Happy retirement, “transitory.”
As if it weren’t hard enough for the Federal Reserve to achieve its key mandate of full employment, now, it’s retiring the word “transitory“; even as members of the central bank struggle to achieve its second objective: price stability.
In testimony in front of the Senate Banking Committee, Powell declared it high time to retire the word “transitory,” which has become a vexation for the U.S. central banker and a inscrutable piece of Jabberwocky to those watching inflation touch a roughly three-decade high.
“We tend to use [ transitory] to mean that it won’t leave a permanent mark in the form of higher inflation,” Powell told Senate lawmakers on Tuesday. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”
Arguably, few have been more dogged in their attempt to explain a word, which Merriam-Webster defines as “of brief duration”and “tending to pass away: not persistent.”
However, “transitory” has, perhaps, led to heaps of market confusion for Powell.
Just last week, the Fed’s preferred inflation measure, the personal consumption expenditure price index, rose at the fastest pace in almost 31 years. Whether “transitory” or not, the surge in pricing has been closely watched by investors, even if they are bidding up the Dow Jones Industrial Average
DJIA,
the S&P 500 index
SPX,
and the Nasdaq Composite Index
COMP,
and keeping the benchmark 10-year Treasury yield
TMUBMUSD10Y,
anchored below 2%.
Market participants often refer to “transitory” to describe expectations that a surge in pricing pressures, attributed to supply-chain bottlenecks and surging demand as COVID restrictions loosened, are likely to be short-lived.
However, that’s not precisely how Powell has seen it and he can hardly be blamed for wanting to nix the maddening term.
Back in July, the Fed boss spent several minutes attempting to explain “transitory” to a room of reporters following a policy meeting.
The concept of “transitory” is really this: It is that the increases will
happen. We’re not saying they will reverse. That’s not what “transitory” means. It means that the increases in prices will happen, so there will be inflation but that the process of inflation will stop so that—so that there won’t be further—when, when we think of inflation, we really think of inflation going up year upon year upon year upon year. That’s inflation.
Powell continued:
So what, what I mean by “transitory” is just something that doesn’t leave a permanent mark on the inflation process. Again, we don’t mean—I don’t mean that, that, that, that, you know, producers are going to take those price increases back. That’s, that’s not the idea. It’s just that they won’t go on indefinitely. So to the extent people are, are, are implementing price increases because raw materials are going up or labor costs or something’s going up, you know, the question, really, for inflation really is, does that mean they’re going to go up the next year by the same amount? So you’re going to be in a process where inflation, the inflation process, gets going. And, and that happens because people’s expectations about future inflation move up. And we don’t think that’s happening.
Got it?
Powell appeared to acknowledge at a subsequent news conference following the central bank’s Nov. 2-3 policy meeting that there was more work to do.
“’Transitory’ is a word that people have had different understandings of,” Powell said earlier in November. “ For some, it carries a sense of ‘short-lived,’” he said. “There’s a real time component of it measured in months, let’s say.”
“Really for us what ‘transitory’ has meant is that if something is transitory, it will not leave behind it permanently or very persistently — higher inflation. So that’s why we, you know, we took a step back from ‘transitory.’”
It’s still not clear how ephemeral or not pricing pressures will be when supply chains eventually loosen.
The abandonment of the terminology may suggests that Powell and company are either fed up with explaining it or starting to view inflation as more durable and pernicious than had originally been expected.
Powell told lawmakers that it would be appropriate for policy makers to consider speeding up the wind-down of the central bank’s monthly asset purchases when they meet next month, prompting further declines in sensitive benchmark U.S. stock indexes.
Part of the reason for the drop is the hawkishness implied by the Fed at a time when questions remain about inflation and its duration and severity. Some economists are betting that inflation could rise to 7%, which is well above the Fed’s annual target of 2%.
In any case, as ephemeral as it denotes, the term “transitory” has been put out to pasture for a time. But we just don’t know how long that time will be.
This post was originally published on Market Watch
