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    Inflation Expectations Climb, Dogging Federal Reserve Officials

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    A key measure of inflation expectations released on Tuesday showed continued acceleration, a survey that came as Richard H. Clarida, the Federal Reserve’s vice chair, indicated that central bankers were alert to the risk of high inflation.The combination underscored that the threat of a longer period of rising prices has become more pronounced.In remarks prepared for the Institute of International Finance’s annual meeting, Mr. Clarida said he believed that the “unwelcome” jump in inflation this year, “once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory.”“That said, I believe, as do most of my colleagues, that the risks to inflation are to the upside, and I continue to be attuned and attentive to underlying inflation trends,” he added, “in particular measures of inflation expectations.”Fed officials received bad news on inflation expectations Tuesday morning. The Federal Reserve Bank of New York’s Survey of Consumer Expectations showed that medium-term inflation expectations — those for three years ahead — climbed to 4.2 percent in September from 4 percent in August. That is the highest since the series started in 2013. Short-term expectations jumped to 5.3 percent, also a new high.Central bankers have said for months that they expect this year’s rapid inflation to fade as consumers and businesses get back to normal because it is the product of surging demand when supply is struggling to catch up thanks to factory shutdowns and shipping bottlenecks. But it has become increasingly clear that the adjustment will be measured in quarters and years rather than weeks and months, and policymakers have increasingly braced for the possibility that quick price gains could last considerably longer than they had first anticipated.Even so, Mr. Clarida and his colleagues at the Fed are moving only gradually to remove their support from the economy, cognizant that millions of jobs are still missing compared with before the pandemic. The Fed signaled in its latest policy decision that it would soon begin to taper its large monthly asset purchases, which it has been using to keep many types of borrowing cheap.Mr. Clarida reiterated that belief on Tuesday, saying Fed officials “generally view that, so long as the recovery remains on track, a gradual tapering of our asset purchases that concludes around the middle of next year may soon be warranted.” But even once that process gets going, interest rates are expected to remain near zero for months or even years.Still, the Fed is staring down a challenging 2022, a year when it may have to decide whether it can keep rates near rock bottom while inflation is taking time to fade. Officials are still hoping price gains will slow to more normal levels, allowing them to be patient in removing policy support. More

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    Federal Reserve Signals a Shift Away From Pandemic Support

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    The Fed said it could soon slow its large-scale purchases of government-backed bonds and indicated it might raise interest rates in 2022.Federal Reserve officials indicated on Wednesday that they expect to soon slow the asset purchases they have been using to support the economy and predicted they might raise interest rates next year, sending a clear signal that policymakers are preparing to curtail full-blast monetary help as the business environment snaps back from the pandemic shock.Jerome H. Powell, the Fed’s chair, said during a news conference that the central bank’s bond purchases, which have propped up the economy since the depths of the pandemic downturn, “still have a use, but it’s time for us to begin to taper them.”That unusual candor came for a reason: Fed officials have been trying to fully prepare markets for their first move away from enormous economic support. Policymakers could announce a slowdown to their monthly government-backed securities purchases as soon as November, the Fed’s next meeting, and the program may come to a complete end by the middle of next year, Mr. Powell later said. He added that there was “very broad support” on the policy-setting Federal Open Market Committee for such a plan.Nearly 20 months after the coronavirus pandemic first shook America, the Fed is trying to guide an economy in which business has rebounded as consumers spend strongly, helped along by repeated government stimulus checks and other benefits.Yet the virus persists and many adults remain unvaccinated, preventing a full return to normal activity. External threats also loom, including tremors in China’s real estate market that have put financial markets on edge. In the United States, partisan wrangling could imperil future government spending plans or even cause a destabilizing delay to a needed debt ceiling increase.Mr. Powell and his colleagues are navigating those crosscurrents at a time when inflation is high and the labor market, while healing, remains far from full strength. They are weighing when and how to reduce their monetary policy support, hoping to prevent economic or financial market overheating while keeping the recovery on track.“They want to start the exit,” said Priya Misra, global head of rates strategy at T.D. Securities. “They’re putting the markets on notice.”Investors took the latest update in stride. The S&P 500 ended up 1 percent for the day, slightly higher than it was before the Fed’s policy statement was released, and yields on government bonds ticked lower, suggesting that investors didn’t see a reason to radically change their expectations for interest rates.The Fed has been holding its policy rate at rock bottom since March 2020 and is buying $120 billion in government-backed bonds each month, policies that work together to keep many types of borrowing cheap. The combination has fueled lending and spending and helped to foster stronger economic growth, while also contributing to record highs in the stock market.But now, officials believe the time has come to tiptoe away from such full-fledged support. Late last year, policymakers laid out a lower bar for slowing purchases than for lifting interest rates. They simply wanted to see “substantial further progress” toward their goals of stable inflation and maximum employment before pulling back on asset buying. When it comes to lifting rates, officials indicated they would like to see inflation sustainably at their target and a labor market that is fully healed.Slowing their asset purchases in the near-term could give the Fed more room to be more nimble in the future. Policymakers have signaled that they want to stop buying securities before moving interest rates above zero.But Mr. Powell has tried to clearly separate the two decisions, signaling that changes to the policy interest rate — the Fed’s more traditional and more powerful tool — are not imminent.“You’re going to be well away from satisfying the liftoff test when we begin to taper,” he reiterated on Wednesday.Half of the Fed’s policymakers expect to lift rates from near-zero next year. Officials released a fresh set of economic projections on Wednesday, laying out their predictions for growth, inflation and the funds rate through the end of 2024. Those included the “dot plot” — a set of anonymous individual estimates showing where each of the Fed’s 18 policymakers expect their interest rate to fall at the end of each year.Where the Fed Stands on Future Interest Rates More

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    E.C.B. Will Slow Its Crisis-Era Bond Buying

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    The European Central Bank said on Thursday it would slow down the pace of its pandemic-era bond-buying program, one of the main tools it has used to support the eurozone economy through lockdowns, citing “favorable financing conditions” and the inflation outlook.The program, which has lately been purchasing about 80 billion euros, or $95 billion, of mostly government bonds each month, is a way to keep borrowing costs low and encourage economic growth.Other policy measures were left unchanged. Interest rates were held steady, including the so-called deposit rate, which remained at negative 0.5 percent. Policymakers also maintained the size of the bank’s other bond-buying program that was restarted in 2019 to head off a regional recession.In the eurozone, inflation is rising faster than expected, supply chain disruptions and product shortages are pushing costs higher for manufacturers, and there are early signs that the economic recovery is slowing down.It’s a concoction that has created divisions among the central bank’s policymakers about when to slow and then end its enormous bond-buying program. It began in March 2020 as the pandemic spread across Europe, and is meant to buy a total of 1.85 trillion euros in bonds and run until at least next March. The slowdown would help ensure the purchases end on schedule, though the central bank hasn’t ruled out an extension.“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases,” the central bank said in statement on Thursday.Thursday’s decisions are the first test of the central bank’s updated forward guidance. In July, policymakers said they were willing to overlook short-term jumps in inflation and would raise interest rates only once it was clear the annual inflation rate would reach 2 percent “well ahead” of the end of the central bank’s projection horizon and stay around that level over the medium term.New projections for inflation and economic growth will be published later on Thursday when the central bank’s president, Christine Lagarde, will hold a press conference.. The previous forecasts, in June, predicted inflation would peak at 2.6 percent in the fourth quarter and decline to 1.5 percent in 2022 and 1.4 percent in 2023.But inflation has already risen to 3 percent in August, the highest in nearly 10 years, the region’s statistics agency said last week. So far, policymakers have been betting that the jump in inflation will be temporary, like other central banks around the world.In recent years preceding the pandemic, the inflation rate was below the bank’s 2 percent target.“The stars are much better aligned than they have been for a long time for the return of inflation back to 2 percent,” Klaas Knot, the governor of the Dutch central bank and a member of the governing council at the European Central Bank, said last week.Jens Weidmann, the head of the German central bank, said that policymakers shouldn’t ignore the risk of “excessively high inflation” and that they should not “commit to our very loose monetary policy stance for too long.”But the European Central Bank as a whole has been more cautious than the Federal Reserve and Bank of England about preparing markets for a return to normal policy. While the economy is rebounding — rising 2.2 percent in the second quarter from the first three months of the year — Ms. Lagarde has highlighted the uncertainty posed by the spread of the Delta variant.Recently, Philip Lane, the central bank’s chief economist, said there were headwinds for the economy in the second half of the year, including supply-chain bottlenecks that could be more persistent than expected.While the pandemic-era bond program might be approaching its end, the central bank is expected to maintain its older bond purchase effort, under which the bank buys 20 billion euros in assets a month. Many analysts expect policymakers to increase the size of purchases to keep providing stimulus to the economy even after the immediate impact of the pandemic has passed. More

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    Fed’s Williams hints that bond-buying taper could start even if job gains slow.

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    John C. Williams, the president of the Federal Reserve Bank of New York and a powerful monetary policy official, hinted on Wednesday that it might be possible for the central bank to begin removing support for the economy before the end of the year even if the job market grows at a lackluster pace in coming months.The Fed has been buying $120 billion in government-backed bonds each month to help the economy by keeping interest rates low and money flowing. Policymakers have been debating when to begin slowing that program. They said in December that they would do so only once they had made “substantial further progress” toward maximum employment and inflation that averages 2 percent over time.Key policymakers have made it clear that the inflation side of that goal has been satisfied, with prices up markedly this year, but they have been waiting for more progress on employment. Assessing the job market has been complicated by surging coronavirus infections tied to the Delta variant, and payroll gains slowed in August.Mr. Williams, who holds a constant vote on monetary policy and is foremost among the central bank’s 12 regional policymakers, told reporters on Wednesday that he had been looking at the cumulative level of employment progress rather than month-to-month changes — suggesting that weakening jobs growth would not necessarily make impossible a start to the so-called taper. “It’s not a speed condition,” Mr. Williams said. “It’s really about, where are we, relative, on this path back toward maximum employment?”He added that he was looking not just at job gains but also at measures like labor force participation for a “full picture” of how much progress the job market has made.“Some months come in stronger, some not so strong,” Mr. Williams said. “It’s really about accumulation.”He added, “We’ll have to wait and see the data as it comes in.”Mr. Williams said during a speech earlier in the day that if the economy continued to improve as he expected, “it could be appropriate to start reducing the pace of asset purchases this year.” Pulling back on bond buying will be just a first step in removing support, and the Fed’s policy interest rate is expected to remain at near zero for some time.His comments came just as the Fed released its latest anecdotal survey of business contacts across its regional districts, commonly called the “Beige Book.” “Delta” was referenced 32 times as employers reported that “growth downshifted slightly to a moderate pace in early July through August.” 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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    Fed Minutes July 2021: Officials Debated Timing of Taper

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    Federal Reserve officials are preparing to slow the central bank’s large purchases of government-backed bonds, the first step toward a more normal monetary policy setting as the economy heals from the pandemic — but when they met last month, they remained starkly divided over just when the pullback should happen.Minutes from the central bank’s July 27-28 gathering showed that Fed officials generally thought they would soon meet their standard for slowing bond purchases, which they had previously established as “substantial further progress” toward the central bank’s maximum employment and inflation goals.“Most” of the officials “judged that the standard set out in the committee’s guidance regarding asset purchases could be reached this year,” the release showed. But precisely when to begin remained a matter of active debate.Some officials wanted to slow bond purchases soon to guard against the risk of higher inflation, and “a few” were worried that continued big purchases could lead to financial system risks, the account of the meeting released Wednesday showed.But a few others argued for a slower process, stressing that rising Delta variant coronavirus cases posed risks to the economic outlook, and several worried that in coming years inflation — though high today — could dip to uncomfortably low levels again. Several of the officials also pointed to big lingering uncertainties, like when workers would return to jobs.The snapshot of Federal Open Market Committee deliberations comes ahead of the central bank’s most closely watched annual gathering, an economic symposium in Jackson Hole in Wyoming that will take place next week. Jerome H. Powell, the Fed’s chair, will deliver a speech at the event, and many investors expect he could provide hints or details about the central bank’s coming policy move.Mr. Powell and his colleagues are working against a complicated backdrop as the economy grows rapidly and as inflation and asset prices pop, but the labor market recovery remains incomplete, with nearly 7 million jobs still missing compared with employment levels at the start of the pandemic.The Fed is still holding interest rates near zero and plans to do so until the labor market is more fully healed, which means monetary policy will continue to support the economy even once the bond buying begins to slow. Fed officials have suggested that they may favor raising interest rates by late 2022 or — more popularly — 2023.Some officials who are eager to start to slow bond purchases soon have emphasized that moving early and quickly would allow the Fed to be more flexible when it comes to raising borrowing costs. The Fed is buying $120 billion in Treasury and mortgage-backed debt each month, and officials have said they would prefer to bring that policy to a close before lifting the federal funds rate.The debate over timing was still unresolved in July.“Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” the minutes released on Wednesday said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”How quickly the slowdown in buying will happen was also up for discussion, and participants expressed “a range of views on the appropriate pace of tapering asset purchases.”The last Fed meeting came before the Labor Department reported that hiring in July was strong, creating a sunnier snapshot of the job market’s recovery.“Since the July F.O.M.C. meeting, the probability of a September announcement and an October or November start date to tapering those purchases has increased considerably, in our view,” Bob Miller, the head of fundamental fixed income in the Americas for BlackRock, wrote following the release.But the minutes also came before infections from the Delta variant of the coronavirus surged so drastically.“The uncertainty created by Delta, as well as the uncertainty over the post-summer labor market and the path of inflation, all reinforce our view that a tapering announcement is not imminent,” Ian Shepherdson, the chief economist at Pantheon Macroeconomics, wrote in a research note. “We think it will come in November, and even that is contingent on the Delta wave clearly subsiding before then.”The Fed meets next on Sept. 21-22. More

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    Federal Reserve Keeps Rates Unchanged but Cites ‘Progress’ Toward Goals

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    The central bank gave the clearest hint yet that it will soon begin to shift bond-buying from emergency mode.The chair, Jerome H. Powell, said the Fed was keeping interest rates unchanged and would continue to buy large amounts of government debt, but suggested that these purchases could taper off as recovery continued.Stefani Reynolds for The New York TimesThe Federal Reserve on Wednesday offered the most direct signal yet that it will begin to dial back its emergency support for the economy in the near future, as its chair, Jerome H. Powell, made it clear that policymakers will do so deliberatively and with plenty of warning.Fed officials voted to leave both of their key policy supports intact before wrapping up their two-day July meeting, holding interest rates near zero and continuing government-backed bond purchases unabated. Those two tools fuel economic demand by making money cheap to borrow and spend.But they spent the meeting debating when and how to slow the bond-buying program, which is expected to be the first step toward a more normal policy setting as the economy rebounds strongly from its pandemic stupor. A decision isn’t imminent, but officials used their July policy statement to signal that one is coming.The Fed had said in December that it would keep buying bonds at a steady pace — $120 billion per month — until it had made “substantial” further progress toward its two targets, stable inflation and maximum employment.“Since then, the economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings,” the Fed’s policy-setting committee said in its postmeeting statement on Wednesday.Mr. Powell offered an even more detailed outlook for the purchase program during his subsequent news conference. He explained that officials had not yet decided on the pace or structure of the coming slowdown, and that there were a “range of views” on when it should happen.“We’re going to continue to try to provide clarity as appropriate,” Mr. Powell said, adding that this meeting had involved the first deep-dive discussion on those issues.Mr. Powell delivered another message: The Fed isn’t ready to withdraw support just yet. He said that while the economy was progressing toward “substantial” progress, “we have some ground to cover on the labor market side.”Investors have been keenly watching for any news on when and how the Fed will begin to withdraw from buying assets, worried that the announcement of a tapering program might whipsaw markets. Fed critics have been asking why the central bank continues to buy bonds, fueling an already-scorching housing market and pushing up sky-high stock prices.Fed officials are trying to strike a balance, ensuring they are prepared to slow stimulus measures as the economy strengthens while avoiding an abrupt pullback. The latter could undermine the Fed’s credibility and potentially roil markets, causing lending to dry up and slowing the recovery when millions of prepandemic jobs are still missing and risks to the economy persist.“They don’t want to cause a sharp and fast increase in interest rates — that would be detrimental,” said Roberto Perli, head of global policy research at Cornerstone Macro. “The labor market is still not where it should be.”Lingering threats to the outlook have been underscored by rising coronavirus cases in the United States and around the world tied to the Delta variant.Mr. Powell acknowledged risks from the variant, but he suggested that any economic pullback it drove might not be as severe as last year’s. Still, he said, “it might weigh on the return to the labor market,” noting that the Fed will be monitoring that “carefully.”But the Fed chair conveyed a generally optimistic tone about the economy on Wednesday.While he pointed out that the labor market had a lot of room left to heal, he also suggested that workers were lingering on the sidelines because they were afraid of the virus, had caregiving duties or were receiving generous unemployment insurance benefits. Those factors should fade as life returns to normal.The United States is on a path to a strong labor market, and “it shouldn’t take too long, in macroeconomic time, to get there,” Mr. Powell said.He discussed at length another reality of the reopening era: rising prices. As economic growth roars back, with strong consumer spending supported by repeated government stimulus checks, inflation is surging. That is partly the result of data quirks, but also because demand for washing machines, electronics, cars and housing is outstripping what producers can supply.The Consumer Price Index picked up by 5.4 percent in June compared with a year earlier, the quickest pace since 2008. The Fed’s preferred inflation gauge has been slightly more muted, at 3.9 percent in May, but that, too, is well above the central bank’s 2 percent average inflation goal.“Inflation has increased notably” Mr. Powell said, adding that it is likely to remain elevated in coming months. But as supply bottlenecks abate, he said, “inflation is expected to drop back toward our longer-run goal.”Price gains could turn out to be higher and more persistent than Fed officials expect, Mr. Powell acknowledged. But expectations of where prices might head next seem consistent with the Fed’s goal, he said.When Fed officials say they expect today’s pressures to prove “transitory,” Mr. Powell said, they mean that increases today will not lead to ever-higher prices down the road.To put it even more plainly: A bag of flour might cost 5 cents more this year, but if the increase is transitory, it will not keep going up 5 cents with each passing year.“The increases will happen — we’re not saying they will reverse,” Mr. Powell said, but “the process of inflation will stop.”For now, officials are monitoring price increases but also staying focused on a different set of risks: About 6.8 million jobs are still missing compared with February 2020 levels. Workers are taking time to sort back into suitable employment, and the central bank wants to make sure the economic recovery is robust as they try to do that.Even when the Fed begins to dial back bond-buying, interest rates are likely to remain low. Long-running forces, including the aging population and rising inequality, have pushed them down naturally, and the central bank is expected to keep its main policy rate — the federal funds rate — at rock bottom, where it has been since March 2020.Officials have signaled that, barring a sustained burst in inflation or financial stability risks, they would like to leave interest rates near zero until the job market has returned to full employment. Their latest economic projections, released in June, suggested that most officials did not expect the economy to meet that high bar until 2023.Mr. Powell reiterated a commitment to seeing the recovery through.“The labor market has a ways to go,” he said. “We at the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.” More

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    Fed Considers Tapering Bond Purchases as Economy Grows

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    Federal Reserve officials are gathering in Washington this week with monetary policy still set to emergency mode, even as the economy rebounds and inflation accelerates.Economists expect the central bank’s postmeeting statement at 2 p.m. Wednesday to leave policy unchanged, but investors will keenly watch a subsequent news conference with the Fed chair, Jerome H. Powell, for any hints at when — and how — officials might begin to pull back their economic support.That’s because Fed policymakers are debating their plans for future “tapering,” the widely used term for slowing down monthly purchases of government-backed debt. The bond purchases are meant to keep money chugging through the economy by encouraging lending and spending, and slowing them would be the first step in moving policy toward a more normal setting.Big and often conflicting considerations loom over the taper debate. Inflation has picked up more sharply than many Fed officials expected. Those price pressures are expected to fade, but the risk that they will linger is a source of discomfort, ramping up the urgency to create some sort of exit plan. At the same time, the job market is far from healed, and the surging Delta coronavirus variant means that the pandemic remains a real risk. Policy missteps could prove costly.The Fed’s balance sheet has grown, thanks to bond-buying.The Federal Reserve has swollen its balance sheet by buying bonds to bolster the economy during the pandemic, making it a bigger player in markets.

    Source: Federal ReserveBy The New York TimesHere are a few key things to know about the bond-buying, and key details that Wall Street will be watching:The Fed is buying $120 billion in government backed bonds each month — $80 billion in Treasury debt and $40 billion in mortgage-backed securities.Economists mostly expect the central bank to announce plans to slow those purchases this year, perhaps as soon as August, before actually dialing them back late this year or early next. That slowdown is what Wall Street refers to as a “taper.”There’s a hot debate among policymakers about how that taper should play out. Some officials think the Fed should slow mortgage debt buying first because the housing market is booming. Others have said mortgage security buying has little special effect on the housing market. They have hinted or said they would favor tapering both types of purchases at the same speed.The Fed is moving cautiously, and for a reason: Back in 2013, markets convulsed when investors realized that a similar bond-buying program after the financial crisis would slow soon. Mr. Powell and crew do not want to stage a rerun.Bond-buying is just one of the Fed’s policy tools, and is used to lower longer-term interest rates and to get money chugging around the economy. The Fed also sets a policy interest rate, the federal funds rate, to keep borrowing costs low. It has been near zero since March 2020.Central bankers have been clear that tapering off bond purchases is the first step toward moving policy away from an emergency setting. Increases in the funds rate remain off in the distant future. More