance sheet of bond holdings next month.If the Fed continues to rapidly adjust policy this year as it tries to catch up, policymakers risk slamming the brakes on a speeding economy. Such hard stops can hurt, pushing up unemployment and possibly tipping off a recession. Officials typically prefer to apply their policy brakes gradually, increasing the chances that the economy can slow down painlessly.Still, several Fed officials pointed out that it was easier to say what the Fed should have done in 2021 after the fact — that in the moment, it was difficult to know price increases would last. Inflation initially came mainly from a few big products that were in short supply amid supply chain snarls, like semiconductors and cars. Only later in the year did it become obvious that price pressures were broadening to food, rent and other areas.“I try to give some grace, and say: In a very uncertain time, with an unprecedented setting, with no real models to guide us, people are going to do the best they can,” Raphael Bostic, the president of the Federal Reserve Bank of Atlanta, said in an interview Monday. Mr. Bostic was an early voice suggesting that the Fed should stop buying bonds and think about raising interest rates.Officials have said it was the acceleration in inflation data in September, followed by rising employment costs, that convinced them that price gains might last and that the central bank needed to act decisively. The Fed chair, Jerome H. Powell, pivoted on policy in late November as those data points added up.“It was a complicated situation with little precedent — people make mistakes,” said Randal K. Quarles, who was the Fed’s vice chair for supervision in 2021.Erin Scott/ReutersWhile Mr. Quarles argued that the Fed should have responded as the September data came in, he suggested that there had been a complicating factor: Mr. Powell was waiting to see if he would be reappointed by the Biden administration, which did not announce its decision to renominate him until mid-November.Mr. Quarles, on a “Banking With Interest” podcast episode last week, said reacting to the data was “hard to do until there was clarity as to what the leadership going forward of the Fed was going to be.”Inflation F.A.Q.Card 1 of 5What is inflation? More

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    The Fed Wants to Fight Inflation Without a Recession. Is It Too Late?

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    Federal Reserve officials took a while to recognize that inflation was lasting. The question is whether they can tame it gently now.The Federal Reserve is poised to set out a path to rapidly withdraw support from the economy at its meeting on Wednesday — and while it hopes it can contain inflation without causing a recession, that is far from guaranteed.Whether the central bank can gently land the economy is likely to serve as a referendum on its policy approach over the past two years, making this a tense moment for a Fed that has been criticized for being too slow to recognize that America’s 2021 price burst was turning into a more serious problem.The Fed chair, Jerome H. Powell, and his colleagues are expected to raise interest rates half a percentage point on Wednesday, which would be the largest increase since 2000. Officials have also signaled that they will release a plan for shrinking their $9 trillion balance sheet starting in June, a policy move that will further push up borrowing costs.That two-front push to cool off the economy is expected to continue throughout the year: Several policymakers have said they hope to get rates above 2 percent by the end of 2022. Taken together, the moves could prove to be the fastest withdrawal of monetary support in decades.The Fed’s response to hot inflation is already having visible effects: Climbing mortgage rates seem to be cooling some booming housing markets, and stock prices are wobbling. The months ahead could be volatile for both markets and the economy as the nation sees whether the Fed can slow rapid wage growth and price inflation without constraining them so much that unemployment jumps sharply and growth contracts.“The task that the Fed has to pull off a soft landing is formidable,” said Megan Greene, chief global economist at the Kroll Institute, a research arm of the Kroll consulting firm. “The trick is to cause a slowdown, and lean against inflation, without having unemployment tick up too much — that’s going to be difficult.”Optimists, including many at the Fed, point out that this is an unusual economy. Job openings are plentiful, consumers have built up savings buffers, and it seems possible that growth will be resilient even as business conditions slow somewhat.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: Times readers sent us their questions about rising prices. Top experts and economists weighed in.Interest Rates: As it seeks to curb inflation, the Federal Reserve announced that it was raising interest rates for the first time since 2018.How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.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.But many economists have said cooling price increases down when labor is in demand and wages are rising could require the Fed to take significant steam out of the job market. Otherwise, firms will continue to pass rising labor costs along to customers by raising prices, and households will maintain their ability to spend thanks to growing paychecks.“They need to engineer some kind of growth recession — something that raises the unemployment rate to take the pressure off the labor market,” said Donald Kohn, a former Fed vice chair who is now at the Brookings Institution. Doing that without spurring an outright downturn is “a narrow path.”Fed officials cut interest rates to near-zero in March 2020 as state and local economies locked down to slow the coronavirus’s spread at the start of the pandemic. They kept them there until March this year, when they raised rates a quarter point.But the Fed’s balance-sheet approach has been the more widely criticized policy. The Fed began buying government-backed debt in huge quantities at the outset of the pandemic to calm bond markets. Once conditions settled, it bought bonds at a pace of $120 billion, and continued making purchases even as it became clear that the economy was healing more swiftly than many had anticipated and inflation was high.Late-2021 and early-2022 bond purchases, which are what critics tend to focus on, came partly because Mr. Powell and his colleagues did not initially think that inflation would become longer lasting. They labeled it “transitory” and predicted that it would fade on its own — in line with what many private-sector forecasters expected at the time.When supply chain disruptions and labor shortages persisted into the fall, pushing up prices for months on end and driving wages higher, central bankers reassessed. But even after they pivoted, it took time to taper down bond buying, and the Fed made its final purchases in March. Because officials preferred to stop buying bonds before lifting rates, that delayed the whole tightening process.The central bank was trying to balance risks: It did not want to quickly withdraw support from a healing labor market in response to short-lived inflation earlier in 2021, and then officials did not want to roil markets and undermine their credibility by rapidly reversing course on their balance sheet policy. They did speed up the process in an attempt to be nimble.Under Jerome H. Powell, the Fed, which meets on Wednesday, is trying to walk a thin line.Nate Palmer for The New York Times“In hindsight, there’s a really good chance that the Fed should have started tightening earlier,” said Karen Dynan, an economist at the Harvard Kennedy School and a former Treasury Department chief economist. “It was really hard to judge in real time.”Nor was the Fed’s policy the only thing that mattered for inflation. Had the Fed begun to pull back policy support last year, it might have slowed the housing market more quickly and set the stage for slower demand, but it would not have fixed tangled supply chains or changed the fact that many consumers have more cash on hand than usual after repeated government relief checks and months spent at home early in the pandemic.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Fed Officials Make It Clear on Inflation: This Time Is Different

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    Federal Reserve officials are preparing to pull back their economic help as inflation remains stubbornly high and the labor market swiftly heals, and they are signaling clearly that the last business cycle is a poor template for what comes next.During the economic expansion that stretched from the global financial crisis to the start of the pandemic, the Fed acted very gradually — it slowly dialed back bond buying meant to help the economy, then only ploddingly shrank its balance sheet of asset holdings. Central bankers increased borrowing costs sporadically between 2015 and the end of 2018, raising them at every other meeting at the very fastest.But inflation was muted, the labor market was slowly crawling out of an abyss, and business conditions needed the Fed’s support. This time is different, a series of Fed presidents emphasized on Monday — suggesting that the pullback in policy support is likely to be quicker and more decisive.Four of the central bank’s 12 regional presidents spoke on Monday, and all suggested that the Fed could soon begin to cool off the economy. Central bankers are widely expected to make a series of interest rate increases starting in March, and could soon thereafter begin to fairly rapidly shrink their balance sheet holdings. The pace of policy retreat is still up for debate and officials reiterated that it will hinge on incoming data — but several also noted that economic conditions are unusually strong.“The economy is far stronger than it has been, during any of my time in this role, and certainly, during any of the recoveries that we’ve been trying to navigate our policy through in recent memory,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with Yahoo Finance. Any risks “that our policies are going to lead to a contraction in the economy, I think they’re relatively far off.”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.While it took the Fed a long time to begin shrinking its balance sheet last time, the central bank will probably move more promptly in 2022, Esther George, president of the Federal Reserve Bank of Kansas City, suggested during a speech.“With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook,” said Ms. George, who votes on monetary policy this year.Tricky questions lie ahead about how big the balance sheet should be, she noted. The Fed’s holdings have swollen to nearly $9 trillion, more than twice its size before the pandemic.Ms. George estimated that the Fed’s big bond holdings were weighing down longer-term interest rates by roughly 1.5 percentage points — nearly cutting the interest rate on 10-year government debt in half. While shrinking the balance sheet risks roiling markets, she warned that if the Fed remains a big presence in the Treasury market, it could distort financial conditions and imperil the central bank’s prized independence from elected government.“While it might be tempting to err on the side of caution, the potential costs associated with an excessively large balance sheet should not be ignored,” she said. She suggested that shrinking the balance sheet could allow policymakers to raise rates, which are currently set near-zero, by less.Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, also argued for an active — albeit still gradual — path toward removing policy help.The Fed is not behind the curve, she said on a Reuters webcast, but it needs to react to the reality that the labor market appears at least temporarily short on workers and inflation is running hot. Prices picked up by 5.8 percent in the year through December, nearly three times the 2 percent the Fed aims for on average and over time.“We’re not trying to combat some vicious wage-price spiral,” Ms. Daly said. Still, she said she could support a rate increase as soon as March, and hinted that four rate increases could be reasonable, a path that would slow things down while “not pulling away the punch bowl completely and causing disruptions.”Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Fed Officials Make It Clear: This Time Is Different

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    Federal Reserve officials are preparing to pull back their economic help as inflation remains stubbornly high and the labor market swiftly heals, and they are signaling clearly that the last business cycle is a poor template for what comes next.During the economic expansion that stretched from the global financial crisis to the start of the pandemic, the Fed acted very gradually — it slowly dialed back bond buying meant to help the economy, then only ploddingly shrank its balance sheet of asset holdings. Central bankers increased borrowing costs sporadically between 2015 and the end of 2018, raising them at every other meeting at the very fastest.But inflation was muted, the labor market was slowly crawling out of an abyss, and business conditions needed the Fed’s support. This time is different, a series of Fed presidents emphasized on Monday — suggesting that the pullback in policy support is likely to be quicker and more decisive.Four of the central bank’s 12 regional presidents spoke on Monday, and all suggested that the Fed could soon begin to cool off the economy. Central bankers are widely expected to make a series of interest rate increases starting in March, and could soon thereafter begin to fairly rapidly shrink their balance sheet holdings. The pace of policy retreat is still up for debate and officials reiterated that it will hinge on incoming data — but several also noted that economic conditions are unusually strong.“The economy is far stronger than it has been, during any of my time in this role, and certainly, during any of the recoveries that we’ve been trying to navigate our policy through in recent memory,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with Yahoo Finance. Any risks “that our policies are going to lead to a contraction in the economy, I think they’re relatively far off.”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.While it took the Fed a long time to begin shrinking its balance sheet last time, the central bank will probably move more promptly in 2022, Esther George, president of the Federal Reserve Bank of Kansas City, suggested during a speech.“With inflation running at close to a 40-year high, considerable momentum in demand growth, and abundant signs and reports of labor market tightness, the current very accommodative stance of monetary policy is out of sync with the economic outlook,” said Ms. George, who votes on monetary policy this year.Tricky questions lie ahead about how big the balance sheet should be, she noted. The Fed’s holdings have swollen to nearly $9 trillion, more than twice its size before the pandemic.Ms. George estimated that the Fed’s big bond holdings were weighing down longer-term interest rates by roughly 1.5 percentage points — nearly cutting the interest rate on 10-year government debt in half. While shrinking the balance sheet risks roiling markets, she warned that if the Fed remains a big presence in the Treasury market, it could distort financial conditions and imperil the central bank’s prized independence from elected government.“While it might be tempting to err on the side of caution, the potential costs associated with an excessively large balance sheet should not be ignored,” she said. She suggested that shrinking the balance sheet could allow policymakers to raise rates, which are currently set near-zero, by less.Mary C. Daly, the president of the Federal Reserve Bank of San Francisco, also argued for an active — albeit still gradual — path toward removing policy help.The Fed is not behind the curve, she said on a Reuters webcast, but it needs to react to the reality that the labor market appears at least temporarily short on workers and inflation is running hot. Prices picked up by 5.8 percent in the year through December, nearly three times the 2 percent the Fed aims for on average and over time.“We’re not trying to combat some vicious wage-price spiral,” Ms. Daly said. Still, she said she could support a rate increase as soon as March, and hinted that four rate increases could be reasonable, a path that would slow things down while “not pulling away the punch bowl completely and causing disruptions.”Inflation F.A.Q.Card 1 of 6What is inflation? 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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    Why Critics Fear the Fed's Policy Shift May Prove Late and Abrupt

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    The Federal Reserve is still buying bonds as prices surge. Some praise the central bank’s continuing policy pivot; others ask if it was fast enough.The Federal Reserve has moved at warp speed by central banking standards over the past six months as it prepares to lean against a surge in prices: first slowing its economy-stoking bond purchases, then deciding to end that buying program earlier and finally signaling that interest rate increases are coming.Some on Wall Street and in Washington are questioning whether it moved rapidly enough.Consumer prices increased by 7 percent in December from the prior year, the fastest pace since 1982, as rapid spending on goods collides with limited supply as a result of shuttered factories and backlogged ports. While price increases were initially expected to fade quickly, they have instead lasted and broadened to rents and restaurant meals.The Fed is charged with maintaining full employment and stable prices. The burst in inflation is causing some to question whether the central bank was too slow to recognize how persistent price increases were becoming, and whether it will be forced to respond so rapidly that it pushes markets into a free fall and the economy into a sharp slowdown or even recession.“The first policy mistake was completely misunderstanding inflation,” said Mohamed El-Erian, the chief economic adviser at the financial services company Allianz. He thinks the Fed now runs the risk of having to pull support away so rapidly that it disrupts markets and the economy. The Fed’s Board of Governors “maintained its transitory inflation narrative for 2021 way too long, missing window after window to slowly ease its foot off the stimulus accelerator.”Plenty of economists disagree with Mr. El-Erian, pointing out that the Fed reacted swiftly as it realized that conditions did not match its expectations. And market forecasts for inflation have remained under control, suggesting that investors believe that the Fed will manage to stabilize prices over the long run. Even so, stocks are shuddering and consumers are watching nervously as the central bank prepares for what could an unusually rapid withdraw of monetary support — ramping up pressure on its policymakers.“The downturn was faster, the upturn was faster: It was an unprecedented event, so not forecasting it properly was not the end of the world,” said Gennadiy Goldberg, a senior U.S. rates strategist at TD Securities. “What matters is what their readjustment is once the forecast has changed.”Jerome H. Powell, the Fed chair, and his colleagues meet this week in Washington and will release their latest policy decision at 2 p.m. on Wednesday.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 is on track to end its asset buying program in March, at which point markets expect policymakers to begin raising interest rates. Investors expect officials to raise interest rates as many as four times this year, while allowing their balance sheet of asset holdings to shrink. Both policy changes would work together to remove juice from the rapidly recovering economy.The path the Fed is now following differs starkly from the one it was projecting as recently as September, when many Fed officials had not come around to the idea that rates would rise in 2022. Likewise, the Fed began tapering off its bond buying program only in late 2021, so it is now in the uncomfortable position of making its final purchases — giving markets and the economy an added lift — even as inflation comes in hot.The central bank’s critics argue that it should have started to withdraw its help earlier and faster. That would have begun to cool off demand and inflation sooner, and it would allow for a more gradual drawdown of support now.“I don’t think the Fed caused this inflation problem, but I do think they were late to recognize it,” said Aneta Markowska, chief financial economist at Jefferies, an investment bank. “And, therefore, they will have to catch up very quickly.”Sudden Fed moves carry an economic risk: Failing to give markets time to digest and adjust often sends them into tumult. Rocky markets can make it hard for households and businesses to borrow money, causing the economy to slow sharply, and perhaps more than the central bank intended.That is why the Fed typically tries to engineer what policymakers often refer to as a “soft landing.” The goal is to avoid upending markets, and to allow the economy to decelerate without slowing it down so abruptly that it tips into recession.But the economy has surprised the central bank lately.In 2021, Fed policymakers bet that rapid inflation would fade as the economy got through an unusual reopening period and the pandemic abated. They wanted to be patient in removing support as the labor market healed, and they did not meaningfully change their plans for policy after Democrats took the White House and Senate and it became clear that they would pass a large stimulus package.The path the Fed is now following differs starkly from the one it was projecting as recently as September.Stefani Reynolds for The New York TimesAs those dollars trickled out into the economy and the pandemic persisted, though, demand remained strong, supply chains remained roiled, and inflation began to broaden out from pandemic-disrupted products like cars and airfares into rents, which move slowly and matter a lot to overall price increases. Workers returned to the job market more slowly than many economists expected, and wages began to pick up sharply as labor shortages surfaced.That caused the Fed to change course late last year — and to do so fairly abruptly.“Inflation really popped up in the late spring last year, and we had a view — it was very, very widely held in the forecasting community — that this would be temporary,” Mr. Powell said in December. But officials grew more concerned as employment cost data moved higher and inflation indicators showed hot readings, he said, so they pivoted on policy.Inflation F.A.Q.Card 1 of 6What is inflation? More

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    Lael Brainard predicts that the Fed will engineer a soft economic landing.

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    Lael Brainard, a Federal Reserve governor whom President Biden has nominated to be the central bank’s new vice chair, said the Fed would communicate its plans for removing economic support clearly — and suggested that the job market would continue to grow even as the Fed pulled back its help and as inflation began to ease.Ms. Brainard faced vetting before the Senate Banking Committee on Thursday. She fielded questions about her qualifications and her views on the Fed’s role in preparing the financial system for climate change and the outlook for the United States economy.In a hearing marked by limited contention — one that suggested Ms. Brainard could enjoy some bipartisan support — the nominee expressed a willingness to combat high and rising prices by removing Fed help for the economy. The central bank is already slowing its bond-buying program, and it has signaled that it could soon raise interest rates and begin to shrink its asset holdings in a bid to further cool off the economy.“I believe we’ll be able to see inflation coming back down to target while the employment picture continues to clear,” Ms. Brainard said, after noting that the Fed would communicate its plans for withdrawing support clearly. “There are some short-term constraints there that I think are limiting people from coming back into the labor market. As those are lifted, I think we’ll have continued gains.”The jobless rate has been plummeting, but millions of workers are still missing from the job market compared with before the pandemic, and many employers complain that they cannot find employees, suggesting that health concerns and other challenges are keeping many people on the sidelines for now. At the same time, price inflation is rapid, with a report on Wednesday showing that a key price index rose in December at the fastest pace since 1982.Ms. Brainard acknowledged that pandemic imbalances that have roiled global shipping and shut down factories are part of what is driving high inflation today — and that the Fed’s policies can do little to fix those supply problems. But she highlighted that Fed policies that affect borrowing costs can have a significant impact in cooling off demand.“We have a set of tools — they are very effective — and we will use them to bring inflation back down,” Ms. Brainard said.Fed officials have increasingly signaled that they expect to raise interest rates in 2022 to keep high inflation from becoming permanent. Markets increasingly expect four rate increases in 2022, which would put the Fed’s short-term policy interest rate just above 1 percent. More