The word of the year on the capital markets is likely to be “temporary”. Because almost all central bankers and many economists have repeatedly emphasized that the rise in inflation is “temporary”. Whether it is really so – but that is exactly what is hotly debated.
In the United States, Raphael Bostic, head of the Atlanta Fed and thus a prominent monetary politician at the US Federal Reserve (Fed), “temporarily” described it as a “dirty word” back in October, because he was assuming that prices would continue to rise broadly for a longer period of time. The US economist Mohamed El-Erian has been leading a crusade against the Fed for months, which he accuses of not taking inflation seriously enough.
And now Fed Chairman Jerome Powell has, as if by the way, deleted the word “temporarily”. Everyone who always knew everything better cheers, especially on Twitter. The markets are scared, especially since Powell has also indicated that the central bank could end its bond purchases faster than previously planned – which would also enable an earlier rate hike.
Was that a radical turnaround? Has Powell finally agreed with his critics?
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On closer inspection, not. If you take it very carefully, he actually didn’t say anything new by deleting the controversial word.
A word slowly changes its meaning
Powell had long admitted that inflation is more stubborn than expected a few months ago. Christine Lagarde, President of the European Central Bank (ECB), made a similar statement. It has long been shown that “temporarily” (“transitory” in the original) is a very flexible term.
At first it sounded like inflation was going to be over very quickly. It is now clear that prices are unlikely to rise as rapidly in the coming year as they are now – but the increase will likely remain well above the two percent targeted by the central banks for a while.
“Temporary” has long since ceased to mean that delivery bottlenecks, ever increasing energy prices and catch-up consumption by the lockdown-damaged population will be over at some point. And that is exactly what Powell made clear in his remark.
“We usually use this to say that it has no lasting consequences in the form of higher inflation,” Powell said before the Senate Banking Committee to explain the meaning of the controversial word. But because the word is so misleading, he doesn’t want to use it anymore: “It’s time to stop calling inflation temporary.”
What if he still has to turn around?
So, did he say anything new? Basically not. But in connection with his announcement that he might accelerate bond purchases, his clarification – if it was so – had a clear effect on the markets, at least in the short term.
Powell could get a problem if he has to deviate from his stricter course again because the corona pandemic is picking up speed again with the new Omicron variant. Seen in this light, it is still open whether the powerful Fed chief shook off his critics in the eyes of the public with a clever communicative trick or aroused excessive expectations with a clumsy remark.
More: Fed chairman Powell continues to warn of high inflation