Fed Chairman Jerome Powell’s Inflation Speech Seems to be Changing

The Fed President Way Jerome Powell talks about the inflation that seems to be changing.

Why is this important: The Fed has applied a very stimulating monetary policy, which is helping to stimulate job growth. But inflation has exceeded its target.

• Powell and his colleagues have argued for months that the forces now driving inflation have been “transient.”

Yes, but: As inflation rates rise more than expected and for longer than expected, repeated references to “transitional” could hurt the Fed’s credibility.

• Even Powell himself Thursday Told the Senate Banking Committee that, “I think we are experiencing a steep rise in inflation.

The plot: Powell’s most recent written statement referring to inflation made no reference to “transient”. He also never used the word in his lengthy Q&A with committee members.

• The word “temporary” has come, however.
• “The problem with ‘transient’ is that it suggested a very short period of high inflation,” wrote SGH Macro Advisors economist Tim Duy in a note to clients. “‘Temporary’ suggests that the period of high inflation may be longer.”

The big picture: Semantics aside, Duy’s most important point is that the Fed is communicating that it is ready to tolerate inflation as long as unemployment remains high.

• “Unless the Fed wants to revise the employment target, it really has no choice but to lengthen the period in which inflation can remain high without a policy response,” Duy wrote.

Threat level: None of this is to say the Fed is turning a blind eye to inflation. Rather the opposite.

• “We are trying to figure out if this is something that will pass quickly enough, or if in fact we need to act”, Powell said surprising inflation data.
• Bespoke Investment Group macro-strategist George Pearkes told Axios it was significant that Powell was basically saying “we’re trying to figure this out.”
• “[If] they decide that “we must curb inflation” which is going to be a huge pivot and means that we will have [rate] hikes in 2022 for sure, with a decrease starting in September and going much faster than it would otherwise. “

The bottom line: The Fed is clearly prepared to tolerate a lot of inflation if that means more jobs. But there is a limit and even the Fed doesn’t seem to know where it is.