In recent updates, we’ve highlighted the debate in economics circles between those (generally on the policy side) who have been arguing that recent inflationary pressures are “transitory” in nature and others who believe that inflation expectations have become/are becoming more “baked in”. It was therefore notable to see Federal Reserve Chair Jay Powell announcing the official retirement of the T word in evidence to the US Senate Banking Committee last week. The exchange went as follows:
“How long does inflation have to run above your target before the Fed decides, maybe it’s not so transitory?” Senate Banking Committee Ranking Member Pat Toomey (R-Pa.) asked Powell, who appeared alongside Treasury Secretary Janet Yellen.
Powell explained that while the word has “different meanings to different people,” the Federal Reserve “tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation”.
“I think it’s — it’s probably a good time to retire that word and try to explain more clearly what we mean”, Powell added.
Now to be clear, Central Bankers are well versed in doublespeak, obfuscation and all manner of verbal and written gymnastics, but this had the feel of if not a full-blown retreat, a throwing in of a small white towel. Powell was brought before the committee to explain the 6.2% year on year CPI print for October, which was the highest since 1990.
Not everyone was as polite in their questioning as Sen. Toomey. Sen. John Kennedy (R-La.) told Powell: “I realize that no one is clairvoyant, but I think it’s fair to say that the experts who have been advising you about the future rate of inflation have pretty much the same credibility as those late-night psychic hotlines you see on TV”. Ouch…