The Fed is about to ratchet up its inflation fight. Here’s what to expect.

It’s a big week for economic news. The Federal Reserve is expected to boost interest rates, and the April jobs report will likely show continued gains in employment.

Jerome Powell, the Federal Reserve chairman, has succeeded in boosting employment but is failing when it comes to keeping inflation in check.Al Drago/Bloomberg

We’re about to get a double-shot of economic news with significant implications for interest rates, employment, and financial markets.

On Wednesday, after wrapping up a two-day meeting, Federal Reserve officials are expected to announce their second rate hike this year and other steps to get runaway inflation under control. Fed chairman Jerome Powell will follow up with a news conference, where his every word will be scrutinized for clues on the central bank’s next moves.

Then, on Friday, the Labor Department will release its April report on employment, with readouts on hiring and wage growth that will signal whether the economic contraction in the first three months of the year was a blip or the start of a more serious downturn.

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 from the Fed and the employment report.

The context

The Fed has a dual mandate: maximize employment while keeping consumer prices stable. It gets an A on jobs, with unemployment at 3.6 percent, near a 50-year low.

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

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

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

Rising interest rates

The central bank’s main inflation-fighting tool is interest rates. Higher borrowing costs act as a drag on the economy by making it more expensive for consumers and businesses to use credit to spend. As demand for products and services eases, so should the growth in prices.

In March, officials boosted their benchmark rate, called the federal funds rate, by a quarter of a percentage point to a range of 0.25 to 0.5 percent. It was the first hike since 2018, and since then other rates, including on Treasury securities 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. Policy makers have telegraphed a half-point increase on Wednesday, and their latest projections, made in March, show that the fed funds rate will reach 2 percent by the end of the year.

Wall Street expects the Fed to increase rates another half-point at its June meeting, and then by a quarter-point each at its meetings in July, September, November, and December. But the Fed’s postmeeting statement and Powell’s press conference comments Wednesday will be scoured for hints on whether that schedule will change.

“How the chair answers questions on inflation will provide some guidance to how quickly rates are likely to increase,” Rosengren said.

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

Also: the Fed seeks a “neutral” level for rates, one that neither pushes the economy forward nor holds it back. Policy makers estimate the neutral rate is about 2.4 percent, but that could move higher if inflation gets even hotter.

The shrinking Fed balance sheet

In addition to interest rates, the central bank can regulate the flow of money by buying or selling Treasuries and mortgage-backed securities.

Buying bonds pumps money into the financial system, helping keep rates low. Until recently, the Fed had been on a buying binge, with its holdings soaring to $9 trillion from less than $1 trillion before the financial crisis.

Now the Fed is going to shrink its balance sheet — which will drain money from the financial system and push borrowing costs higher — by letting its bond holdings mature; it may even sell some holdings.

The central bank has indicated it will reduce its balance sheet by $95 billion a month starting this month. Rosengren doesn’t expect any change from that plan to come out of this week’s meeting.

The tight job market

Even the powerful Fed won’t have early access to Friday’s employment report from the Labor Department. But its own internal estimates are usually accurate and will be factored into its decision-making.

The jobless rate dipped to 3.5 percent last month, according to the consensus estimate tallied by Bloomberg, from 3.6 percent in March. That would match the prepandemic low.

Employers added 390,000 jobs, according to the estimates, down from 431,000 in the previous month but still a healthy clip. And average hourly wages rose 5.5 percent from a year ago, versus 5.6 percent in March.

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

That would give the Fed a little breathing room as it plots the course of rates and its bond runoff over the next few months. And it might give financial markets the opportunity to take a deep breath after the sharp declines so far this year.