SAN FRANCISCO – Mary C. Daly was lining up behind a woman in her Walgreens neighborhood in Oakland, Calif. This fall when she witnessed a life-changing consequence of inflation. The older customer dragged her feet uncomfortably as the sales clerk gathered her items.

“She’s starting to ruffle in her pockets and in her purse,” Daly said in an interview. “And she said, ‘It’s a lot more expensive than usual. I buy these things; these are my monthly purchases. ‘”

The woman had to put something back – she chose crisps – because she couldn’t afford everything in her basket.

It would have been sobering for anyone, but it’s been an especially tough time for Daly, who is chairman of the Federal Reserve Bank of San Francisco. As one of 18 senior Fed officials, she is one of the policy makers of the economy to help ensure a strong labor market and maintain stable prices for goods and services.

Like many of his colleagues, Daly originally expected inflation to ease relatively quickly in 2021 as the economy reopened and returned to normal. But the continued waves of viruses that halted and complicated the recovery, and increasingly steep price increases have made central bankers nervous that rapid inflation and labor shortages caused by the pandemic could persist.

These risks prompted the Fed to accelerate its plans to withdraw from policies designed to stimulate the economy. Officials had previously suggested they would keep interest rates low for a long time to allow more people who lost or quit their jobs during the pandemic to return to the workforce. But in recent weeks, they have announced a plan to more quickly scale back their other main policy to stimulate the economy: large-scale bond purchases that have kept long-term borrowing costs low and kept inflows of debt. money in the financial system. The rapid conclusion of this program could put them in a position to raise interest rates as early as March.

Daly, who spoke to the New York Times in two interviews in November and December, has changed his tone especially dramatically in recent weeks. The way she has come to change her mind shows how much policymakers have been caught off guard by persistently high inflation and are now struggling to strike the right balance between addressing it without hurting the fuel market. job.

As late as mid-November, she argued that the Fed should be patient in withdrawing support, avoiding an overreaction to inflation that could prove temporary and risk unnecessarily slowing the labor market recovery. But incoming data has confirmed that employers are still struggling to hire even as consumer prices are rising at the fastest rate in nearly 40 years. Rising rents and tangled supply chains could continue to drive inflation up. And she meets more people like this woman from Walgreens.

“Members of my community tell me they are worried about inflation,” Daly said last week. “What has influenced me a lot is recognizing that the very communities that we try to serve when we talk about people excluded” from the labor market “are the same communities that are paying the heaviest price with rising prices. food, transport and housing prices. prices.”

Daly said she supports stopping bond buying quickly so officials can start raising interest rates. A higher Fed policy rate would spill over into the economy, raising the costs of mortgages, auto loans, and even credit cards, and cooling consumer and business demand. This would ultimately curb inflation, while possibly slowing job growth.

Daly said it was too early to know when the first rate hike would be warranted, but suggested it could be open to the Fed starting to hike rates as early as March.

“I’m comfortable saying that I expect we have to hike rates next year,” Daly said last week. “But how many will it be exactly – two or three – and when will it be – March, June or in the fall?” For me, it’s just too early to know and I don’t see the point in a statement.

Many investors and economists now expect the Fed to raise rates from their current near zero level in March, and Christopher Waller, a Fed governor, suggested last week that he could then support a decision.

The fact that higher rates can come so soon is a big change from what officials were reporting – and people who watched the Fed closely expected – until very recently.

Fed officials have long said they want the economy to return to full employment before raising interest rates. At the start of the pandemic, many policymakers suggested they would like to see the number of people with jobs rebound to levels close to those prevailing at the start of 2020, suggesting that a long period of low rates would be needed.

But increasingly, officials have argued that the economy is on the cusp of meeting its employment target by focusing on the overall unemployment rate and the rates of different racial groups.

The unemployment rate has fallen to 4.2% and Fed officials expect it to drop to 3.5% next year. This would be in line with the rate that prevailed before the pandemic and would be a marked improvement from the pandemic peak of 14.8% in April 2020. Black unemployment is also falling rapidly.

“The economy has made rapid strides towards maximum employment,” Fed Chairman Jerome Powell said at a press conference this month.

Yet this unemployment rate only tells part of the story, as it only counts people who are actively applying for a job. The proportion of people in their prime, between the ages of 25 and 54, who are working or looking for work has declined considerably and is only starting to recover.

Daly said she was reflecting on the Fed’s goal of full employment in terms of what is achievable in the short term, as the coronavirus keeps many workers at home, and in the longer term, when more employees may be able to come back because the virus is no longer under control.

“There’s the job market that we can get eventually, after COVID,” she said. “And there is the job market that we have to face today.”

For now, vacancies far exceed the number of people applying for positions, and wages are rising rapidly, two signs that suggest workers are – at least temporarily – scarce.

It may be that “in the short term, it’s all the workers we have,” Daly said. “But in the long run, we expect more workers to come.”

Retailers in his area are cutting back their hours on busy shopping days because they cannot hire enough staff. The production lines are closed. And with the surge in viral infections and the rapid spread of the new omicron variant, there is no immediate end in sight.

“If we get past COVID, inflation goes down, labor supply recovers – so we definitely want more patience, because we want it to happen during,” Daly said. “But we have COVID, and it won’t go away. ”

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