The Fed Seeks to Navigate a Recovering Economy: Live Updates – The New York Times

The Federal Reserve is staring down a challenge that would have been all but unthinkable a year ago: With its policies set on emergency mode to bolster growth in the face of the pandemic’s shock, it must now navigate an economy that is expected to strengthen rapidly in the coming months.

Officials will release an interest rate policy decision and their first economic projections of 2021 at 2 p.m. on Wednesday, and they are virtually certain to leave borrowing costs unchanged at near zero.

But analysts and Wall Street investors alike are eager to see whether growing economic optimism will shake up the outlook for policy in the months and years ahead.

The Fed slashed interest rates to rock bottom a year ago as the pandemic shut down huge swaths of the economy. It has also been buying $120 billion in bonds per month, a policy meant to keep credit cheap and help the economy rebound from a virus that has thrown millions out of work.

Jerome H. Powell, the Fed chair, has been clear for months that officials expect to be patient in removing that policy help — a cautious tone that he is expected to maintain at a news conference on Wednesday.

“This is one of the most critical Fed meetings we’ve had in a while,” said Michelle Meyer, head of U.S. economists at Bank of America Merrill Lynch. “Markets are really paying attention, and they’re going to dissect everything he says.”

That’s because the economic backdrop is shifting. Coronavirus vaccines are fueling hopes for reopening parts of the service sector. A freshly signed stimulus package will pump $1.9 trillion into the economy, with an eye on preventing evictions, funneling cash to parents and putting $1,400 checks directly into bank accounts.

Against that improving backdrop, economists in a Bloomberg survey expect the Fed to increase rates twice in 2023, the news outlet reported. In December, they expected rates to remain unchanged until 2024 or later.

As investors expect faster growth, higher inflation and a quicker-moving Fed, they have pushed up the yield on 10-year Treasury notes. That has weighed on stock indexes, which tend to fall when rates rise.

The Fed’s economic projections — which anonymously report officials’ forecasts for interest rates, unemployment, inflation and growth both through 2023 and in the longer run — could show a shift when they are released on Wednesday.

Wall Street will pay particular attention to the inflation forecast and the policy rate path. The Fed’s median interest rate forecast previously showed no rate increases over the next three years, but analysts expect that officials could now pencil in one move in 2023.

Key bond yields jumped on Wednesday, rising ahead of the Federal Reserve’s March rate decision and a news conference where Jerome H. Powell, the central bank’s chair, will discuss the economic outlook.

Investors will intently watch the Fed chair’s reaction to the move, which pushed the rate on 10-year government notes up to 1.69 percent around midday. It had hovered around 1 percent at the start of the year.

Market-based interest rates have been moving up throughout 2021, driven by an improving economic outlook, expectations for slightly higher inflation and a growing anticipation that the Fed might dial back its mass bond purchases — which push longer-term rates lower — and lift its short-term policy interest rate sooner than previously expected.

The Fed has been buying $120 billion in Treasury and mortgage-backed bonds each month in a bid to stoke growth and keep markets calm. Officials have said they will continue that pace until they see “substantial” progress, without clearly defining what that means.

Some investors have begun to expect the Fed to taper off that buying sooner than they had been forecasting as government spending and increasing vaccinations improve the economic outlook. Others think that the increase in longer-term bond yields could prompt the Fed to revamp its program in the near term.

Higher market-based rates could make mortgages more expensive and corporate investments less attractive, working against the Fed’s goals. The central bank could shift the composition of its purchases or even buy more to keep interest rates historically low.

Mr. Powell has pushed back on the idea that a taper is imminent, and has promised that the Fed will alert investors well before the slowdown starts. But he has also pointed out that rates are moving up because of a brightening outlook.

“I would be concerned by disorderly conditions in markets or a persistent tightening in financial conditions that threatens the achievement of our goals,” Mr. Powell said at an event this month, while stressing that the Fed looks at a range of financial conditions.

Wall Street has been paying close attention to the outlook for inflation in recent weeks. Key price indexes are expected to bounce back after weak readings last year, and some economists have warned that big government spending could keep them elevated.

That could put a spotlight on Federal Reserve officials’ inflation estimates, and on anything that Jerome H. Powell, the Fed chair, says about the outlook during his news conference after the central bank’s meeting on Wednesday.

The Fed is trying to use its policies to coax the economy back to full employment while lifting and stabilizing inflation, which has been slipping in recent decades. It wants to hit 2 percent annual price gains on average, and it has pledged not to raise rates from near zero until they are poised to hum along at a slightly faster pace for some time.

But some prominent onlookers have warned that the economy could overheat. They say inflation may jump well above the 2 percent average target, thanks to government outlays and booming demand in a reopening economy.

Fed officials have been consistently less concerned about that possibility, and will give an up-to-date snapshot of their own expectations in their first Summary of Economic Projections of 2021. The last set of estimates, released in December, showed inflation stabilizing at 2 percent.

“How much do they revise up inflation? That’s something I’ll be looking for,” said Seth Carpenter, chief U.S. economist at UBS and a former Fed employee.

Analysts broadly expect price gains to accelerate in the coming months for a mechanical reason: The data are about to lap very weak readings from last spring. The most closely watched inflation measures are compared against the same month a year earlier, a recipe for an automatic increase.

But Fed leaders have been clear that a short-lived bounce is not what they’re talking about when they say they want to see quicker increases.

“There’s a difference between a one-time surge in prices and ongoing inflation,” Mr. Powell said this month.

The stimulus money promised under the American Rescue Plan began to hit the bank accounts of many Americans on Wednesday — the first official payment date — though some financial institutions chose to make the cash available to people even before it arrived from the government.

The Treasury Department said on Wednesday that 90 million payments, totaling more than $242 billion, had already been disbursed. The majority of the payments were made by direct deposit, but Treasury had also mailed about 150,000 paper checks worth about $442 million.

Additional rounds of payments will be made in the coming weeks, including for people who will receive theirs by mail as a check or debit card. You can check the status of your payment with the Internal Revenue Service’s Get My Payment tool.

Payments top out at $1,400 per person, including children and adult dependents. To qualify for the full $1,400, a single person must have an adjusted gross income of $75,000 or below. For heads of household, adjusted gross income must be $112,500 or less, and for married couples filing jointly, that number has to be $150,000 or below. Partial payments are available to people who earn more, but the amounts fall quickly.

The payments are calculated using the most recent information on file with the I.R.S., which could be your 2019 tax return if you haven’t yet filed for 2020.

If you’re newly eligible for a payment based on your 2020 income but haven’t yet filed your return, the law allows the Treasury Department to continue payments until September. If you don’t get one during that period, you can claim what you’re owed when you file your 2021 taxes.

The Biden administration said on Wednesday that a restriction in the $1.9 trillion economic relief law that prohibits states from using aid money to cut taxes is constitutional, pushing back against claims by Republican officials in some states who argue that the provision violates state rights.

The response came after a sharply-worded letter from 21 attorneys general, who wrote to Treasury Secretary Janet L. Yellen on Tuesday seeking clarity on a portion of the law that prevents them from using the federal funds “to either directly or indirectly offset a reduction in the net tax revenue” that comes as a result of state tax cuts.

States, which are expected to share $350 billion worth of stimulus funds, are anxiously awaiting guidance about whether the restrictions apply to the use of federal dollars to offset new tax cuts, or if it blocks them from cutting taxes for any reason, even if the cuts were in the works before the law passed.

The attorneys general called the provision “the greatest attempted invasion of state sovereignty by Congress in the history of our Republic.”

The clash between the states and the Biden administration could lead to a lawsuit over the stimulus bill and would represent the first big legal battle for a White House that is rushing to pump relief money into the economy.

The Treasury Department said on Wednesday that if a state that took relief money cuts taxes, that state must repay the amount of lost revenue from those cuts to the federal government.

“It is well established that Congress may establish reasonable conditions on how states should use federal funding that the states are provided,” Alexandra LaManna, a Treasury spokeswoman, said. “Those sorts of reasonable funding conditions are used all the time — and they are constitutional.”

She added: “In the American Rescue Plan, Congress has provided funds to help states manage the economic consequences of Covid-19, and gave states flexibility to use that money for pandemic relief and infrastructure investments.”

The Treasury Department rejected the idea that the provision, which was added to the relief legislation at the last minute this month, was prohibiting states from cutting taxes. States are free to decline the federal funds or can repay the money if they are in good enough fiscal shape to cut taxes.

“The law does not say that states cannot cut taxes at all, and it does not say that if a state cut taxes, it must pay back all of the federal funding it received,” Ms. LaManna said. “It simply instructed them not to use that money to offset net revenues lost if the state chooses to cut taxes. So if a state does cut taxes without replacing that revenue in some other way, then the state must pay back to the federal government pandemic relief funds up to the amount of the lost revenue.”

The amount of aid that a state will receive is tied to its jobless rate, and there are strict requirements to ensure that the money is used for purposes related to the coronavirus or to offset revenues that have been lost because of the health crisis. The Treasury Department plans to closely scrutinize how the money is spent.

In their letter to Ms. Yellen, the attorneys general said that if they do not receive a formal response by March 23, they will take “appropriate additional action.”

Attorney General Patrick Morrisey of West Virginia said in a statement that such action would include seeking a court ruling “that the unprecedented and micromanaging provision violates the U.S. Constitution.”

The world’s thirst for gasoline may never return to pre-pandemic levels, the International Energy Agency said on Wednesday.

Greater fuel efficiency, the growing shift toward electric vehicles and changing transportation habits are expected to weigh on gasoline use in the years ahead, even as consumption recovers from last year’s 11 percent drop caused by lockdowns and other restrictions.

Fatih Birol, the agency’s executive director, has used his role to push for a shift to cleaner energy to help tackle climate change. He said at a news conference Wednesday that it would be “very unlucky” if gasoline use returned to 2019 levels.

The agency said that gasoline consumption was expected to increase strongly in emerging markets like China and India in the next few years, but that beginning in 2023 it would likely decline in the large industrialized economies.

The agency’s report, called Oil 2021 and published Wednesday, said that the pandemic had set off changes in consumer behavior and that governments were making stronger efforts to reduce carbon emissions.

Although gasoline consumption may have peaked, the report predicted that oil demand would probably increase in the coming five years, but growth would be much slower than forecast before the pandemic. In the agency’s view, oil consumption would reach 104.1 million barrels a day in 2026 compared with 99.7 million barrels a day in 2019.

The House Financial Services Committee is holding its second hearing on the GameStop frenzy on Wednesday, with a range of experts expected to expound on what the saga says about the stock market’s plumbing.

The hearing appears likely to have a more wonkish tone than the committee’s first hearing on GameStop, which put a spotlight on Robinhood, the trading app at the center of a remarkable rally that sent shares of the struggling video game retailer up by over 1,600 percent in January.

Witnesses will include stock exchange officials, market analysts, former regulators and academics. Prepared testimony suggests the witnesses will focus on what — if any — deficiencies in the American stock trading system were revealed by the surge of trading in GameStop.

Sal Arnuk, co-founder of trading firm Themis Trading, plans to spotlight the growing role of payment-for-order-flow, where retail brokerage houses such as Robinhood channel customer orders to specific trading firms in exchange for payments.

“These practices create a massive incentive for such brokers to sell their clients orders to sophisticated trading firms uniquely tooled to profit off of them,” Mr. Arnuk will say, according to preliminary testimony released by the House committee. “This is a needless conflict that can harm retail investors, and it degrades the integrity of the market ecosystem as a whole.”

Other witnesses, such as Alexis Goldstein, a senior policy analyst at Americans for Financial Reform, will underscore the growing dominance of the trading firms that pay retail brokerage firms to execute their orders.

Two major market-makers, Citadel Securities and Virtu Financial, “execute a larger volume of U.S. stocks than the New York Stock Exchange,” she said in prepared testimony, urging regulators to look at whether their growth has worsened the prices that are available to investors on the public exchanges.

The hearing is to begin at 10 a.m. Other participants include Michael Blaugrund, chief operating officer of the New York Stock Exchange; Vicki L. Bogan, a Cornell University professor who focuses on the financial and investment behavior of households; Dennis Kelleher, the chief executive of Better Markets, which advocates market reforms; and Michael Piwowar, executive director of the Milken Institute Center for Financial Markets and a former S.E.C. commissioner.

Visa and Mastercard are delaying increases in the fees U.S. retailers pay when consumers use credit cards online in an effort to spare businesses additional financial hardship during the pandemic.

Both companies said the increase in so-called interchange fees would now go into effect in April 2022.

“We believe the steps we have taken and are taking today will further support the recovery and will benefit businesses and consumers alike,” Visa said in a statement.

Neither Visa nor Mastercard would comment on specific rates.

Retailers had asked both companies to postpone fee increases in recent months, hoping to avoid increased costs associated with digital purchases at a time when customers are shopping online more than ever. Senator Dick Durbin, Democrat of Illinois, and Representative Peter Welch, Democrat of Vermont, wrote a letter to Visa and Mastercard’s chief executives earlier this month asking the companies to call off the increases.

BMW became the latest carmaker to promote its commitment to electric vehicles Wednesday, moving up the introduction of a new electric sedan, hinting at plans for an electric Rolls-Royce, and saying that its Mini cars will run exclusively on batteries, though not until the 2030s.

BMW follows rivals like Volkswagen, General Motors and Volvo that have recently declared their intention to shift to electric vehicles. But BMW, based in Munich, is pursuing a more cautious strategy than some of the others.

Unlike Volkswagen, for example, BMW has not introduced a platform — a chassis and other components shared among numerous body styles — designed exclusively for electric propulsion. BMW models will accommodate either battery power or internal combustion engines, an approach that inevitably involves engineering compromises.

Oliver Zipse, the BMW chief executive, said the company’s strategy gave customers more choice. “Others focus on individual market segments and niches,” he said during a news conference Wednesday. “We, on the other hand, are taking a targeted approach across all market segments.”

Some analysts say BMW’s approach prevents it from fully exploiting the advantages of battery power, such as the opportunity to create roomier interiors.

BMW said Wednesday it would introduce its last new Mini with an internal combustion engine in 2025, but would continue to sell the model into the 2030s. In addition, BMW will begin selling its electric i4 BMW sedan this year, sooner than planned. Rolls-Royce, which has been owned by BMW since the late 1990s, will also offer an electric model, Mr. Zipse said, but he did not give details.

Unlike General Motors or Volvo, BMW and other German carmakers have not set a deadline to stop selling cars that run on fossil fuels. They argue that many regions lack charging stations for electric vehicles. “It is not realistic that the same technologies will prevail equally in every country at the same time,” Mr. Zipse said Wednesday.

BMW sold 2.3 million passenger cars last year, 8 percent fewer than in 2019. That is a relatively small number of vehicles compared with Volkswagen or Toyota, which sell four times that number, and could be a disadvantage as the industry goes electric.

BMW as well as Daimler will have trouble selling enough electric vehicles to justify the expense of retooling factories or developing dedicated platforms, Patrick Hummel, an auto industry analyst at UBS, said during a conference call with reporters last week.

“BMW and Daimler will not be in a position to replicate what Volkswagen is doing,” Mr. Hummel said.

Amalgamated Bank, the New York-based lender with a history of supporting progressive causes, announced on Wednesday that it would endorse a bill calling for a federal commission to study the lingering effects of slavery — and the merits of providing reparations.

It is the first American bank to support H.R. 40. The legislation, named after the federal government’s promise to give freed families “40 acres and a mule,” was first proposed more than 30 years ago. Its current lead sponsor is Representative Sheila Jackson Lee, Democrat of Texas, and its 169 co-sponsors are all Democrats. (President Biden has endorsed forming a committee to study reparations, but he has not committed to signing the bill should Congress approve it, which isn’t assured.)

Amalgamated came to support the bill after racial justice protests last year. Lynne Fox, the lender’s chair and interim chief executive, told the DealBook newsletter that the protests convinced the bank’s leaders that they needed to address structural racism with “systemic changes” to society. The bank, which has $6 billion in assets, has previously embraced policies that it said would help reduce gun-related violence.

A bank’s support is symbolically important, according to Ms. Fox. “We acknowledge — and I think others in the financial industry need to acknowledge — the deep-rooted connections between the American financial sector and the slave economy,” she said.

Executives in the banking industry have noted that their firms’ histories have included financing slaveholders, and admitted more recently to racial discrimination against employees and customers. Lenders are under increasing pressure to promote racial equity, including by shareholders.

For her part, Ms. Fox declined to criticize other lenders directly. “We don’t see ourselves as judging other institutions’ conduct,” she said. “Talking is a good first step. We look forward to when other concrete steps are taken.”

Amalgamated has already moved to address racial equity within its walls, Ms. Fox said. Those steps include reviewing wage policies, forming an employee-led committee to review policies and practices, and providing antiracism training.

In its statement endorsing the legislation, Amalgamated pledged to do more: “We believe the commission created through H.R. 40 is an important first step towards achieving racial justice. The work shouldn’t stop there.”

• The S&P 500 index was down 0.5 percent at midday on Wednesday, before the latest Federal Reserve monetary policy decisions are announced.

• The S&P 500 pulled back from a record high on Tuesday, but volatility in stock markets has subsided from earlier in the month when bond yields jumped higher at a rate that took investors by surprises and caught the attention of central bank officials.

• Government bond prices fell on Wednesday, sending their yields higher. The yield on 10-year Treasury notes rose to 1.69 percent.

• Most European stock indexes were lower. The Stoxx Europe 600 index fell 0.4 percent, led by health care and industrial companies, while Britain’s FTSE 100 index dropped 0.5 percent.

• Oil prices fell. Futures on West Texas Intermediate, the U.S. crude benchmark, fell 0.9 percent to $64.24 a barrel.

Uber

• A Bank of America analyst maintained his “buy” rating on Uber after the company said it would reclassify all 70,000 of its drivers in Britain as workers, giving them additional benefits, following a court ruling last month. Justin Post, the analyst, said the change would increase driver costs in the country by 7 percent to 9 percent but the outcome “reflects evolution, not platform risk.”

• The benefits could make Uber more appealing for drivers, force other companies to make similar changes and make it harder for new entrants in the market, Mr. Post wrote in a research note. Uber’s share price was down 3 percent on Wednesday.

• A court in Milan on Wednesday acquitted Royal Dutch Shell, the Italian energy company Eni and several current and former executives in a corruption trial over a 2011 oil deal in Nigeria. Among the defendants in the criminal case was Eni’s chief executive, Claudio Descalzi. In a statement, Shell called the trial “a difficult learning experience.”

• Uber will reclassify more than 70,000 drivers in Britain as workers, it said on Tuesday. The decision, which will provide the drivers a minimum wage, vacation pay and access to a pension plan, is the first time the company has agreed to classify its drivers in this way, Uber said. It comes in response to a landmark British Supreme Court decision last month that said Uber drivers were entitled to more protections. The decision represents a shift for Uber, though the move was made easier by British labor rules that offer a middle ground between freelancers and full employees that doesn’t exist in other countries.

• Google is cutting in half its commission on developers’ first $1 million in app sales, following a similar move by Apple that is aimed at appeasing developers and regulators who accuse the companies of abusing their dominance of the smartphone industry. Google said that starting July 1, it would take 15 percent of the first $1 million developers take in from certain app sales, down from 30 percent. Google will still charge 30 percent after the first $1 million.