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Fed Chairman: ‘Transitory’ No Longer Reflects Inflation Reality

Federal Reserve Chairman Jerome Powell attends the House Financial Services Committee hearing on Capitol Hill in Washington, D.C., September 30, 2021. (Al Drago/Pool via Reuters)

During a hearing before the Senate Banking Committee Tuesday, chairman of the Federal Reserve Jerome Powell said the word “transitory” should be retired because of the public confusion it creates and because it may no longer reflect the current reality of persistent inflation.

Republican Senator Pat Toomey asked Powell how the central bank could maintain the position that inflation is a temporary phenomenon, given that the metric has far surpassed the annual two percent target set by the Fed. The chairman acknowledged this, adding that the economy had been undershooting the Fed’s inflation target for many consecutive years prior, so the last year of pandemic-induced price surges well compensates for it.

“I think the word ‘transitory’ has different meanings to different people. To many it carries a sense of short-lived. We tend to use it to mean that it won’t leave a permanent mark in the former of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean,” Powell said.

As production bottlenecks and the supply chain crisis persists, Powell said a reassessment of the inflation outlook for the country is due. No longer a summer of short-term price hikes, the shortages on store shelves and higher costs across consumer commodities have inflicted real pain on many Americans’ finances and quality of life that is likely to endure past the winter.

“Clearly the risk of more persistent inflation has risen,” Powell warned. The expiration date for the price increases “has been pushed out repeatedly as supply side problems have not really improved,” he added. He did not specify how those supply squeezes could be rectified so producers can meet demand, allowing market forces to settle and prices to relax.

To give itself more breathing room to raise interest rates, a monetary tool that can be used to combat spiraling inflation, the Fed is considering tapering off its large-scale asset purchasing program earlier than previously indicated.

“It is appropriate, I think, for us to discuss at out next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” Powell said Tuesday. “In those two weeks we are going to get more data and learn more about the new variant.”

Powell did not say, however, whether the emergence of the Omicron COVID variant could cause the Fed to reevaluate this strategy and resume large asset buy-outs.

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