Federal Reserve System

Still Getting Your Head Around Digital Currency? So Are Central Bankers.

The question is whether the new technology is going to make the yuan an attractive alternative to other currencies. Chinese central bankers say it is not an effort to supplant the dollar, and Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, said digitization won’t fix issues that make the yuan unattractive as a reserve currency in the first place — like capital controls, which mean you can’t exchange it easily at all times.

Is Bitcoin coming for the dollar?

Others worry that private-sector innovations like Bitcoin or “stablecoins,” which are backed by a bundle of assets or currencies, could become an attractive alternative to government-created cash if central banks don’t keep up.

Mr. Powell has argued that Bitcoin is more like gold than the dollar. It has value because it’s rare and people want to hold it, so it can even at times be traded for other goods and services, but it is not government-guaranteed money.

But global regulators did slow down Facebook’s stablecoin project, originally known as Libra and now called Diem, because they worried about the potential for money laundering and financial system disruption.

Mr. Powell said in testimony last year that Libra was “a bit of wake up call that this is coming fast and could come in a way that is quite widespread and systemically important fairly quickly,” highlighting the “importance of making quick progress.”

If tech companies come to dominate the payment system, that could create privacy and stability issues. In fact, China’s digital yuan was pursued partly in reaction to the rise and dominance of private-sector digital payment platforms like Alipay and WeChat Pay.

A faster or instant payments system, like the FedNow instant payment technology that America’s central bank is now developing, could keep the Fed up-to-date without changing the system as much as a digital currency would. But digital dollar fans say the point is to prepare for the future — and the future might be central bank digital currency.

“Digital cash, if built in the right way, could be really groundbreaking,” said Neha Narula, who is the director of the Digital Currency Initiative at the Massachusetts Institute of Technology and is working with the Boston Fed on its project.

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Money Market Funds Melted in Pandemic Panic. Now They’re Under Scrutiny.

The Trump-era working group suggested a variety of fixes. Some would revise when gates and fees kicked in, while another would create a private-sector backstop. That would essentially admit that the funds might encounter problems, but try to ensure that government money wasn’t at stake.

If history is any guide, pushing through changes is not likely to be an easy task.

Back in 2012, the effort included a President’s Working Group report, a comment process, a round table and S.E.C. staff proposals. But those plans were scrapped after three of five S.E.C. commissioners signaled that they would not support them.

“The issue is too important to investors, to our economy and to taxpayers to put our head in the sand and wish it away,” Mary Schapiro, then the chair of the S.E.C., said in August 2012, after her fellow commissioners made their opposition known.

In 2014, rules that instituted fees, gates and floating values for institutional funds invested in corporate paper were approved in a narrow vote under a new S.E.C. head, Mary Jo White.

Kara M. Stein, a commissioner who took issue with the final version, argued in 2014 that sophisticated investors would be able to sense trouble brewing and move to withdraw their money before the delays were imposed — exactly what seems to have happened in March 2020.

“Those reforms were known to be insufficient,” Ben S. Bernanke, a former Fed chair, said at an event on Jan. 3.

The question now is whether better changes are possible, or whether the industry will fight back again. While asking a question at a hearing this year, Senator Patrick J. Toomey, Republican from Pennsylvania and chair of the Banking Committee, volunteered a statement minimizing the funds’ role.

“I would point out that money market funds have been remarkably stable and successful,” Mr. Toomey said.

Alan Rappeport contributed reporting.

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Now That Everyone Is Bullish, Be Cautious

As businesses shuttered and workers stayed home, the gross domestic product, a broad measure of goods and services, plummeted in the United States. G.D.P. dropped 5 percent in the first quarter of 2020 and more than 31 percent in the second, according to the federal Bureau of Economic Analysis. The unemployment rate surged more than 10 percentage points from March to April last year, nearly reaching 15 percent. That was the highest level and the biggest increase since the Bureau of Labor Statistics began collecting data in January 1948.

In March 2020, the Federal Reserve stepped in. On its own, it couldn’t do much to combat the coronavirus itself — the last presidential administration’s efforts were dilatory at best, historians say. But the Fed and the federal government were able to prop up the markets, provide emergency aid for millions of people, help keep at least some small businesses afloat and put most major corporations in a position to reap big profits as the economy rebounded.

By now, the federal government has committed more than $5 trillion in a variety of coronavirus-related aid packages, and the Fed has made trillions more available in loans, intervened in financial markets, purchased vast quantities of bonds and held short-term interest rates near zero.

The Biden boom

All of this is contributing to what looks like a “Biden boom economy,” as the Princeton economist Alan S. Blinder called it in The Wall Street Journal. Economic growth may exceed 7 percent for the first quarter, and will almost certainly be spectacular for the year as a whole, when compared with 2020.

But there’s the rub. These annual economic and financial numbers are comparisons with the depths of the pandemic. The statistics are warped, inevitably, by “base effects,” which is to say, in economic jargon, that the coronavirus-induced recession of last year is making many current numbers look unnaturally high. They don’t provide much insight about where we are heading in 2022 and later.

Take inflation, for example

As Neil Irwin explained in The New York Times, the current uptick in inflation may not be as worrisome as it would otherwise seem because its comparisons are based on the depressed prices of a year ago, when so many people were huddled indoors.

What’s more, Alberto Cavallo, a Harvard economist who has studied inflation deeply, told me that by altering consumption and supply patterns radically, the pandemic has had many subtle effects. Lower-income people, for example, who pay a higher proportion of their income for food, have experienced greater inflation than those for whom food is a relatively minor expense.

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The Fed Faces Criticism as It Wades Into Climate and Equity Issues

And Michael Strain, an economist at the American Enterprise Institute in Washington, said he was concerned that the Fed’s focus on fostering equity — by driving down Black unemployment, for instance — could make it too hesitant to lift interest rates, allowing inflation to bubble up.

But Fed officials say the central bank is being pragmatic, not political. Ms. Daly regularly points out that understanding climate change risks to the financial system is important for bank regulators and supervisors. Mr. Powell said during a webcast Wednesday that the Fed sees such issues “through the lens of our existing mandates” — racial, gender and other disparities in economic outcomes “hold the economy back,” for example.

“Also I think we now realize that unemployment can go low for quite a long time without inflation being a problem — which will tend to help those groups,” he said.

Still, the Fed knows it’s in fraught territory. Mr. Powell avoids endorsing specific legislative packages. When Fed officials talk about inequality, they often discuss opportunity — a framing with more bipartisan backing.

There is a risk if the Fed is seen as a “quote unquote Democratic institution,” said Peter Conti-Brown, a Fed historian at the University of Pennsylvania. It might lose support across political cycles, as with the Consumer Financial Protection Bureau, which is largely seen as a liberal project.

“The Fed always needs political support to do its job well and to have the autonomy it wants,” said Sarah Binder, a political scientist at George Washington University who studies the Fed’s politics. Pushback that led to reform has generally come from Democrats — who have forced it to focus more on employment and reined in its ability to help Wall Street — rather than Republicans, she noted.

And even now, some Democrats say the central bank could go further. Representative Rashida Tlaib, a Michigan Democrat, has pushed the Fed to do more to get cheaper credit to states and localities, for instance.

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The Fed’s newest governor sees America’s inflation pop as temporary.

Christopher Waller, the newest governor on the Federal Reserve’s Washington-based board, said on Friday that he expects an unfolding acceleration in inflation — which is expected to intensify in the coming months — will prove short-lived.

“I do buy into the idea that this is going to be temporary,” Mr. Waller said on CNBC, during his first television interview since President Donald J. Trump nominated him to the role and the Senate confirmed him. “Whatever temporary surge in inflation we see right now is not going to last.”

Inflation data are being measured against very low readings from 12 months ago, causing a mechanical year-on-year jump, he noted. Spending tied to government stimulus and supply chain constraints will also have an effect.

“We know the stimulus is going to have some impact, but once the stimulus checks are spent, they’re gone,” Mr. Waller said. “We also know that the bottlenecks that are currently there are going to go away.”

The Consumer Price Index, a closely watched inflation measure, rose 2.6 percent in March from a year ago, the Labor Department said earlier this week. But it was skewed by the comparison to March 2020, when prices of some items fell as consumers pulled back spending in the face of the pandemic.

While the C.P.I. and other inflation gauges are expected to rise even higher in coming months, Fed officials and most economists project that they will settle back down before long. Many officials see key measures hovering near the central bank’s 2 percent average inflation target by the end of the year.

Mr. Waller said that investors themselves are not betting on “outrageous, runaway inflation” and that even if the data show a stronger pickup, the Fed stands ready to contain that and is not going to just let inflation “rip.”

“I don’t think anyone would be very comfortable if it got to three, three-plus and stayed there for a while,” Mr. Waller said, noting that the bigger concern would be if inflation expectations jumped.

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The Biden Administration Is Quietly Keeping Tabs on Inflation

“We think the likeliest outlook over the next several months is for inflation to rise modestly,” two officials at Mr. Biden’s Council of Economic Advisers, Jared Bernstein and Ernie Tedeschi, wrote on Monday in a blog post outlining some of the administration’s thinking. “We will, however, carefully monitor both actual price changes and inflation expectations for any signs of unexpected price pressures that might arise as America leaves the pandemic behind and enters the next economic expansion.”

Some Republicans call that posture dangerous. Senator Rick Scott of Florida, the chairman of his party’s campaign arm for the 2022 midterm elections, has called on Mr. Biden and Mr. Powell to present plans to fight inflation now.

“The president’s refusal to address this critical issue has a direct negative effect on Floridians and families across our nation, and hurts low- and fixed-income Americans the most,” Mr. Scott said in a news release last week. “It’s time for Biden to wake up from his liberal dream and realize that reckless spending has consequences, inflation is real and America’s debt crisis is growing. Inflation is rising and Americans deserve answers from Biden now.”

Economic teams in recent administrations spent little time worrying about inflation, because inflationary pressures have been tame for decades. It has fallen short of the Fed’s average target of 2 percent for 10 of the last 12 years, topping out at 2.5 percent in the midst of the longest economic expansion in history.

Shortly before the pandemic recession hit the United States in 2020, President Donald J. Trump’s economic team wrote that “price inflation remains low and stable” even with unemployment below 4 percent. As the economy struggled to climb out from the 2008 financial crisis under President Barack Obama, White House aides feared that prices might fall, instead of rise.

“Given the economic crisis, we worried about preventing deflation rather than inflation,” said Austan Goolsbee, a chairman of the Council of Economic Advisers during Mr. Obama’s first term.

The conversation has changed given the large amounts of money that the federal government is channeling into the economy, first under Mr. Trump and now under Mr. Biden. Since the pandemic took hold, Congress has approved more than $5 trillion in spending, including direct checks to individuals.

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Fed Chief Says U.S. Economy Is at an ‘Inflection Point’ as Risks Remain

WASHINGTON — The economy is at an “inflection point” and on the cusp of growing more quickly, the Federal Reserve chairman, Jerome H. Powell, said in an interview broadcast on Sunday night. But he warned that the crisis was not yet over.

In the interview, with “60 Minutes” on CBS, Mr. Powell said that the American economy “has brightened substantially” as more people are vaccinated and businesses reopen. But he cautioned that “there really are risks out there,” specifically coronavirus flare-ups, if Americans return to normal life too quickly.

“The principal risk to our economy right now really is that the disease would spread again more quickly,” he said. “And that’s troubling. It’s going to be smart if people can continue to socially distance and wear masks.”

The Fed has held interest rates near zero since March 2020 and has been buying about $120 billion in government-backed bonds each month, policies meant to stoke spending by keeping borrowing cheap. Fed officials have been clear that they will continue to support the economy until it is closer to their goals of maximum employment and stable inflation — and that while the situation is improving, it is not there yet.

Mr. Powell reiterated that approach on Sunday, saying that the central bank would “consider raising rates when the labor market recovery is essentially complete, and we’re back to maximum employment, and inflation is back to our 2 percent goal and is on track to move above 2 percent for some time.”

But he said it would “be a while until we get to that place.”

Discussing inflation, Mr. Powell once again made clear that the Fed wanted to see “sustainable” price increases before it adjusted monetary policy.

“Inflation has been below 2 percent,” he said. “We want it to be just moderately above 2 percent. So that’s what we’re looking for.”

“And when we get that,” he added, “that’s when we’ll raise interest rates.”

Some prominent onlookers have warned that the economy has the potential overheat as the federal government pumps out trillions of dollars in stimulus aid and other spending and as the economy reopens, allowing consumers to spend more money.

So far, no sustained inflation spike has materialized.

Figures show the economy is recovering, albeit slowly. Employers added more than 900,000 workers to payrolls last month, but the country is still missing millions of jobs compared with February 2020, and just last week state jobless claims climbed.

Mr. Powell on Sunday highlighted that while some workers were doing well, others had yet to get back to where they were before Covid-19 lockdowns, a phenomenon that will influence when the Fed reduces or removes policy support.

“What you’re seeing is some parts of the economy are doing very well, have fully recovered, have even more than fully recovered in some cases,” Mr. Powell said. “And some parts haven’t recovered very much at all yet. So you do see real disparities between different parts of the economy. It’s sort of unusual for an economy like ours.”

Mr. Powell also pointed to data that shows the burden is falling hardest on those least able to bear it: Lower-income service workers, who are heavily people of color and women, have been hit hard by job losses.

While he expects those workers to get back to their jobs more quickly as the economy rebounds, the Fed needs to “stick with those people and support them as they try to get back to where they were in life, which was working,” he said, adding, “They were in jobs just a year ago.”

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How the Stimulus Could Power a Rebound in Other Countries

Washington’s robust spending in response to the coronavirus crisis is helping to pull the United States out of its sharpest economic slump in decades, funneling trillions of dollars to Americans’ checking accounts and to businesses.

Now, the rest of the world is expected to benefit, too.

Global forecasters are predicting that the United States and its record-setting stimulus spending could help haul a weakened Europe and struggling developing countries out of their own economic morass, especially when paired with a rapid vaccine rollout that has poised the U.S. economy for a faster recovery.

As Americans buy more, they should spur trade and investment and invigorate demand for German cars, Australian wine, Mexican auto parts and French fashions.

The anticipated economic rebound in the United States is expected to join China’s recovery, adding impetus to world output. China’s economy is forecast to expand rapidly this year, with the International Monetary Fund predicting 8.1 percent growth. That is good news for countries like Germany, which depends on Chinese demand for cars and machinery.

just begun to push infections higher in the United States — and a large policy response, including more than $5 trillion in debt-fueled pandemic relief spending passed into law over the past 12 months. Those trends, paired with the accelerating spread of effective vaccinations, seem likely to leave the American economy in a stronger position.

“When the U.S. economy is strong, that strength tends to support global activity as well,” Jerome H. Powell, the chair of the Federal Reserve, said at a recent news conference.

A year ago, it was not at all certain that the United States would gain the strength to help lift the global economy.

International Monetary Fund forecast last April that the U.S. economy might expand 4.7 percent this year, roughly in line with forecasts for Europe’s growth, after an expected slump of 5.9 percent in 2020. But the actual contraction in the United States was smaller, and in January, the I.M.F. upgraded the outlook for U.S. growth to 5.1 percent this year, while the euro area’s expected growth was marked down to 4.2 percent.

I.M.F. has signaled that the estimates for the country’s growth will be marked up further when it releases fresh forecasts on Tuesday.

The recent relief package continues a trend: America has been willing to spend to combat the pandemic’s economic fallout from the start.

America’s initial pandemic response spending, amounting to a little less than $3 trillion, was 50 percent larger, as a share of gross domestic product, than what the United Kingdom rolled out, and roughly three times as much as in France, Italy or Spain, based on an analysis by Christina D. Romer at the University of California, Berkeley.

Among a set of advanced economies, only New Zealand has borrowed and spent as big a share of its G.D.P. as the United States has, the analysis found.

In Europe, where workers in many countries were shielded from job losses and plunging income by government furlough programs, the slow pace of the European Union’s vaccination campaign will probably hurt the economy, said Ludovic Subran, the chief economist of German insurance giant Allianz.

On Wednesday, France announced its third national lockdown as infected patients fill its hospitals.

Mr. Subran also questioned whether the European Union can distribute stimulus financing fast enough. The money from a 750 billion-euro, or $880 billion, relief program agreed to by European governments in July has been slow to reach the businesses and people who need it because of political squabbling, creaky public administration and a court challenge in Germany.