The Corner


Inflation: ‘Transitory’ Taking Longer to Transit

Federal Reserve Chairman Jerome Powell testifies during a Senate Banking Committee hearing on Capitol Hill in Washington, D.C., December 1, 2020. (Susan Walsh/Reuters)

Full transcript of Fed chairman Powell’s statement here.

Some extracts (my emphasis added):

Inflation has increased notably and will likely remain elevated in coming months before moderating. As the economy continues to reopen and spending rebounds, we are seeing upward pressure on prices, particularly because supply bottlenecks in some sectors have limited how quickly production can respond in the near term. These bottleneck effects have been larger than anticipated, but as these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal. Very low readings from early in the pandemic as well as the pass-through of past increases in oil prices to consumer energy prices also contribute to the increase, although these base effects and energy effects are receding.

The process of reopening the economy is unprecedented, as was the shutdown at the onset of the pandemic. As the reopening continues, bottlenecks, hiring difficulties, and other constraints could continue to limit how quickly supply can adjust, raising the possibility that inflation could turn out to be higher and more persistent than we expect.

Our new framework for monetary policy emphasizes the importance of having well-anchored inflation expectations, both to foster price stability and to enhance our ability to promote our broad-based and inclusive maximum-employment goal. Indicators of longer-term inflation expectations appear broadly consistent with our longer-run inflation goal of 2 percent. If we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal, we’d be prepared to adjust the stance of policy.

. . . As the Committee reiterated in today’s policy statement, with inflation having run persistently below 2 percent, we will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer-term inflation expectations remain well anchored at 2 percent. We expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved. With regard to interest rates, we continue to expect that it will be appropriate to maintain the current 0 to ¼ percent target range for the federal funds rate until labor market conditions have reached levels consistent with the Committee’s assessment of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time.

In addition, we are continuing to increase our holdings of Treasury securities by at least $80 billion per month and of agency MBS by at least $40 billion per month until substantial further progress has been made toward our maximum-employment and price-stability goals….

In coming meetings the Committee will again assess the economy’s progress toward our goals, and the timing of any change in the pace of our asset purchases will depend on the incoming data. As we have said, we will provide advance notice before making any changes to our purchases…

You can find commentary on the subsequent press conference here (via CNBC).

Statements by a Fed chairman can be read in many different ways, and usually are.

But it would seem to me that, although Powell recognizes transitory inflation is taking a little longer to transit than hoped, that, so far as he is concerned, the risk–reward calculation has not changed. That’s made easier by the fact that the reward of lower unemployment clearly weighs higher for him than the risk of “transitory” inflation lasting long enough to feed upon itself.  That’s just as well as that risk is evidently increasing. No taper yet, then, quite clearly, nor anytime soon.

As I mentioned the other day:

The longer this “transitory” period of higher inflation endures, the greater the risk that inflationary expectations will become embedded in the “real” world (bond yields may show no serious signs of any impending concern, but that owes a lot to the Fed’s machinations, and, in all likelihood, some four- dimensional chess by bond investors). Inflation has a nasty habit of feeding on upon itself. And it can, as Bloomberg’s John Authers has put it, be “habit-forming.


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