The Daily Update: Powell Retires Transitory, Promotes Tapering

Yesterday Fed Chair Powell gave his prepared statement before the Senate Banking Committee, with the big news with regards to inflation being that Powell thinks it a good time to retire the word ‘transitory’. After months of telling all and sundry that the spike in inflation was largely due to ‘transitory’ forces, he now believes it’s ‘probably a good time to retire that word’.

In his prepared remarks, Powell sounded bullish on growth and the labour markets. ‘Recent data suggest that the post-September decline in cases corresponded to a pickup in economic growth. Gross domestic product appears on track to grow about 5 percent in 2021, the fastest pace in many years. As with overall economic activity, conditions in the labour market have continued to improve’.

With regards to inflation he acknowledged ‘notable price increases in some areas’, but reiterated, ‘Most forecasters, including at the Fed, continue to expect that inflation will move down significantly over the next year as supply and demand imbalances abate’ he noted. However, ‘Supply chain problems have made it difficult for producers to meet strong demand, particularly for goods. Increases in energy prices and rents are also pushing inflation upward. As a result, overall inflation is running well above our 2 percent longer-run goal, with the price index for personal consumption expenditures up 5 percent over the 12 months ending in October’.

He also went on to say that ‘It is difficult to predict the persistence and effects of supply constraints, but it now appears that factors pushing inflation upward will linger well into next year. In addition, with the rapid improvement in the labour market, slack is diminishing, and wages are rising at a brisk pace" and added "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 labour market and to prevent higher inflation from becoming entrenched."

The 'transitory' remark came when Powell was asked by Senate Banking Committee Ranking Member Pat Toomey ‘How long does inflation have to run above your target before the Fed decides, maybe it’s not so transitory?’ Powell said that while the word has ‘different meanings to different people’ the Fed 'tends to use it to mean that it won’t leave a permanent mark in the form of higher inflation’. He added ‘I think it’s probably a good time to retire that word and try to explain more clearly what we mean’.

So now we go from one T, transitory to another, tapering. On this, Powell expects the December FOMC meeting later this month to discuss the speed at which they wrap up bond purchases. ‘At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner’ he said, adding ‘I expect that we will discuss that at our upcoming meeting’.