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    Omicron Is an Economic Threat, but Inflation Is Worse, Central Bankers Say

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    Within 24 hours, the Federal Reserve, Bank of England and European Central Bank all stepped forward to deal with price increases.There is still a lot scientists do not know about Omicron. There is cautious optimism — but no certainty — about the effectiveness of vaccines against this fast-spreading variant of the coronavirus, and experts do not fully understand what it means for public health or the economy.But central banks have concluded they don’t have the luxury of waiting to find out.Facing surging inflation, three of the world’s most influential central banks — the Federal Reserve, Bank of England and European Central Bank — took decisive steps within 24 hours of each other to look past Omicron’s economic uncertainty. On Thursday, Britain’s central bank unexpectedly raised interest rates for the first time in more than three years as a way to curb inflation that has reached a 10-year high. The eurozone’s central bank confirmed it would stop purchases under a bond-buying program in March. The day before, the Fed projected three interest rate increases next year and said it would accelerate the wind down its own bond-buying program.The perception that the Bank of England would “view the outbreak of the Omicron variant with greater concern than it actually did” caused the surprise in financial markets, ” Philip Shaw, an economist at Investec in London, wrote in a note to clients. The Fed also “carried on regardless” with its tightening plans, he added.Aside from Omicron, the central banks were running out of reasons to continue emergency levels of monetary stimulus designed to keep money flowing through financial markets and to keep lending to businesses and households robust throughout the pandemic. The drastic measures of the past two years had done the job — and then some: Inflation is at a nearly 40-year high in the United States; in the eurozone it is the highest since records began in 1997; and price rises in Britain have consistently exceeded expectations.It is still unknown how Omicron will affect the economic recovery. Vaccine makers are still testing their shots against the variant.Alessandro Grassani for The New York TimesThe heads of all three central banks have separately decided that the price gains won’t be as temporary as they once thought, as supply chains take a while to untangle and energy prices pick up again.Andrew Bailey, the governor of the Bank of England, said that policymakers in Britain were seeing things that could threaten inflation in the medium-term. “So that’s why we have to act,” he said on Thursday.“We don’t know, of course, a lot about Omicron at the moment,” he added. It could slow the economy, and already there are canceled holiday parties, fewer restaurant bookings, less retail foot traffic and signs that more people are staying home. But Omicron could also worsen inflationary pressures, he said. “And that’s, I’m afraid, a very important factor for us.”Already, price gains have popped higher this year as snarled supply chains and goods shortages have raised shipping and manufacturing costs. Depending on the severity of Omicron and how governments react, the variant could cause factories to shut down and could keep supply chains in disarray and workers at home, prolonging goods and labor shortages and pushing inflation higher.At the same time, policymakers are assuming the impact on the economy will be milder than previous waves of the virus. With each surge in cases and reintroduction of restrictions, the dent to the economy has gotten smaller and smaller. This would lessen the risk that the central banks end up tightening monetary policy into a downturn.Still, it is an awkward balancing act. On the same day the Bank of England raised rates, its staff cut half a percentage point from their growth forecasts for the final three months of the year. By the end of 2021, the British economy will still be 1.5 percent smaller than its prepandemic size, the bank estimated.Christine Lagarde, the president of the European Central Bank, said Omicron had created uncertainty in the face of a strong recovery.Pool photo by Ronald Wittek“From a macroeconomic perspective, it’s unlikely that the fourth wave is going to have as meaningful an impact as we’ve seen even during last winter,” said Dean Turner, an economist at UBS Global Wealth Management.The economic recoveries from the pandemic, though bumpy, haven’t been derailed yet. Unemployment rates are falling in Europe and the United States, and businesses are complaining that is difficult to hire staff. That, combined with the burst of inflation, was enough to bolster the case for some monetary tightening.“There’s a lot of uncertainty with the new variant, and it’s not clear how big the effects would be on either inflation or growth or hiring,” Jerome H. Powell, the Fed chair, said on Wednesday. But there is a “real risk” inflation could be more persistent, he also said, which was part of the reason the bank sped up its plans to taper its bond purchases.Ending the Fed’s bond purchases sooner would give the central bank room to react to a wider range of economic outcomes next year, Mr. Powell said.“The data is pretty glaring,” Mr. Turner of UBS said of recent statistics on inflation and employment. “There’s only so much caution you can get away with,” before central banks need to take action, he said.Omicron has created uncertainty in the face of a strong recovery, Christine Lagarde, the president of the European Central Bank said on Thursday after she outlined how the bank would end its largest pandemic-era stimulus measure.Vaccine-makers are still testing their shots against Omicron and medical officials are encouraging restraint when it comes to socializing rather than implementing new lockdowns, but central bankers are marching ahead because time isn’t on their side. The effect of monetary policy decisions on the wider economy isn’t immediate.The Bank of England is forecasting that inflation will peak at 6 percent in April, three times the central bank’s target. Within such a short time frame, there is little policymakers can do to stop that from happening, but they can try to signal to businesses and unions setting wages that they will act to stop higher inflation from becoming entrenched, said Paul Mortimer-Lee, the deputy director of the National Institute of Economic and Social Research in London. This may prevent higher prices from spilling over into significantly higher wages, which could cause businesses to raise prices even more.While all three central banks are facing similar problems with high inflation and are keeping watch over wage negotiations, their future challenges are different.The Federal Reserve and Bank of England are worried about the persistence of high inflation. For the European Central Bank, inflation in the medium term is too low, not too high. It is still forecasting inflation to be below its 2 percent target in 2023 and 2024. To help reach that target in coming years, the central bank will increase the size of an older bond-buying program beginning in April, after purchases end in the larger, pandemic-era program. This is to avoid “a brutal transition,” Ms. Lagarde said.She warned against drawing strong comparisons between Britain, the United States and the eurozone economies.“Those three economies are at a completely different states of the cycle,” she said. “We are in a different universe and environment,” even though there might be some spillover effects across countries from the actions each central bank takes.Melissa Eddy More

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    Fed Could Raise Rates 3 Times in 2022 and Speeds End of Bond-Buying

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    With the economy healing, but price gains pinching consumers, officials are dialing back bond purchases and getting in position to raise interest rates (three are possible next year).Federal Reserve policymakers moved into inflation-fighting mode on Wednesday, saying they would cut back more quickly on their pandemic-era stimulus at a moment of rising prices and strong economic growth, capping a challenging year with a policy shift that could usher in higher interest rates in 2022.The central bank’s policy statement set up a more rapid end to the monthly bond-buying program that the Fed has been using throughout the pandemic to keep money chugging through markets and to bolster growth. A fresh set of economic projections released on Wednesday showed that officials expect to raise interest rates, which are now set near-zero, three times next year.“Economic developments and changes in the outlook warrant this evolution,” Jerome H. Powell, the Fed chair, said of the decision to pull back on bond purchases more quickly.By tapering off its bond buying faster, the Fed is doing less to stimulate the economy with each passing month, and putting the program on track to end completely in March.That would place Fed policymakers in a position to raise interest rates — their more traditional and more powerful tool — sooner. The Fed has made clear it wants to end its bond-buying program before it raises rates, which would cool off demand by making it more expensive to borrow for a home, a car or expanding a business. That would in turn weigh on growth and, eventually, price gains. The Fed’s new economic projections suggested rates, which have been at rock-bottom since March 2020, might rise to 2.1 percent by the end of 2024. More

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    The Fed Meets Amid Faster Inflation and Prepares to React

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    The Federal Reserve could announce plans to cut economic support faster, and may signal 2022 rate increases, at its Dec. 14-15 meeting.Federal Reserve officials, worried about rising costs and buoyed by a healing labor market, are pivoting from bolstering the economic recovery to more quickly withdrawing the support that has aided the economy since the pandemic began.The policymakers, who meet this week for their final gathering of 2021, are widely expected to outline a faster end to their bond-buying campaign and will telegraph how aggressively they expect to raise rates from rock-bottom next year.The potential for major policy signals at the Fed’s meeting, which concludes at 2 p.m. on Wednesday, will make it one of the most closely watched of the pandemic era.Officials took their first step toward weaning the economy off the central bank’s support in November, when they said they would begin to slow a large-scale bond buying program that had been in place since early in the pandemic to keep money flowing around markets and support the economy. In the weeks since the Fed’s last meeting, fresh data has showed that consumer prices are climbing at the fastest pace in nearly 40 years and the unemployment rate has fallen to 4.2 percent, far below its pandemic peak.Given inflation and growth trends, Fed officials signaled clearly that they would discuss withdrawing support more quickly at this gathering, and economists think officials will signal a plan to taper off bond purchases so that the buying will stop altogether in March.Policymakers will also provide their latest thinking on the path for interest rates in their updated quarterly economic projections, and could pencil in two or three increases next year. When they last released the projections in September, officials were split on whether they would raise rates at all in 2022. Lifting the federal funds rate is arguably the Fed’s most powerful tool for pushing back on inflation, because it would slow demand and economic growth by percolating through the rest of the economy, lifting borrowing costs on mortgages, business loans and auto debt.In late November, Jerome H. Powell, the Fed chair, set the stage for the central bank’s shift from an economy-stoking stance to one that is more focused on keeping inflation under control.“At this point, the economy is very strong, and inflationary pressures are high, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner,” Mr. Powell said during congressional testimony on Nov. 30.The Fed chair is expected to further explain during a post-meeting news conference on Wednesday how he is thinking about the central bank’s policy stance as it confronts rapid inflation and an uncertain economic path at a time when the virus shows no signs of abating and a new variant, Omicron, complicates the outlook.The Fed spent much of 2021 tiptoeing away from full-blast economic support, hoping to remove stimulus gradually enough that the job market would heal fully and quickly. But gradualism has given way to wariness in recent weeks, partly thanks to a new series of data points showing that inflation is still high and might stay elevated for some time.Central bankers knew that prices would climb quickly in early 2021 as the economy recovered from the depths of the pandemic, but the increases have been strikingly broad-based and long-lasting. The gains are broadening beyond pandemic-sensitive goods and into rent and some services, and both wages and inflation expectations are picking up. Policymakers have increasingly questioned the wisdom of adding juice to the economy with each passing month.“They’re realizing that they need to stop pouring gasoline on the fire,” said Gennadiy Goldberg, a rates strategist at T.D. Securities.The Fed has two key jobs: keeping prices stable and fostering maximum employment. Progress on the second goal has also been notable in recent months. The unemployment rate has dropped sharply, falling to 4.2 percent in November and improving faster than Fed officials or most economist expected.Even so, about four million jobs are still missing compared to before the pandemic. Some of those people may have retired, but others are expected to return to the job search once health concerns and pandemic-related child-care problems become less pronounced. Many Fed officials had been hoping to keep their policies very accommodative as those people came back.But inflation is forcing policymakers to balance their job market ambitions with their goal of keeping price gains under control. While an unhealed job market is bad for American households, so too are high and unpredictable price increases that chip away at paychecks and make it hard for businesses to plan. Plus, if the Fed waits too long to react to inflation, the fear is that they might have to lift rates sharply to bring it to heel, setting off a new recession.“We have to balance those two goals when they are in tension as they are right now,” Mr. Powell said in testimony on Dec. 1. “But I assure you we will use our tools to make sure that this high inflation that we are experiencing does not become entrenched.”Shoppers in New York last week. A burst in inflation has caught policymakers by surprise.George Etheredge for The New York TimesThe Biden administration announced in late November that it would reappoint Mr. Powell as Fed chair, which may have also given Mr. Powell a renewed mandate to lay out a plan to manage the risks around inflation and might explain the Fed’s sudden and notable pivot toward focusing more intently on inflation, said Krishna Guha, head of the global policy central bank strategy team at Evercore ISI.If Mr. Powell were leaving the central bank early next year when his term expires, it might have been tough for him to signal a plan for the future that his successor would have been stuck executing.Plus, “there is pressure from both sides of the aisle for the Fed to bring inflation under control,” Mr. Guha said. But he thinks the political element of the shift could be exaggerated; economic fundamentals also explain it.While many Fed officials say they still expect high inflation to fade, plenty of signs suggest it is at risk of remaining too high for too long. Businesses report that they are raising wages or setting aside money as they prepare to pay more. Companies — from dollar stores to pizza shops — are lifting prices and finding that consumers accept the change.Even companies taking a cautious approach to lifting prices express uncertainty about how long it will take to clear the supply chain snarls that are pushing up prices for inputs like food commodities and imported goods.“I think we’re living in elevated time of everything, right?” Randy Garutti, chief executive officer of Shake Shack, said at an investor conference early this month. “That will moderate. I can’t tell you when, I don’t know if it will be next year ’23 or ’24, or which product it will be? That’s unclear.”Fed officials are quick to acknowledge that the supply snarls seem likely to last into next year, and they seem to view the new coronavirus variant — about which much is still unknown — as something with the potential to prevent tortured supply routes from returning to normal.As they wrestle with the crosscurrents, Wall Street is debating how quickly the Fed might move to push rates higher next near, and will closely watch how many rate increases officials pencil into their fresh economic projections this week for any hint at the trajectory.“We think it’s a close call between two or three” estimated increases, J.P. Morgan economists wrote in a preview note, noting that they think three are more likely. They expect the Fed to first raise rates in June 2022, then lift them again every three months.The plan won’t necessarily be to try to constrain the economy by withdrawing support so rapidly that Fed policy becomes a big drag on growth — the equivalent of slamming the brakes. Instead, it will be to stop helping the economy so much, said Diane Swonk, chief economist at Grant Thornton LLP.“The Fed is going to take their foot off the gas pedal,” she said. The new development at this meeting is that the stimulus deceleration will be happening “even faster.” More

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    Why the November Jobs Report Is Better Than It Looks

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    The number of jobs added was below expectations, but otherwise the report shows an economy on the right track.Everything in the November jobs numbers Friday was good except for the number that usually gets the most attention.The 210,000 jobs that U.S. employers added last month was far below analyst expectations. But most of the other evidence in the report points to a job market that is humming. An open question a few months ago — is this a tight labor market or a loose one? — is quickly being settled in favor of “tight.”Most notably, the jobless rate fell to 4.2 percent from 4.6 percent, a remarkable swing in a single month. The speed with which unemployment has gone from a grave crisis to a benign situation is astounding. Unemployment was 6.7 percent last December. In one year, we’ve experienced an improvement that took three and a half years in the last economic cycle (March 2014 to September 2017).Sometimes a falling unemployment rate is driven by a pernicious trend: People drop out of the labor force. The opposite was true in November. The survey of American households on which the data is based showed uniformly positive signs. The number of people working was up by 1.1 million while the number of adults not in the labor force — neither working nor looking for work — fell by 473,000.Among people in their prime working years, those 25 to 54, the share of people employed rose by a whopping half a percentage point. It was 78.8 percent in November, rapidly approaching its pre-Covid level of 80.4 percent. By early in 2022, it’s easy to imagine that people in that age bracket will be employed at prepandemic rates.Even the disappointing number on job creation, derived from a separate survey of employers, has some silver linings. For one, it was accompanied by positive revisions to September and October job growth numbers, amounting to a combined 82,000, which takes some of the sting away. Revisions have been uncommonly large, and mostly in a positive direction, in recent months, reflecting challenges collecting data in a pandemic economy.For another, soft job creation numbers may also be evidence of a tight labor market. Employers may want to add jobs in larger numbers, but are constrained by the number of workers they’re able to find. That story is certainly consistent with many business surveys and anecdotes about labor shortage issues.A tight job market — one in which workers are scarce and employers have to compete to attract workers — is generally the goal of economic policy. Compensation tends to rise, and workers are confident in their ability to find a new job. The new numbers are just the latest evidence that this is the world American workers are living in right now. (Among the other evidence: The rate of people voluntarily quitting their jobs is at record levels.)That’s not to say everything is perfect. The share of adults in the labor force remains significantly below prepandemic levels — 61.8 percent in November, compared with 63.3 percent in February 2020. That reflects in part the decisions of people to retire early. And it remains unclear how many of those people might return to work as the economy and public health conditions improve.But in terms of policy, this increasingly looks like an economy on the right track. The work of macroeconomic stabilization appears to be pretty much complete. At its coming policy meeting, the Federal Reserve will seriously consider winding down its program of bond-buying faster than planned, Chair Jerome Powell said this week.Despite the soft job creation numbers, the overall November employment report appears to support those plans. Fed officials would like to see a stronger rebound in labor force participation, but that measure was at least heading in the right direction in November. And ultimately it isn’t Fed policy that will decide whether, for example, a 62-year-old who left his job during the pandemic decides to start working again.If anything, the new numbers support the idea that the Fed has found itself out of position, with a monetary policy that is looser than it should be at a time when the labor market is quite healthy and with inflation far above its target.Consider this: In the last economic cycle, the Fed began tapering its bond purchases in December 2013, when the unemployment rate was 6.7 percent and inflation was coming in below the Fed’s 2 percent goal. This time, it began when the jobless rate was 4.2 percent and inflation was in the ballpark of 6 percent (November inflation numbers have not yet been released).Even if you believe the Fed was too quick to tighten monetary policy in 2013 — and the sluggish recovery of the 2010s is evidence that it was — the contrast is striking. In that sense, a more aggressive tapering plan from the Fed will be an effort to adjust its policy stance with the facts on the ground without causing too much disruption to markets or the economy.If the Fed succeeds, the economy will keep growing steadily and the labor market will continue its gradual improvement. But it’s worth noting just how rapid the improvement has already been. In February, the Congressional Budget Office was forecasting the unemployment rate would be 5.3 percent in the current quarter. It has ended up a full percentage point below that level.Ultimately, this has been a speedy labor market recovery, and one that appears to have more room to run. Policymakers have every reason to take the win and continue adjusting to that reality. More

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    A Top Official Says the Fed Will ‘Grapple’ With a Faster Bond-Buying Taper

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    The president of the New York Federal Reserve said Omicron could prolong supply and demand mismatches, causing some inflation pressures to last.John C. Williams, president of the Federal Reserve Bank of New York, said the latest variant of the coronavirus could prolong the bottlenecks and shortages that have caused inflation to run hotter than expected, and is a risk Fed officials will assess as they “grapple” with how quickly to remove economic support.It is still too soon to know how the Omicron variant, which public health officials in southern Africa identified just last week, will affect the economy, Mr. Williams said Tuesday in an interview with The New York Times. But if the new version of the virus leads to another wave of infections, it could exacerbate the disruptions that have caused prices to rise at their fastest pace in three decades.“Clearly, it adds a lot of uncertainty to the outlook,” Mr. Williams said of the new variant. He later added that a risk with the new variant is that it “will continue that excess demand in the areas that don’t have capacity, and will stall the recovery in the areas where we actually have the capacity.”That, he said, would “mean a somewhat slower rebound overall” and “also does increase those inflationary pressures, in those areas that are in high demand.”Mr. Williams’s comments are the latest indication that policymakers are growing more concerned about inflation and are weighing how to respond. Jerome H. Powell, the Fed chair, signaled on Tuesday that the central bank could move to withdraw economic support more quickly than it initially expected and suggested that such a decision could come as soon as the Fed’s December meeting.The Fed had been buying $120 billion in government-backed securities each month throughout much of the pandemic to bolster the economy by keeping money flowing in financial markets. In November, officials announced plans to wind down that program gradually through the end of the year and the first half of 2022, a process known as “tapering.” But Mr. Powell indicated on Tuesday that the central bank could wrap up its bond-buying more quickly.Mr. Williams, who is vice chair of the Fed’s policymaking Open Market Committee and is a top adviser to Mr. Powell, did not explicitly endorse a faster tapering process, saying that “there’s a lot to learn and digest and think about coming up to the next meeting.”.css-1xzcza9{list-style-type:disc;padding-inline-start:1em;}.css-3btd0c{font-family:nyt-franklin,helvetica,arial,sans-serif;font-size:1rem;line-height:1.375rem;color:#333;margin-bottom:0.78125rem;}@media (min-width:740px){.css-3btd0c{font-size:1.0625rem;line-height:1.5rem;margin-bottom:0.9375rem;}}.css-3btd0c strong{font-weight:600;}.css-3btd0c em{font-style:italic;}.css-1kpebx{margin:0 auto;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-family:nyt-cheltenham,georgia,’times new roman’,times,serif;font-weight:700;font-size:1.375rem;line-height:1.625rem;}@media (min-width:740px){#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-size:1.6875rem;line-height:1.875rem;}}@media (min-width:740px){.css-1kpebx{font-size:1.25rem;line-height:1.4375rem;}}.css-1gtxqqv{margin-bottom:0;}.css-19zsuqr{display:block;margin-bottom:0.9375rem;}.css-12vbvwq{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;}@media (min-width:740px){.css-12vbvwq{padding:20px;width:100%;}}.css-12vbvwq:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-12vbvwq{border:none;padding:10px 0 0;border-top:2px solid #121212;}.css-12vbvwq[data-truncated] .css-rdoyk0{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-12vbvwq[data-truncated] .css-eb027h{max-height:300px;overflow:hidden;-webkit-transition:none;transition:none;}.css-12vbvwq[data-truncated] .css-5gimkt:after{content:’See more’;}.css-12vbvwq[data-truncated] .css-6mllg9{opacity:1;}.css-qjk116{margin:0 auto;overflow:hidden;}.css-qjk116 strong{font-weight:700;}.css-qjk116 em{font-style:italic;}.css-qjk116 a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;text-underline-offset:1px;-webkit-text-decoration-thickness:1px;text-decoration-thickness:1px;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:visited{color:#326891;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:hover{-webkit-text-decoration:none;text-decoration:none;}But he emphasized that the economy had rebounded more strongly this year than he and other officials had been expecting, and said the unemployment rate had fallen quickly. That economic strengthening at a moment of high inflation may warrant less Fed support, he said.“The question is: Would it make sense to end those purchases somewhat earlier, by maybe a few months, given how strong the economy is?” he said. “That’s a decision, discussion, I expect we’ll have to grapple with.”Inflation has proved a thornier problem than the Fed and most private-sector economists predicted earlier this year. In March, Fed officials said they expected their preferred inflation measure to show consumer prices rising at 2.4 percent at the end of 2021; by September, they had revised that forecast to 4.2 percent.That’s likely to increase further. The central bank’s preferred inflation gauge climbed 5 percent in its most recent reading. Policymakers are closely watching to see what happens in a Consumer Price Index report set for release on Dec. 10, just before the Fed’s meeting on Dec. 14 and 15.Mr. Williams acknowledged that inflation had proved stronger and more lasting than he initially expected. But he said the error wasn’t the result of a misunderstanding of how the economy works; rather, it was his failure to anticipate the resurgence of the pandemic itself. Mr. Powell made similar comments in his testimony before the Senate on Tuesday.The spread of the Delta variant over the summer delayed the return of workers to the labor force by disrupting child care and making some people nervous to return to in-person work. It also contributed to supply-chain issues by causing a new round of factory shutdowns in some parts of the world and by extending the pandemic-era shift in consumer spending away from services and toward goods.Empty office space in New York this summer when the Delta variant wave delayed the return of workers. A new wave of cases could lead to more and longer-lasting inflation.Gabriela Bhaskar/The New York Times“These are all things that are driven — I think in large part, not totally, but in large part — to Covid, and the ability so far for us to get control of that,” he said. “This is just lasting a lot longer than expected.”The new variant, Mr. Williams added, “has that potential to just extend this process we’ve been going through.”If the Omicron variant further delays the return of workers and the easing of supply shortages, that could lead to more and longer-lasting inflation. But a new wave of virus cases could also hurt the demand side of the economy, leading people to spend less at restaurants and movie theaters and provoking a new wave of layoffs.Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More

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    Powell Says Fed Could Finish Bond-Buying Taper Early

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    Jerome H. Powell, the Federal Reserve chair, signaled on Tuesday that the central bank was growing more concerned about high — and stubborn — inflation, and could speed up its plan to withdraw financial support from the economy as it tries to ensure that rapid price gains do not become long-lasting.Mr. Powell, whom President Biden plans to renominate for a second term, testified before the Senate Banking Committee at a fraught economic moment. Inflation has jumped to its highest level in three decades and a new coronavirus variant, Omicron, threatens to keep the economy from returning to normal, potentially dragging out supply and demand mismatches. Yet millions of workers are still missing from the job market — and the health threat could keep them on the sidelines.As arguably the nation’s most important economic policymaker, Mr. Powell must navigate that divide. His comments Tuesday suggested that he was preparing to do it with an eye more firmly focused on the threat of inflation.That could mean ending the Fed’s bond-buying program sooner than expected. The central bank had been buying $120 billion in government-backed securities each month throughout much of the pandemic to bolster the economy by keeping money flowing in financial markets. In November, officials announced plans to slow those purchases by $15 billion a month, which would have the program ending midway through 2022. But Mr. Powell said the central bank could wrap up more quickly, reducing the amount of economic juice the Fed is adding.“At this point, the economy is very strong, and inflationary pressures are high,” he said. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner.”His comments further rattled investors, who had already been fretting about Omicron’s potential impact. Stocks, which had been down roughly 0.5 percent for much of the morning, tumbled after Mr. Powell’s comments and the S&P closed down 1.9 percent. Short-term bond yields, which are heavily influenced by expectations for Fed rate increases, spiked as investors began to expect what is sometimes referred to as a “hawkish,” or aggressive approach to interest rate policy.“The tone of his remarks was notably hawkish, suggesting that the Fed’s primary focus is on the risk of more persistent excess inflation,” Krishna Guha, an economist at Evercore ISI, wrote in a research note reacting to the testimony.Mr. Powell said he expected Fed officials to discuss slowing bond purchases faster “at our upcoming meeting,” which is scheduled for Dec. 14-15. He stressed that between now and then, policymakers will get a better sense of the new Omicron virus variant, a fresh labor market report and updated inflation numbers.While he emphasized that much is unknown about Omicron, he said experts could get a better sense of it “in about a month,” and will know at least something about the risks “within a week or 10 days.”For now, he focused on the risk the central bank has already come to know: rapid price gains. Inflation is running at its fastest pace since the early 1990s in the United States, and prices have picked up in Europe and across many other advanced economies as booming consumer demand runs into sharply constrained supply. In the eurozone, annual inflation jumped to 4.9 percent, according to data released Tuesday, the highest since records began in 1997. Global factory shutdowns, clogged ports and unusual shipping patterns have driven shortages in couches, cars and computer chips.Fed officials had for months predicted that the snarls would clear and price gains would fade. Instead, they have broadened — and that has made central bankers like Mr. Powell increasingly worried.“Generally, the higher prices we’re seeing are related to the supply-and-demand imbalances that can be traced directly back to the pandemic and the reopening of the economy, but it’s also the case that price increases have spread much more broadly in the recent few months,” Mr. Powell said Tuesday. “I think the risk of higher inflation has increased.”Monetary policymakers had spent recent months focused on helping the economy to heal, hoping to pull the millions of workers still missing from the job market back into work.To that end, the Fed’s policy interest rate, its more traditional and more powerful tool, has remained set to near zero. Officials had been stressing that they would be patient in pulling back that support and cooling down the economy, giving missing employees more time to return.But their tone appears to be shifting as prices for food, rent and goods are jumping.The Federal Reserve chair, Jerome H. Powell, and Treasury Secretary Janet L. Yellen appeared at a Senate Banking Committee hearing on Tuesday.Sarahbeth Maney/The New York TimesSlowing bond purchases quickly would put officials in a position to raise borrowing costs sooner than previously forecast. Lifting interest rates earlier or faster would pump the economic brakes, helping to slow home-building, business expansions and consumer spending. Weakening demand would in turn help to weigh down prices over time.By trying to rein in price increases, the Fed would probably slow hiring. Doing so could be painful while people still remain out of work partly out of virus fears or a lack of child care.That’s why Omicron could pose such a big challenge. If the new variant shuts down factories and slows shipping routes while keeping would-be job applicants at home, it could put the Fed in a tough spot. Central bank policymakers are supposed to foster both full employment and keep prices stable, and such a situation would force them to choose between those goals.Mr. Powell’s willingness to pull back support faster despite the new variant — and his full-throated recognition that price gains are not poised to be as short-lived as officials had once hoped — caught investors’ attention.Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More

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    Inflation Worries Dominated the Federal Reserve’s Last Meeting

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    Worries about inflation dominated the Federal Reserve’s November policy meeting, with some policymakers suggesting that the central bank should move more quickly to reduce its bond-buying program in order to give it flexibility to raise interest rates sooner if necessary, minutes from the Fed’s November meeting showed.The Fed has been buying $120 billion in bonds each month and has kept interest rates near zero, policy moves that have helped make borrowing cheap and keep money flowing through the economy. Earlier this month, the Fed took the first step toward withdrawing support for the economy when it announced that it would begin scaling back its Treasury bond and mortgage-backed security purchases by $15 billion a month starting in November.“Some participants suggested that reducing the pace of net asset purchases by more than $15 billion each month could be warranted so that the committee would be in a better position to make adjustments to the target range for the federal funds rate, particularly in light of inflation pressures,” the minutes showed, referring to the Federal Open Market Committee, which sets interest rates.Those comments reflected uncertainty at the central bank over how long supply chain kinks and elevated prices might continue. Fed officials maintained their expectation that inflation would diminish “significantly during 2022,” but policymakers “indicated that their uncertainty regarding this assessment had increased.”“Many participants pointed to considerations that might suggest that elevated inflation could prove more persistent,” officials said..css-1xzcza9{list-style-type:disc;padding-inline-start:1em;}.css-3btd0c{font-family:nyt-franklin,helvetica,arial,sans-serif;font-size:1rem;line-height:1.375rem;color:#333;margin-bottom:0.78125rem;}@media (min-width:740px){.css-3btd0c{font-size:1.0625rem;line-height:1.5rem;margin-bottom:0.9375rem;}}.css-3btd0c strong{font-weight:600;}.css-3btd0c em{font-style:italic;}.css-1kpebx{margin:0 auto;font-family:nyt-franklin,helvetica,arial,sans-serif;font-weight:700;font-size:1.125rem;line-height:1.3125rem;color:#121212;}#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-family:nyt-cheltenham,georgia,’times new roman’,times,serif;font-weight:700;font-size:1.375rem;line-height:1.625rem;}@media (min-width:740px){#NYT_BELOW_MAIN_CONTENT_REGION .css-1kpebx{font-size:1.6875rem;line-height:1.875rem;}}@media (min-width:740px){.css-1kpebx{font-size:1.25rem;line-height:1.4375rem;}}.css-1gtxqqv{margin-bottom:0;}.css-19zsuqr{display:block;margin-bottom:0.9375rem;}.css-12vbvwq{background-color:white;border:1px solid #e2e2e2;width:calc(100% – 40px);max-width:600px;margin:1.5rem auto 1.9rem;padding:15px;box-sizing:border-box;}@media (min-width:740px){.css-12vbvwq{padding:20px;width:100%;}}.css-12vbvwq:focus{outline:1px solid #e2e2e2;}#NYT_BELOW_MAIN_CONTENT_REGION .css-12vbvwq{border:none;padding:10px 0 0;border-top:2px solid #121212;}.css-12vbvwq[data-truncated] .css-rdoyk0{-webkit-transform:rotate(0deg);-ms-transform:rotate(0deg);transform:rotate(0deg);}.css-12vbvwq[data-truncated] .css-eb027h{max-height:300px;overflow:hidden;-webkit-transition:none;transition:none;}.css-12vbvwq[data-truncated] .css-5gimkt:after{content:’See more’;}.css-12vbvwq[data-truncated] .css-6mllg9{opacity:1;}.css-qjk116{margin:0 auto;overflow:hidden;}.css-qjk116 strong{font-weight:700;}.css-qjk116 em{font-style:italic;}.css-qjk116 a{color:#326891;-webkit-text-decoration:underline;text-decoration:underline;text-underline-offset:1px;-webkit-text-decoration-thickness:1px;text-decoration-thickness:1px;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:visited{color:#326891;-webkit-text-decoration-color:#326891;text-decoration-color:#326891;}.css-qjk116 a:hover{-webkit-text-decoration:none;text-decoration:none;}Inflation has picked up over the past year, posing a challenge for the Fed, which is responsible for maintaining stable prices and fostering maximum employment. Prices have continued to surge since the Fed’s last meeting, a trajectory that could push policymakers to reduce their economic support more quickly than previously expected.Inflation has climbed as supply-chain snarls, soaring demand for goods and wage hikes have pushed prices higher; policymakers noted that increased rent and energy prices have also played a role. Inflation has become a persistent issue for the White House, depressing President Biden’s approval ratings and complicating the path to a full economic recovery from the pandemic.Data released on Wednesday showed that prices were rising at the fastest pace in three decades as consumers face higher prices for gas and food. Prices climbed by 5 percent in the 12 months through October, according to the Personal Consumption Expenditures index, the Fed’s preferred measure of inflation.Richard H. Clarida, the Fed’s vice chair, hinted last week that it could be appropriate for policymakers to consider speeding up their process of slowing bond purchases at their next gathering, saying that he will be looking “closely at the data that we get between now and the December meeting.”Mary Daly, the president of the Federal Reserve Bank of San Francisco, told Yahoo Finance this week that she would be open to supporting a quicker end to the bond-buying program if economic trends did not improve.Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More

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    What Jerome Powell Didn’t Do: Lay the Groundwork for Higher Rates

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    He said high inflation was mostly a result of pandemic effects like supply network disruptions, a problem he thinks the Fed can’t fix.The real news out of the Federal Reserve on Wednesday was not in what it did, but in what Chair Jerome Powell didn’t do.The thing that the Fed’s policy committee did — announce that the central bank would gradually wind down its economy-stimulating program of buying bonds — was highly telegraphed and comfortably in line with investors’ expectations.The thing that Mr. Powell didn’t do was give any hint that persistently high inflation in recent months was leading him to rethink his patient approach to raising the Fed’s interest rate target. Rather, he repeated his longstanding belief that high inflation was mostly caused by disruptions in global supply networks and other ripple effects of the pandemic — problems that the Fed can’t do much about.It is a delicate moment. President Biden must decide whether to reappoint Mr. Powell to a second term leading the Fed. High inflation is causing economic discontent for Americans, according to surveys, and helping to drag down the president’s approval ratings. Global bond markets have been gyrating amid uncertainty about whether the era of ultralow interest rates may be coming to an end.On interest rates, Mr. Powell rejected the thinking of leaders at several other leading central banks and of a handful of his own colleagues. They think that excess demand in the economy is a big part of the inflation problem and that rate increases would help address it — and that current high inflation could become ingrained in economic decision-making, with long-lasting consequences.If he had expressed more alarm about those inflationary pressures, it would have been a signal that the Fed might act to raise rates more abruptly than it once planned. The Bank of Canada, the Reserve Bank of Australia and the Bank of England have recently done just that. Several Eastern European central banks are going a step further, aggressively raising rates to try to combat inflation (including a 0.75-percentage-point rate increase by the Polish central bank on Wednesday).Mr. Powell himself has essentially conceded in recent appearances that surging prices due to supply disruptions are on track to last longer than he expected. He said in late September that it was frustrating that supply chain bottlenecks weren’t improving and might be getting worse, and said this would hold inflation higher for longer than the Fed had thought.But he was steadfast on Wednesday in not suggesting that those developments were a reason to accelerate the Fed’s interest rate hike plans. He suggested those would need to wait until the tapering of bond purchases was complete and until Fed officials concluded the economy had achieved maximum employment.“We understand the difficulties that high inflation poses for individuals and families,” Mr. Powell said Wednesday. But he continued: “Our tools cannot ease supply constraints. Like most forecasters, we continue to believe that our dynamic economy will adjust to the supply and demand imbalances, and that, as it does, inflation will decline to levels much closer to our 2 percent longer-run goal.”With language like that, he was declining to embrace the use of “open-mouth policy,” or of essentially trying to assuage inflation fears by using more specific language to suggest the Fed had a hair-trigger readiness to take immediate action to head off higher prices.He appeared to be applying the lessons of the 2010s labor market in setting the central bank’s course. Over that decade, unemployment kept falling lower, with participation in the work force rising higher than many analysts had thought plausible. With hindsight, the Fed may have erred by raising interest rates prematurely, slowing that process of labor market improvement.In a 2021 context, that means allowing more post-pandemic healing of the labor market before assuming, for example, that many of the Americans who currently say they are not in the labor force will return as public health conditions improve.“There’s room for a whole lot of humility here as we try to think about what maximum employment would be,” Mr. Powell said. The last economic cycle, he said, showed that “over time you can get to places that didn’t look possible.”Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More