Here, with the help of Eric Rosengren, who retired at the end of September as president of the Federal Reserve Bank of Boston, is a guide to what to look for this week in the Fed and the ‘job.

The context

The Fed has a dual mandate: to maximize employment while maintaining consumer price stability. It gets an A on jobs, with unemployment at 3.6%, near a 50-year low.

But it risks failing on inflation, which over the past year has emerged as a serious threat for the first time in four decades. The Fed’s preferred inflation gauge rose 6.6% in March from a year earlier, far exceeding its target of 2%.

As a result, Powell and his colleagues on the Federal Open Market Committee must try to pull off a “soft landing” — bringing inflation down without plunging the economy into a recession. It’s an extraordinarily difficult mission, according to Rosengren, and radically different from the crises of 2020 (COVID) and 2008 (the Great Recession), when the Fed cut interest rates to near zero to prevent the economy from falling. completely implode.

“We haven’t been in a situation where we’ve been overshooting inflation for a very long time,” Rosengren said. “It makes things much more difficult.”

Rising interest rates

The central bank’s primary inflation-fighting tool is interest rates. Higher borrowing costs drag the economy down by making it more expensive for consumers and businesses to use credit to spend. As demand for products and services decreases, price growth should also decrease.

In March, officials raised their benchmark rate, known as the federal funds rate, by a quarter of a percentage point to a range of 0.25 to 0.5%. It was the first hike since 2018, and since then other rates, including on Treasuries and mortgages, have climbed and the stock market has sold off.

But as Powell made clear at the time, the Fed will not stop there. Policymakers telegraphed a half-point increase on Wednesday, and their latest projections, made in March, show the federal funds rate will hit 2% by the end of the year.

Wall Street expects the Fed to hike rates another half point at its June meeting, then a quarter point each at its July, September, November and December meetings. But the Fed’s post-meeting statement and comments from Powell’s press conference on Wednesday will be scanned to see if that timeline will change.

“How the president responds to questions about inflation will provide some indication of how quickly rates are likely to rise,” Rosengren said.

In other words, if Powell seems more concerned about inflation than he was two months ago, it may mean the Fed will tighten faster than it had expected.

Also: the Fed is looking for a “neutral” level for rates, a level that neither pushes the economy forward nor slows it down. Policymakers estimate the neutral rate to be around 2.4%, but it could rise if inflation escalates further.

The Fed’s balance sheet down

In addition to interest rates, the central bank can regulate money flows by buying or selling treasury bills and mortgage-backed securities.

Buying bonds injects money into the financial system, which helps keep rates low. Until recently, the Fed was on a buying spree, with its holdings soaring to $9 trillion from less than $1 trillion before the financial crisis.

Now the Fed will shrink its balance sheet – draining money from the financial system and driving up borrowing costs – by letting its bond holdings mature; he can even sell certain holdings.

The central bank said it would reduce its balance sheet by $95 billion a month starting this month. Rosengren expects no change from that plan at this week’s meeting.

The tight labor market

Even the mighty Fed won’t get early access to Friday’s Labor Department jobs report. But his own internal estimates are usually accurate and will factor into his decision-making.

The jobless rate fell to 3.5% last month, according to Bloomberg’s consensus estimate, from 3.6% in March. This would correspond to the pre-pandemic trough.

Employers added an estimated 390,000 jobs, up from 431,000 the previous month, but still a healthy clip. And the average hourly wage rose 5.5% from a year ago, compared to 5.6% in March.

If those forecasts are accurate, the report will show the economy “is strong but not picking up speed,” Rosengren said.

That would give the Fed some breathing room as it charts the course of rates and its bond sales over the next few months. And it could give financial markets a chance to take a deep breath after the steep declines so far this year.

Larry Edelman can be contacted at [email protected] Follow him on Twitter @GlobeNewsEd.