Powell Says It’s Time to Retire Word ‘Transitory’ From Fed’s Inflation Narrative

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Federal Reserve Chair Jerome Powell faced a grilling on the persistence of inflationary pressures during a Senate hearing on Nov. 30, with the central bank chief acknowledging that it’s “time to retire” the word “transitory” from the inflation narrative, noting that factors pushing inflation higher would stick around “well into next year.”

Powell made the remarks during testimony before the Senate Committee on Banking, Housing, and Urban Affairs, while responding to a question from Sen. Pat Toomey (R-Penn.), who challenged the Fed’s “transitory” framing of the current bout of inflation, which hit a three-decade high in October and accelerated its monthly pace from the prior month.

“I know you believe this is transitory,” Toomey said. “But everything is transitory. Life is transitory. How long does inflation have to run above your target before the Fed decides ‘maybe it’s not so transitory?’” he asked while questioning whether the Fed’s continued stimulus represented a weakening of the central bank’s commitment to price stability.

Powell said the Fed’s inflation test for rolling back its accommodative monetary policy stance has “clearly” been met now, with inflation running well above the central bank’s target of around 2 percent.

“I think the word ‘transitory’ has different meanings to different people. To many, it carries a time semblance of short-lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation,” Powell said.

“I think it’s probably a good time to retire that word and try and explain more clearly what we mean,” the Fed chief added.

Powell maintained, however, that the Fed continues to expect that inflation will “move down significantly” over the next year as supply-side bottlenecks ease. Noting it’s difficult to predict the persistence of supply constraints, Powell added that it seems that factors driving inflation higher “will linger well into next year.”

At the same time, Powell said there’s still ground to cover in terms of labor market recovery, a key touchstone for the Fed, while reiterating his commitment that the Fed would use its policy tools “both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

Powell said it’s taking longer than expected for the labor force participation rate, which has been stuck at historically depressed levels for some time, to edge back up.

“To get back to the kind of great labor market that we had before the pandemic, we’re going to need a long expansion. To get that, we’re going to need price stability. In that sense, the risk of persistent high inflation is also a major risk to getting back to such a labor market,” Powell said.

By Tom Ozimek

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