The U.S. economy created far fewer jobs than expected in November, in a sign that hiring started to slow even ahead of the new Covid threat, the Labor Department reported Friday.

Nonfarm payrolls increased by just 210,000 for the month, though the unemployment rate fell sharply to 4.2% from 4.6%, even though the labor force participation rate increased for the month to 61.8%, its highest level since March 2020.

The Dow Jones estimate was for 573,000 new jobs and a jobless level of 4.5% for an economy beset by a chronic labor shortage.

A more encompassing measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons dropped even more, tumbling to 7.8% from 8.3%. The household survey painted a brighter picture, with an addition of 1.1 million jobs as the labor force increased by 594,000.

“This report is a tale of two surveys,” said Nick Bunker, economic research director at jobs placement site Indeed. “The household survey shows accelerating employment gains, workers returning to the labor force, and low levels of involuntary part-time work. The payroll survey shows a significant deceleration in job growth, particularly in COVID-affected sectors.”

“The underlying momentum of the labor market is still strong, but this month shows more uncertainty than expected,” he added.

Leisure and hospitality, which includes bars, restaurants, hotels and similar businesses, saw a gain of just 23,000 after being a leading job creator for much of the recovery. Though the sector has regained nearly 7 million of the jobs lost at the depths of the pandemic, it remains about 1.3 million below its February 2020 level, with an unemployment rate stuck at 7.5%.

Following the disappointment, markets initially shrugged off the numbers, but then turned negative after the open.

Initial jobs tallies this year have seen substantial revisions, with months showing low counts initially often bumped higher. The October and September estimates were moved up a combined 82,000 in the report released Friday.

Sectors showing the biggest gains in November included professional and business services (90,000), transportation and warehousing (50,000) and construction (31,000). Even with the holiday shopping season approaching, retail saw a decline of 20,000.

Worker wages climbed for the month, rising 0.26% in November and 4.8% from a year ago. Both numbers were slightly below estimates.

Fed ready to change policy

Policymakers have been watching the employment figures closely to gauge how close the economy is to a full recovery from the depths of the pandemic. The U.S. suffered its shortest but steepest recession in the early days of the Covid-19 breakout and has been on a progressive but volatile path since.

Federal Reserve officials put a new wrinkle into the picture this week when they indicated that the measures they instituted to support growth could be coming to an end sooner than expected.

In congressional testimony earlier in the week, Fed Chairman Jerome Powell said he expects the central bank’s policy committee to discuss at its meeting this month stepping up the level at which it is tapering its monthly bond purchases. Powell said he sees the unwinding to conclude “a few months” sooner than expected, a move that would open the possibility for interest rate hikes.

“The disappointing 210,000 gain in non-farm payrolls in November suggests the labor market recovery was faltering even before the potential impact of the new Omicron variant, possibly as a result of the rising infection rates in the Northeast and Midwest,” wrote Andrew Hunter, senior U.S. economist at Capital Economics. “Nevertheless, the Fed will still push ahead with its plans to accelerate the pace of its QE taper at this month’s FOMC meeting.”

San Francisco Fed President Mary Daly backed up Powell’s comments in remarks Thursday, saying that inflation that is stronger and more durable than expected is creating the need to rethink policy. She said the Fed should “at least, you know, think about raising the interest rate” and accelerating the taper pace.

Daly also hinted that the summary of economic projections to be released this month, in which officials show their expectations for the future, likely will point to interest rate hikes pulled forward into 2022. Markets currently expect the Fed to enact at least two quarter-percentage point increases next year.

St. Louis Fed President James Bullard added to the chorus on Friday, saying the economy as measured by GDP has recovered fully and can operate with less policy stimulus, particularly considering the pace at which inflation is running.

“These considerations suggest, on balance, that the Federal Open Market Committee should remove monetary policy accommodation,” Bullard said.

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A worker moves boxes of goods to be scanned and sent to delivery trucks during operations on Cyber Monday at Amazon’s fulfillment center in Robbinsville, New Jersey, November 29, 2021.
Mike Segar | Reuters

Job growth is expected to have been strong in November, and employers likely continued to boost wages to attract and retain workers in an incredibly tight labor market.

Economists expect 573,000 jobs were created last month, up from 531,000 in October, according to Dow Jones. The unemployment rate is expected to have declined to 4.5% from 4.6%, and average hourly wages are expected to have increased by 0.4% on a monthly basis, or 5% year over year.

“It looks like it was a really good month, and we’ll see if we can sustain it, with some pullback, which is natural with concerns about omicron,” said Diane Swonk, chief economist at Grant Thornton. “But at the moment, we’re still coming off what was an incredible month, especially for travel and tourism.”

The jobs data, expected Friday at 8:30 a.m. ET, will be an important input for the Federal Reserve at its Dec. 14 and 15 meeting. Earlier this week, Fed Chairman Jerome Powell said the central bank could speed up the tapering of its $120 billion a month bond-buying program, which it put in place to prop up the economy during the pandemic. The Fed will discuss the acceleration at its December meeting, he said.

The Fed’s dual mandate

Full employment is one of the Fed’s dual mandates, so economists will be closely watching the participation rate in the November report to see if it rises. This metric is the percentage of the eligible workforce that is employed or actively seeking work, and it was 61.6% in October.

Swonk expects an above-consensus 750,000 jobs were added in November, and she expects the unemployment rate fell to 4.4%. Swonk said wage growth should be solid, as employers attempt to attract workers in the face of demand from Amazon and other employers that have raised wages.

“It’s a hot job market and there’s a surge in demand that’s like nothing we’ve ever seen,” she said. She noted that job openings are up 55% from the February 2020 level, according to the online jobs site Indeed.

“There’s no immigration. It’s fallen off a cliff. The pandemic has accelerated retirements and hurt participation among some groups that normally need to participate the most,” she said. “It’s far from perfect. It’s a job market that has a collision of demand surging with constraints on supply.”

Wage gains were likely across the board in November. “We’ll see gains on the low end, but the higher end, professional services, is really hot,” Swonk said.

Luke Tilley, chief economist at Wilmington Trust, expects 300,000 jobs were created in November, based on private sector data and the weekly unemployment claims data.

He expects the hiring trend is strong and will remain so.

“Our expectation is 500,000 jobs per month on average over 12 months going forward, but there’s going to be fluctuations, with the virus and ups and downs of different industries,” said Tilley.

Greater context behind the jobs report

Tilley said the Fed will be looking for the reasons behind the jobs report’s weakness or strength, as it tries to assess what will be normal for the labor market post-pandemic. “If it’s weak because there’s still no labor supply, that’s very different for them than weakness because demand is petering out,” he said. “I think the Fed, the FOMC, is probably spending more time getting their arms around what does a full recovery of the labor market mean.”

He said the Fed will have to adjust to a lower participation rate. “That has implications for the unemployment rate and should we even be comparing it to the pre-pandemic unemployment rate,” he said.

But the jobs report will also be judged by investors, with an eye on what it means for Fed policy. Financial markets have been sensitive to any nuances that could help determine the central bank’s timeline on completing its bond-buying program, which now is expected to end in June 2022.

Once the bond purchases end, the door would be open for the Fed to raise interest rate hikes.

Swonk has been expecting the Fed to speed up the tapering of its bond purchases because of higher than expected inflation, so the wage portion of the employment report will also be very important. “We’re not getting a wage price spiral…but that is what the Fed is worried we could get to,” she said.

David Petrosinelli, senior trader at InspereX, said the jobs report will not likely have a big impact on the market unless it is very strong or very weak.

“I think this market is much more cued up for a stronger number, and that tells me rates have some room to run,” he said. Petrosinelli pointed to the yield on the benchmark 10-year Treasury, at 1.44% Thursday afternoon. Yields move opposite price.

“You can look back to last week and that was 1.70%,” he said, referring to the 10-year yield. “I think that was the upper bound there. If you get a really strong number, we could go right back there, albeit bounded by the sideshow of this new variant.”

Yields moved sharply lower after initial reports of the omicron variant of Covid last Friday.

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A customer carries her purchases during Black Friday shopping at Fashion Outlets of Chicago in Rosemont of Greater Chicago Area, Illinois, the United States, on Nov. 26, 2021.
Joel Lerner | Xinhua News Agency | Getty Images

Strong consumer demand sparked a wave of CEO optimism about the economy over the next six months, the Business Roundtable said Wednesday, as it revealed the results of its most recent survey.

But the lobbying group, whose members are CEOs of major American companies, cautioned that the survey was completed before the emergence of the new omicron Covid variant, and that the survey measured only the executives’ plans for the next six months.

The Business Roundtable released its fourth quarter CEO Economic Outlook Survey, revealing its headline index had risen to its highest level in the 20-year history of the survey, hitting a value of 124, which is up 10 points from the third quarter. 

On top of that, CEOs reported their plans for hiring increased 13 points, plans for capital investment increased 7 points and expectations for sales increased 9 points. The group cited the release of enormous pent-up consumer demand as a driver of the optimism in corporate boardrooms.

“This quarter’s survey reflects the encouraging signs we’re seeing with the economic rebound as consumers begin to resume travel and spending,” said Business Roundtable Chairman Doug McMillon, the CEO of Walmart. “Continued progress in defeating the pandemic, including new variants, will be necessary to sustain strong growth into the second half of 2022.”

In their first estimate of 2022 U.S. GDP growth, CEOs projected 3.9% growth for the year.

The Business Roundtable survey also asked CEOs for the cost pressures facing their companies. Forty-eight percent identified labor costs as the top cost pressure, followed by 20% identifying supply chain disruption costs and 17% identifying material costs.

Business Roundtable CEO Josh Bolten spotlighted recent legislation on Capitol Hill as one of the reasons for the executives’ economic optimism.

“The recent bipartisan Infrastructure Investment and Jobs Act, which directs much-needed resources to upgrade our nation’s physical infrastructure and broadband connectivity, is an important investment in the long-term health of the economy,” he said. “As the economy reverts to a normal cadence, sound economic policy can help sustain strong growth over the long term.”

The survey was conducted between Nov. 3 and Nov. 22. The World Health Organization labeled omicron a “variant of concern” on Nov. 26.

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Federal Reserve Chairman Jerome Powell believes that the omicron variant of Covid-19 and a recent uptick in coronavirus cases pose a threat to the U.S. economy and muddle an already-uncertain inflation outlook.

“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said in remarks he plans to deliver to Senate lawmakers on Tuesday. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”

Treasury Secretary Janet Yellen will join Powell on Tuesday in testifying before the Senate Banking Committee. The Fed chief and Treasury secretary are required to report to Congress each calendar quarter as part of the March 2020 economic-relief legislation that magnified the central bank’s emergency lending programs.

Powell’s remarkets were released by the central bank on Monday evening.

The Fed chief also offered more direct comments on inflation, saying that it’s challenging to forecast the persistence and impact of supply constraints, but that it now appears that “factors pushing inflation upward will linger well into next year.”

He noted that many forecasters, including some at the Fed, predict that inflation will move down “significantly” over the next year as bulked-up supply chains overtake cooling demand for goods.

Powell’s remarks came just days after fears over a new Covid variant drove investors to ditch U.S. stocks and push back their expectations for future Fed rate hikes. The Dow Jones Industrial Average dropped 900 points, or 2.5%, on Friday and clinched its worst session of year on the week’s final day of trading. Markets rebounded some on Monday.

Concerns about the spread and potential impact of the omicron coronavirus variant caused traders on Friday to flock to the relative safety of Treasury bonds and reduce their forecast for future Fed rate hikes.

Last week, about 25% of investors said they thought the Fed would still have interest rates near zero in June 2022, with the other 75% betting the central would have hiked at least once by then, according to the CME Group’s FedWatch tool. That spread has since narrowed thanks in part to the new variant, with some 35% of investors now betting the Fed will still have rates near zero in June 2022.

The yield on the benchmark 10-year Treasury note fell 15 basis points on Friday to 1.49% before bouncing back above 1.5% on Monday. Bond yields fall as their prices rise.

While the Fed ended those lending programs earlier this year, the central bank has only just begun to reduce its $120 billion in monthly purchases of Treasury debt and mortgage securities. The central bank decided at its most-recent policy meeting to taper its regular asset purchases amid widespread supply-chain disruptions and inflation levels not seen in the U.S. since the 1990s.

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A customer’s groceries are rung up at a store in San Francisco, California, U.S., on Thursday, Nov. 11, 2021.
David Paul Morris | Bloomberg | Getty Images

Critical supply chains are choked off. Demand soars. Prices surge and everyone starts freaking out about inflation and wonder how long it will last.

Is it 1945? 1916? 1974?

The answer, of course, is all of the above, and you can throw 2021 in there as well.

Inflation is not something new for the U.S. as the nation has weathered seven such episodes of lasting price surges since World War II including the current run, which is the strongest in 30 years. Getting out of the pandemic shock has been a difficult exercise for the world’s largest economy, and inflation has been a painful side effect.

But trying to find a historical parallel – and, thus, perhaps a way out – isn’t easy. Virtually every cycle bears at least some similarities to others, but each is unique in its own way.

The most common comparison to these days is the stagflation – low growth, high prices – environment of the 1970s and early ’80s. And while there’s probably at least some validity to that, the reality is more complicated.

“In terms of how widespread inflation is, it’s pretty much touching everything. It’s widespread, or more than what we saw in the 1970s,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group. “The question is, how long it remains elevated and when it backs off and at what rate does it settle out?”

Most U.S. policymakers reject the 1970s connection.

Leaders such as Federal Reserve Chairman Jerome Powell, Treasury Secretary Janet Yellen and Biden administration officials view inflation as temporary and almost wholly driven by factors unique to the pandemic. Once those factors subside, they see inflation drifting lower, eventually getting around the 2% level the Fed considers emblematic of a healthy and growing economy.

Some White House economists have asserted that the current stretch looks not like the stagflation era, but more like the immediate post-World War II climate, when price controls, supply problems and extraordinary demand fueled double-digit inflation gains that didn’t subside until the late 1940s.


Episodes of U.S. inflation

Consumer price index, percent change from a year ago

20%

Post-WWII

Oil shocks

15

Korean War

10

Supply ​

Iraq invades ​

Late 1960’s ​

chain ​

Kuwait

Gas price ​

economic ​

disruptions

spike

expansion

5

0

−5

1950

’60

’70

’80

’90

’00

’10

’20

Note: Periods of heightened inflation are shaded.

Source: Bureau of Labor Statistics (CPI), White House (inflationary periods through ‘08). Data is

seasonally adjusted and as of Oct. ’21.

​ ​

​ ​

Episodes of U.S. inflation

Consumer price index, percent change from

a year ago

20%

1

4

15

10

2

7

5

3

6

5

0

−5

1960

’80

’00

’20

Post-WWII

Korean War

1

2

Late 1960’s economic expansion

3

Oil shocks

Iraq invades Kuwait

4

5

Gas price spike

Supply chain disruptions

6

7

Note: Periods of heightened inflation are shaded.

Source: Bureau of Labor Statistics (CPI), White

House (inflationary periods through ‘08).

Data is seasonally adjusted and as of Oct. ’21.

Episodes of U.S. inflation

Consumer price index, percent change from a year ago

20%

Post-

WWII

Oil shocks

15

Korean ​

War

10

Iraq ​

Supply ​

invades ​

Late ​

1960’s ​

chain ​

economic ​

Kuwait

Gas price ​

disrup-

tions

expansion

spike

5

0

−5

1950

’60

’70

’80

’90

’00

’10

’20

Note: Periods of heightened inflation are shaded.

Source: Bureau of Labor Statistics (CPI), White House (inflationary periods through

‘08). Data is seasonally adjusted and as of Oct. ’21.

“Today’s shortage of durable goods is similar — a national crisis necessitated disrupting normal production processes,” a team of White House economists wrote in a July 2021 paper. “Instead of redirecting resources to support a war effort, however, manufacturing capabilities were temporarily shut down or reduced to avoid COVID contagion.”

Once the supply chain disruptions are remedied – and there are signs that at least the major ports are becoming less crowded in recent days – “inflation could quickly decline once supply chains are fully online and pent-up demand levels off,” the paper stated.

Transitory, permanent or ‘in between’

The idea that inflation is “transitory” – a well-worn term that is transitioning out of vogue – is central to the insistence from fiscal and monetary authorities that excessively easy policy is not to blame for the inflation surge.

However, easy policy has been at the core of many previous cycles, and trying to blame everything on the pandemic hasn’t gone over especially well with consumers, whose confidence is running at decade lows, and on Wall Street, where investors are getting antsy over how long inflation will last.

Whether inflation is temporary, in fact, is probably the biggest debate happening in investing circles these days.

A customer pumps gas into her vehicle at a gas station on November 22, 2021 in Miami, Florida.
Joe Raedle | Getty Images

“The debate is always couched in black and white. The reality is, it’s probably in between there,” said Jim Paulsen, chief investment strategist at the Leuthold Group.

In fact, Paulsen has studied inflation over the past century or so and found that while there may been many periods where it has become problematic, there are only two where it proved lasting: after World War I and in the aforementioned 1970s-early ’80s.

He’s largely in the camp that this run, too, will pass as it has been fueled largely by supply chain problems that ultimately will resolve.

Still, he’s wary of being wrong.

“It’s not as temporary as we first thought, but I still think that’s the best odds” that it will pass in the coming months, Paulsen said. “But I’d also say that it is undoubtedly the biggest risk that it’s not. If it’s not, then it’s a disastrous outcome not only for stocks but also for the economy if it’s truly runaway.”

The inflation danger comes because this cycle is unlike any other in one important way: Policymakers have never thrown anything close to this amount of money at the economy.

What if sometime next year we not only declare pseudo-victory over Covid, but we declare it over inflation, too?
Jim Paulsen
chief investment strategist, the Leuthold Group

‘Abuse of policy’

While President Joe Biden and Yellen have insisted that all the fiscal and monetary stimulus is not the underlying cause of inflation, the argument that nearly $10 trillion between Congress and the Fed hasn’t pushed prices higher is hard to swallow for some.

Even though Paulsen believes the present conditions will fade in 2022, he worries about what he calls “global synchronized abuse of policy.” In essence, the meaning is that policymakers remain in emergency posture for an economic picture that seems long past crisis stage, with the potential for boiling over should officials continue to turn up the heat.

Still, he also sees declining commodity prices – with oil at the center – as well as falling shipping costs and the lessening of clogs at the ports as hopeful signs that inflation will, at least in historical terms, prove temporary.

“What if sometime next year we not only declare pseudo-victory over Covid, but we declare it over inflation, too?” Paulsen said.

The emergence of a new Covid variant in South Africa complicates both questions. Even Powell, Bush and others in the inflation-is-transitory camp say that the pandemic has been the root cause of price pressures, so if the new variant turns into a larger threat, that means inflation stays higher for longer.

Beside that, though, most mainstream economists are sticking to the belief that 2022 will say a significant drop in inflation.

How it all ends

Mark Zandi, the chief economist at Moody’s Analytics, feels that way even though he says there are close parallels between the current predicament and the runaway inflation of the 1970s.

For one, he said the waves in that inflation shock were both demand-driven and the product of supply issues because of the oil embargoes back then. Unions that were able to negotiate cost of living increases in contracts also boosted the wage-price spiral.

A sentient Fed also contributed to the problems by taking inflation too lightly and resisting the interest rate hikes that could have slowed the economy.

While Fed policymakers have been slow to tighten in the present day, they have vowed that if inflation expectations become unhinged, they’ll act. The worry, though, is that the Fed is already too late.

“The wage spiral that we suffered back then was because of the COLAs and the explosion if inflation expectations. They did rise and the Fed did not recognize that and did not respond to it,” Zandi said. “Assuming each future wave of the virus is less disruptive, then, yeah, I think we would see signs of moderation.”

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As Americans sit down at their Thanksgiving tables, many of the items in front of them will be more expensive than they were last year. Pies in particular. And climate change is a contributing factor.

Inflation is hitting every sector of the economy, and food products are not immune. But many of the ingredients that go into holiday pies have been hit by floods, fires and drought, causing shortages and pushing prices higher.

For example, the crust. Wheat prices are now at the highest level since 2012 and are up over 10% in just the past month. Severe drought in the U.S. west and northern plains caused what the U.S. Department of Agriculture is estimating will be the worst wheat production in nearly two decades.

Those higher costs for wheat, as well as alfalfa, make feed costs higher, causing dairy prices to rise. Cows also produce less milk during droughts.

Then there’s the pie filling.

“The Pacific Northwest had a terrible year between the heat and the drought. We saw a lot of things that they are good at, like cherries and apples, see a pretty major hit to their production from where they typically are,” said Michael Swanson, agriculture economist at Wells Fargo.

Pumpkins are also pricier, due to heavy rains in the midwest that caused a pumpkin shortage. The average price of a pumpkin was 15% higher this fall.

Even honey. Wildfires in the West left honeybees with little to eat. States like California, Colorado, Montana and Utah have lost nearly half their honeybee colonies in the past two years, due to disease, starvation and unusual weather.

Imports are also affected. Prices for vanilla from Madagascar and chocolate from Brazil are also rising due to severe weather and flooding.

“Now we worry about freezes in Brazil even more than we did before, or floods in China. And so we can’t run and hide anymore from global severe weather events because they’re all part of the food chain,” said Swanson.

At The Pie Shop in Washington, D.C., Thanksgiving orders are all filled and the pies are piling up, but so are the costs.

“I would say there are a number of ingredients that on some weeks are almost double what they were last year,” said Sandra Basanti, who has owned the Shop with her husband for 12 years.

Basanti tries to source ingredients locally to keep costs down, but large items like flour, sugar and eggs need to be bought from bulk distributors. She also makes savory pies that require beef, and the cost of that is rising as well.

All of it is hitting her small business especially hard.

“Usually Thanksgiving is when we’re able to make a little extra money to cushion us for the slow winter. However, this year, I’m not so sure that we will really even be profitable,” she said.

Over 12 years Basanti said she has raised her prices maybe 10%, but that is not enough to make up for the recent hike in her production costs. She doesn’t want to raise prices now, she said, because, “There’s only so much you can really charge for a pie.”

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Federal Reserve officials at their meeting earlier this month expressed concern about inflation and said they would be willing to raise interest rates if prices keep rising.

The committee that sets interest rates for the Fed on Wednesday released the minutes from the November session where it first signaled that it could be dialing back all the economic help it’s been providing during the pandemic.

The meeting summary indicates a lively discussion about inflation, with members stressing the willingness to act if conditions continue to heat up.

“Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives,” the minutes stated.

Officials stressed a “patient” approach regarding incoming data, which has shown inflation running at its highest pace in more than 30, the years.

But they also said they would “not hesitate to take appropriate actions to address inflation pressures that posed risks to its longer-run price stability and employment objectives.”

Following the two-day session that concluded Nov. 3, the Federal Open Market Committee indicated it will begin cutting back on the monthly bond-buying program that had seen it purchasing at least $120 billion in Treasurys and mortgage-backed securities.

The goal of the program was to keep money flowing in those markets while maintaining broader interest rates at low levels to boost economic activity.

Federal Reserve Chairman Jerome Powell attends the House Financial Services Committee hearing on Capitol Hill in Washington, U.S., September 30, 2021.
Al Drago | Reuters

In its post-meeting statement, the FOMC said “substantial further progress” in the economy would allow a $15 billion a month reduction in purchases — $10 billion in Treasurys and $5 billion in MBS. The statement said that schedule would be maintained through at least December and probably continue going forward until the program wound down – likely by late spring or early summer 2022.

The minutes noted that some FOMC members wanted an even faster pace to give the Fed leeway to raise rates sooner.

“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 said.

That’s important because inflation has gotten even hotter since the November meeting. In previous cycles, the Fed has raised interest rates to cool the economy, but officials have said they are willing to allow inflation to run hotter than normal to let the employment picture improve.

Markets, though, are anticipating a more aggressive Fed.

Traders in contracts that bet on the future of short-term rates are indicating the Fed will raise its benchmark rate three times in 2022 in25 basis point intervals, though current official projections are for no more than one hike next year. However, those markets are volatile and can change quickly depending on the signals the Fed sends.

FOMC members expressed concern at the meeting that the continued high inflation readings could influence public perception and “expectations were becoming less well anchored” to the Fed’s 2% longer-run target.

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Customers stand in line to check out at a grocery store in San Francisco, California, U.S., on Thursday, Nov. 11, 2021.
David Paul Morris | Bloomberg | Getty Images

After lying dormant for years, inflation is once again chipping away at American wallets, and it has become a chief concern for the White House.

In recent months, the Biden administration ramped up its efforts to remedy the supply-chain interruptions economists blame for hot inflation. And President Joe Biden has been pushing his economic agenda as a remedy for inflation worries.

But ask investors, economists and the American people for their thoughts on inflation, and no one sees inflation cooling off anytime soon. That means everyone from the president to the everyday voter will likely need patience to get through this.

“I don’t think you want to promise people inflation is going away,” said Jason Furman, an economist and former chairman of the White House Council of Economic Advisers during the Obama administration.

“I think the hardest thing to communicate is that not every problem has a solution. Some of what needs to be done to heal our economy is to be patient,” he continued. “That’s a really hard a message for any president to deliver. They have to be seen as doing things.”

The politics of prices

Rising food and gas prices are weighing on Americans living on fixed or modest incomes. Retail grocery prices rose 1% in October, laundry and dry-cleaning costs are up 6.9% from a year ago, and in some parts of California gasoline is being sold north of $6 a gallon. General Mills notified retailers that it plans to soon hike prices on dozens of its brands, including Cheerios, Wheaties and Annie’s, according to a report published Tuesday.

In turn, the inflation messaging coming out of the White House has focused a great deal on two big, Biden-backed bills. One of the president’s favorite counters to inflation worries is to point out that many economists say his $1.75 trillion Build Back Better bill and a separate $1 trillion infrastructure plan will make businesses and workers more productive and ease inflation pressures over the long term.

Yet while better roads, access to child care and weatherization may help reduce costs years in the future, Democrats face critical midterm elections in less than 12 months.

Inflation appeared to be a hurdle for Democrat Terry McAuliffe, who lost to Republican Glenn Youngkin in Virginia’s recent gubernatorial election.

Political strategists viewed that election as a gauge of voter attitude toward the current direction of policy with Democrats in control of the White House and Congress. The high-profile Democratic defeat in an increasingly blue Virginia is thought to have sparked compromise between party centrists and progressives on the infrastructure and anti-poverty and climate bills.

Americans’ angst about the economy, as measured by the percentage of those surveyed who mention any economic issue as the top problem facing the U.S., reached a pandemic-era high according to polling firm Gallup. (The survey polled a random sampling of 815 adults, and it had a margin of error of plus or minus 4 percentage points.)

Twenty-six percent of Americans now cite an economic concern as the nation’s top problem, while 7% say inflation, specifically, is their chief anxiety. In September, just 1% of Americans named inflation as their top worry, Gallup said. It has been more than 20 years since inflation was named as the most important problem by at least 7% of Americans.

“Moms and dads are worried, asking, ‘Will there be enough food we can afford to buy for the holidays? Will we be able to get Christmas presents to the kids on time?'” Biden said in a speech on Tuesday.

No major impact on gas

To help ease fuel costs during the holiday season, Biden announced that the U.S. and some of its allies will tap their national strategic petroleum reserves.

“The fact is we’ve faced even worst spikes before just in the last decade,” Biden said of rising gas prices. “But it doesn’t mean we should just stand by idly and wait for prices to drop on their own.”

While the Biden administration said it would put 50 million barrels of oil from government stockpiles onto global markets in the coming weeks, some analysts warned the action likely amounts at best to an attempt to pacify consumers.

Tapping the nation’s oil reserves will have a limited impact on fuel costs since “nearly 40% of the 50MM bbl release was already planned for 2022 as well as the fact that much of the oil will simply go into commercial stockpiles,” wrote Tom Essaye, founder of Sevens Report, a markets research firm.

That oil will eventually be repurchased “and later returned to the SPR, meaning the move is largely symbolic and not going to have a major impact on the actual physical markets,” he added.

Furman, who teaches economics at Harvard University, agreed. He said that drawing on the SPR falls into the “no-stone-left-unturned” category for a White House worried about the political impact of rising prices.

The current inflation, he said, is a function of broad shifts in aggregate demand and aggregate supply — beyond the influence of a one-time appeal to the SPR or any other quick fix.

Inflation expectations

A pesky characteristic of inflation is that today’s price increases are a product of what people think prices will be tomorrow. In other words, inflation expectations can, by themselves, cause inflation.

According to New York Federal Reserve Bank’s most-recent consumer survey, median inflation expectations in October increased to 5.7% for the coming year, the highest level ever recorded since the series began in 2013.

A measure of investors’ expectation for inflation over the next five years has spiked in recent months.

The difference between the yields on five-year Treasury inflation-protected securities, or TIPS, and the corresponding Treasury notes hit 3.17 on Wednesday, its highest level since at least 2003. That effectively means that investors think inflation will average about 3% over the next five years.

The recent uptick in market-based inflation expectations drew the attention of Federal Reserve officials during their November policy meeting. Their meeting minutes, released Wednesday, showed that some central bankers considered the jump as evidence that rising inflation forecasts are starting to go mainstream.

“A couple of participants pointed to increases in survey- and market-based indicators of expected inflation—including the notable rise in the five-year TIPS-based measure of inflation compensation—as possible signs that inflation expectations were becoming less well anchored,” the Fed minutes read.

“I’ve been teaching my students the model that would have helped them predict inflation this year. And that model is that, if you’re way short in demand, then extra demand can help,” he said.

“But if you try to push it too far, you run into a supply constraint,” he continued. “You’ll end up with higher prices rather than higher quantities.”

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Jerome Powell, who guided the Federal Reserve and the nation’s economy through the staggering and sudden Covid-19 recession by implementing unprecedented monetary stimulus, is being nominated for a second term as chairman of the U.S. central bank.

President Joe Biden made the announcement Monday morning following weeks of speculation that a push from progressives might see Fed Governor Lael Brainard get the spot.

Acknowledging the political pressure he faced to nominate a more progressive Democrat than the Republican Powell, Biden said Monday afternoon he settled on Powell because the current economic circumstances present “enormous potential and enormous uncertainty” and require “stability and independence.”

Brainard was designated as vice chair of the board of governors; she had been widely expected to get a separate vice chair for supervision post, which oversees the nation’s banking system. As vice chair for monetary policy, she would succeed Richard Clarida, whose term expires Jan. 31, 2022, and will oversee a wider swath of policy decisions.

Read more: Who is Lael Brainard?

“As I’ve said before, we can’t just return to where we were before the pandemic, we need to build our economy back better, and I’m confident that Chair Powell and Dr. Brainard’s focus on keeping inflation low, prices stable, and delivering full employment will make our economy stronger than ever before,” Biden said in an earlier statement.

The nominations next head to the Senate for confirmation.

In making the decision, Biden praised the Powell Fed for its “decisive” action in the early days of the pandemic.

The Fed rolled out an unprecedented array of lending programs while also cutting interest rates back to near zero and instituting a monthly bond-buying program that would increase the central bank’s holdings of Treasurys and mortgage-backed securities by more than $4 trillion.

“Chair Powell has provided steady leadership during an unprecedently challenging period, including the biggest economic downturn in modern history and attacks on the independence of the Federal Reserve,” a White House statement said. “During that time, Lael Brainard – one of our country’s leading macroeconomists – has played a key leadership role at the Federal Reserve, working with Powell to help power our country’s robust economic recovery.”

The announcement coincided with a boost to the stock market while government bond yields were higher across the board.

Markets are watching closely the pace the Fed will follow as it unwinds its massive policy support.

Officials already have indicated they will start paring back the bond purchases, with reductions of some $15 billion per month that would see the program likely conclude in late spring or early summer 2022.

Interest rate hikes are another matter.

Most Fed officials thus far have said they won’t consider raising rates at least until the bond buying taper winds down. However, markets have been looking for a faster timeline for rates, with the initial hike now priced in for June 2022.

“The president chose the status quo for monetary policy and financial regulation,” said Mark Zandi, chief economist at Moody’s Analytics. “The Fed’s going to slowly but steadily take its foot off the monetary accelerator.”

Treasury Secretary Janet Yellen, who also was Powell’s immediate predecessor at the Fed’s helm, lauded Powell for the way he handled the job in the face of the pandemic crisis, which brought the U.S. not only its steepest but also its shortest recession.

“Over the past few years, Chair Powell has provided strong leadership at the Federal Reserve to effectively meet and address unexpected economic and financial challenges, and I am pleased our economy will continue to benefit from his stewardship,” Yellen said.

Controversy in recent days

Though Powell carried the day, it was not without controversy.

The Fed has been under fire lately following an ethics scandal in which multiple officials engaged in trading stocks at a time when the institution was implementing policies aimed at boosting markets. Powell disclosed that he owned municipal bonds, which the Fed also was buying, and he also bought and sold funds tied to the broad stock market indexes.

At the same time, the Fed has been hit with inflation running faster than it had anticipated – in fact, at the sharpest pace in 30 years. Official Fed policy since September 2020 has been to let inflation run somewhat hotter than the standard 2% target if it allows for full and inclusive employment, but prices have been rising well above that level.

Powell has held to the line that inflation will cool off once factors associated with the pandemic return to normal. But the recent readings have raised questions about the so-called average inflation targeting that signaled a historic turn in central bank monetary policy.

The inflation also has come with a rapid economic recovery and a decline in the unemployment rate from a pandemic peak of 14.8% to its current 4.6%.

Presented later Monday afternoon in a joint appearance with Biden, both Powell and Brainard stressed the importance of controlling inflation.

“We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing and transportation,” Powell said. “So we use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

Brainard added that she is “committed to putting working Americans at the center of my work at the Federal Reserve. This means getting inflation down at a time when people are focused on their jobs and how far their paychecks will go.”

Brainard emerged as a key force in the race over who would carry the Fed through the next four years. She has taken point on several issues important to the Biden administration, particularly the need for the Fed to brace the banking system against disruptive climate change events.

A former undersecretary of the Treasury during the Obama administration, Brainard also has been a strong proponent of a digital dollar as a means to open the financial system to the unbanked.

The White House statement stressed the importance of progressive for the Fed in the years to come.

Biden said that Powell and Brainard “also share my deep belief that urgent action is needed to address the economic risks posed by climate change, and stay ahead of emerging risks in our financial system.”

“Fundamentally, if we want to continue to build on the economic success of this year we need stability and independence at the Federal Reserve – and I have full confidence after their trial by fire over the last 20 months that Chair Powell and Dr. Brainard will provide the strong leadership our country needs,” he added.

Biden still has more work to do on the Fed: There is one vacant position on the board of governors, while the Clarida vacancy will need to be filled come January. He also will need to name a vice chair for supervision, a post the departing Randal Quarles had held until his term expired in October. The White House indicated Monday that those moves will be announced in early December.

The initial congressional reaction to Monday’s news was positive.

Sen. Sherrod Brown (D-Ohio), who chairs the pivotal Senate Banking Committee that will first hear the nominations, said, “I look forward to working with Powell to stand up to Wall Street and stand up for workers, so that they share in the prosperity they create.”

Pennsylvania Republican Patrick Toomey said he will support Powell though he noted he has had disagreements with central bank policies.

The news is likely a disappointment to progressives including Sen. Elizabeth Warren, D-Mass., who said in September that the Fed’s role in relaxing banking regulations in recent years makes Powell a “dangerous man” and that she would oppose his renomination. 

Biden recently met with Warren to discuss the appointments, according to a source familiar with the matter.

Two other Democratic senators, Sheldon Whitehouse of Rhode Island and Jeff Merkley of Oregon, also said they would oppose Powell.

Battling back from Covid

President Donald Trump appointed Powell to the position in 2018 in somewhat of a surprise. Trump chose to pass over then-Chair Janet Yellen, an unusual move in that Fed leaders are rarely removed after just one term. Former President Barack Obama initially appointed Powell to a 14-year term as governor in 2014.

Though Trump nominated Powell, he later fired withering criticism at the Fed chief when the central bank raised interest rates seven times in 2017 and 2018. The former president went as far as to call the Fed policymakers “boneheads” for trying to normalize policy as the economy recovered.

As for Brainard, she is now widely expected to be named vice chair of supervision, a key Fed post to oversee the nation’s banking system.

The Fed is empowered by Congress to fulfill two mandates: Maximize U.S. employment and keep inflation stable. Its leaders, known as governors, are nominated by the president and vote on how to adjust interest rates, regulate the nation’s largest banks and monitor the health of the economy.

To combat the spike in unemployment and recession that began in the spring of 2020, the central bank slashed interest rates and began buying some $120 billion in Treasury bonds and mortgage-backed securities every month. It also instituted a variety of lending programs aimed at keeping fixed income markets functioning after they endured significant stress at the beginning of the pandemic.

Economists credit that quick and sizable response for stabilizing financial markets and later repressing long-term interest rates. Lower interest rates make it easier for corporations to take on loans to build new factories, or for individuals to buy homes or cars. 

“Under Powell the Fed has placed more emphasis on having the economy operate at maximum employment,” Mike Feroli, chief U.S. economist at JPMorgan, said via email.

“This is a goal progressive economists have long advocated and a goal which is presumably consistent with Biden’s agenda.”  

Treasury Secretary Janet Yellen, one of Biden’s top economic advisors and a counselor on his Fed nominations, told CNBC earlier this month that she is happy with the Fed chief’s work. Yellen was the first woman to serve as the Fed’s chair and is the country’s first female Treasury secretary. 

“I talked to him about candidates and advised him to pick somebody who is experienced and credible,” Yellen said. “I think that Chair Powell has certainly done a good job.” 

Powell is also popular on Capitol Hill, where lawmakers on both sides of the aisle have praised his leadership and amiability since he took over for Yellen in February 2018. 

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Real estate broker Rebecca Van Camp places a “Sold” placard on her sign in front of a home in Meridian, Idaho, on Wednesday, Oct. 21, 2020.
Darin Oswald | Tribune News Service | Getty Images

Sales of previously owned homes in October rose 0.8% to a seasonally adjusted annualized rate of 6.34 million units, according to the National Association of Realtors. Sales were 5.8% lower than October 2020. October of last year was the cyclical high in the market.

This measure represents closed sales for existing single-family homes and condominiums in October, so contracts that were likely signed in August and September. The closing process can take one to two months on average.

Realtors are now predicting full-year sales of over 6 million, which would be the highest number of sales since 2006.

“Sales remain very strong and I would attribute that to continuing job additions,” said Lawrence Yun, chief economist for the Realtors.

Yun also pointed to an increase in investors in the market, likely driven by soaring rents for single-family homes. Investors made up 17% of October buyers, up from 13% in September and 14% in October of 2020. All cash buyers represented 24% of buyers. Most investors use all cash.

First-time buyers represented 29% of sales compared with 32% a year ago. Historically that share is around 40%.

The supply of existing homes for sale continued to weaken. There were 1.25 million homes available for sale at the end of October, which is 12% lower compared with a year ago. This represents a 2.4-month supply at the current sales pace. A 5 to 6-month supply is considered a balanced market between buyer and seller.

Weak supply and strong demand pushed the median price of an existing home to $353,900. That is 13.1% higher compared with October 2020.

By price category, sales of homes priced under $250,000 fell 24% year over year. Sales of homes priced between $750,000 and $1 million rose 25%. Sales of million-dollar plus homes were up 31%.

Buyers in October did not get a break from mortgage rates. They rose steadily from the start of August through September. The average rate on the popular 30-year fixed loan was 2.78% on August 3rd, according to Mortgage News Daily. By October 29th it was 3.22%. The rate as of last Friday was 3.16%.

The latest read on sales of newly built homes from September showed a 14% jump from August. Builders continue to see strong demand, due to the low supply of existing homes for sale. Some of the largest national builders, however, have said they are slowing sales due to supply chain and labor issues. They are concerned they might not be able to deliver the homes on time.

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