As inflation began to edge upwards under former President Joe Biden, America’s top experts sought to calm fears by insisting such a rise was merely “transitory.” In late 2021, when inflation began to spiral out of control – proving that it was anything but transitory – Federal Reserve Chair Jerome Powell and then-Treasury Secretary Janet Yellen buried the term completely. It turned out that the soaring costs were not a short-lived affair, forcing the Eccles Building and the Biden administration to pivot and accept that inflation was more than a temporary phenomenon. The keyword of yesteryear, however, is making a comeback. A good look at recent history shows this does not bode well for the US economy.
Transitory: You Keep Saying This Word
The Federal Reserve concluded its two-day monetary policy meeting on March 19. For the second time, the US central bank left interest rates alone as policymakers assessed the inflation situation and waited for further clarity from the “net effect” of President Donald Trump’s changes in trade, immigration, fiscal, and regulatory policies. Since it was widely anticipated, investors paid closer attention to the Summary of Economic Projections and Powell’s post-meeting press conference.
While reporters inundated the central bank chief with questions, Powell, during a slightly tense exchange with a Bloomberg reporter, uttered a word that harkened back to four years ago. When asked if transitory inflation had returned to the Fed lexicon as it grapples with tariffs, Powell responded that this is “kind of the base case.”
“We really can’t know that. We’re going to have to see how things actually work out. It can be the case that it’s appropriate sometimes to look through inflation, if it’s going to go away quickly, without action by us, if it’s transitory,” Powell said. “That can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and, critically, as well on inflation expectations being well anchored.”
In addition, Powell noted that short-term inflation expectations have spiked, but long-term market-based forecasts are well-anchored. In other words, the marketplace is not projecting another situation whereby inflation remains a permanent fixture of the US economy.
Still, the press conference provided more insights into how the central bank views tariffs and how it is beginning to consider the various possibilities surrounding the administration’s levy plans. Ultimately, according to Powell, nothing is set in stone, whether tariff-driven inflation or policy. “We will be watching all of it very, very carefully. We do not take anything for granted,” he said.
A Transitory Punchline
For the wee ones, transitory morphed into a punchline when the headline inflation rate exceeded 9% in June 2022 and continued to stay well above the central bank’s 2% target. Years later, Powell still jokes about it on occasion. In his August 2024 speech at the annual Jackson Hole economic symposium, Powell quipped that “the good ship transitory was a crowded one,” saying he noticed “some former shipmates out there today.” Despite the humor, this word destroyed the entity’s credibility.
Powell must have known that uttering the word would raise some eyebrows among market watchers. Indeed it did, based on the various commentaries from industry analysts.
Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management: “‘Transitory’ is back, or at least that was the insinuation. The market reaction, to me, says that investors are willing to believe that tariffs and other policies won’t create lasting inflationary pressures and that the Fed can stay in control.”
Ipek Ozkardeskaya, a senior analyst at Swissquote Bank: “The Fed kept its policy rate unchanged as expected, cut the growth forecast and lifted its inflation outlook quite notably but Chair Jerome Powell stressed out that the potential impact of tariffs on inflation would be ‘transitory’ – implying that the Fed could continue to ease policy to support growth.”
Mohamed El-Erian, a prominent economist: “I would have thought that, particularly after the big policy mistake of earlier this decade and given all the current uncertainties, some Fed officials would show greater humility.”
Since the Federal Reserve maintains an abysmal track record when uttering this word, does it mean the United States is on a collision course with elevated inflation for the foreseeable future?
Fed Up
Over the past couple of months, the Federal Reserve has taken a backseat to President Trump and other administration officials. The US stock market has shifted its focus from every word uttered by central bankers to Trump’s social media posts and statements by administration officials in mainstream media interviews. Perhaps Powell wanted to return to the spotlight. Whatever the motive behind Powell’s resurrection of the term, market experts will likely publish multiple analyses and charts for months, possibly overthinking this one. If inflation shoots back up and stays above the 2% objective, the Fed will probably be laughed at – again.
