The Federal Reserve folds on the issue of inflation being Transitory

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by Shaun Richards

Yesterday the Chair of the US Federal Reserve Jerome Powell gave evidence to Congress. The issue of 2021 has of course been the rise in inflation which he has called “Transitory” many times. The problem for him is not only that it has gone much higher than expected with the PCE index that the US Federal Reserve targets doing this.

The PCE price index increased 0.6 percent. Excluding food and energy, the PCE price index increased 0.4 percent……The PCE price index for October increased 5.0 percent from one year ago, reflecting increases in both goods and services . Energy prices increased 30.2 percent while food prices increased 4.8 percent. Excluding food and energy, the PCE price index for October increased 4.1 percent from one year ago.  ( Bureau of Economic Affairs )

Even for what has become called Team Transitory these numbers have become ever harder to spin. The core number that they so adore has rallied too and at a time of rising energy costs and squeezed budgets there have found themselves in “I cannot eat an I-Pad” territory. Switching to the more well-known CPI series the numbers were even worse with monthly growth of 0.9% and annual of 6.2%.

In essence things had gone higher than suggested and indeed much higher as well as starting to look more persistent as other categories start to join the rise. But until now the Federal Reserve and indeed the US Treasury Secretary had stuck to the Transitory story.

However there were signs of change in the written testimony.

We understand that high inflation imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation. We are committed to our price-stability goal. We will use our tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.

You may have spotted the switch as what he would usually call “non-core” items are now essentials. That is before we get to the way that rising housing costs are measured via fantasy rents rather than this actual price.

After seasonal adjustment, the U.S. National Index posted a month-over-month increase of 1.2%, and the 10-City and 20-City Composites both posted increases of 0.8% and 1.0%, respectively. In September, 19 of the 20 cities reported increases before seasonal adjustments while all 20 cities
reported increases after seasonal adjustments.

As you can see they continue to surge even with the annual rate dipping slightly to 19.5%. as opposed to imputed rent growth of 3.1%. On that subject we would all like to pay imputed electricity bills this year!

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But the change in the testimony was from the “we will use our tools” bit which was much more definite.

Transitory becomes well Transitory

The Wall Street Journal recorded the exchange like this.

The chairman acknowledged that inflation has long since gone beyond the central bank’s 2% target. He then said that some people define transitory to mean “short-lived.” But at the Fed “we tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation.” He added that perhaps it’s time for the Fed to “retire” the word and “try to explain more clearly what we mean.”

So the cold reality of higher inflation has punctured the Transitory bubble. Once more we are in the arena of my financial lexicon for these times as central bankers ape Humpty Dumpty in having words mean what they want them to mean rather than their definition.

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The Wall Street Journal is not entirely impressed.

That sounds good to us, though it does invite the question of what he means by a “permanent mark” from inflation. The current annual rate of 6% is already permanent in the sense that the inflation of the last year is built in and prices won’t fall to erase it. Transitory or permanent, we’d prefer that Mr. Powell act to stop it.

I welcome their emphasis on the price level as too many try to swerve the consequences of a higher price level which is permanent to use Chair Powell’s words. Those of you who follow my Twitter exchanges with former Bank of England policymaker Danny Blanchflower will have noted he is at that game regularly trying to suggest that after a year it disappears. From the annual numbers it does but prices are 6% higher and people are poorer even if inflation is then zero.


There was an apparent shift here as CNBC notes.

Federal Reserve Chairman Jerome Powell indicated Tuesday that the central bank could step up the removal of its efforts to boost the economy as it battles escalating inflation pressures.

In an appearance before a Senate committee, the Fed chief said he thinks reducing the pace of monthly bond buys can move more quickly than the $15 billion-a-month schedule announced earlier this month.

Powell said he expects the issue to be discussed at the December meeting.

That is a curious choice of language from CNBC as “battles” suggests the Fed has been active whereas in fact it has only just started a small reduction in its monthly bond purchases. Indeed even the words below do not indicate that big a change.

“The need for that has clearly diminished as the economy has continued to strengthen, as we’ve seen continued significant inflationary pressures, and that’s why we announced that we would taper, and it’s why we’re now saying we’re going to discuss a somewhat faster taper at our next meeting,”


So it is Definitely Maybe on an acceleration to US $30 billion per month. Although it will still be adding to the existing US $4.5 billion stock for a while.

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You can take the Federal Reserve position in 2021 as incompetence or a deliberate policy of turning a blind eye to inflation risks. The normal rules however do not apply as the ordinary person would get sacked for equivalent failures whereas Chair Powell has just been appointed for a second term. Indeed with the amount of inflation seen it was even more extraordinary that President Biden felt he could get away with the first part of the quote below.

I’m confident that Chair Powell and Dr Brainard’s focus on keeping inflation low, prices stable, and delivering full employment

But even now with a confession that the inflation strategy is crumbling the response is likely to be not much. In Jerome Powell’s own words policy remains accomodative in a period when he tells us the economy is strong and inflation is high. What would he do in another slowdown or even recession?

The market response was intriguing though with a couple of nuances. Firstly whilst bond yields rose a little the impact was much smaller than the falls created by fears about the Omicron variant. Next such moves as there were happened at the short-end with the two-year yield rising to 0.6%. That potentially represents another policy failure because QE was created to influence longer-term interest-rates and whilst it might be in line with short-term attention spans the two-year is hardly that.



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