Opinion | Why the Fed Chair Won't Call Inflation 'Transitory' Anymore - The New York Times
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Jerome Powell, the Federal Reserve chair, picked an interesting time to banish “transitory” from his vocabulary. All year he has been describing the rise in inflation as transitory — five times in a single speech in August, for example. On Tuesday he publicly changed his mind, telling the Senate Banking Committee that it was “probably a good time to retire that word.” In other words, inflation may moderate but it won’t go away anytime soon.
David Rosenberg, the chief economist of Rosenberg Research, wrote in a note to clients that it was “completely ironic” that Powell chose to recant on a day when prices of oil and other commodities were cratering, removing one source of inflationary pressure, while junk bond prices were weakening, signaling market fears of an economic slowdown. “Nice timing on throwing in the towel on ‘transitory,’ Jay!” he wrote.
It’s worth understanding why Powell transited away from transitory, because he isn’t just another economy watcher. The Fed chair is first among equals on the interest-rate-setting Federal Open Market Committee, and he’s not going anywhere; last month President Biden announced he would nominate Powell to a second four-year term.
You might think the new Omicron variant of the coronavirus would make Powell and his fellow rate-setters reluctant to remove monetary stimulus. But while Omicron might cause the economy to grow more slowly, it won’t necessarily curb inflation. It could even make it worse if it suppresses the supply of goods and services — say, by forcing manufacturers and shippers to curtail operations. Powell cited “increased uncertainty” about inflation as a result of Omicron in his prepared congressional testimony.
The most important reason Powell pivoted toward more of a focus on inflation, as far as I can tell from his testimony, is that he has lost patience with the pace of the rebound in labor force participation. Many people who stopped working early in the pandemic still haven’t re-entered the job market. So employers are competing for the few workers who are available, driving up wages and salaries. To date, wages haven’t kept up with consumer prices, but they are running ahead of the Fed’s goal of 2 percent inflation.
Today the Bureau of Labor Statistics reported that the unemployment rate fell in November to 4.2 percent as the number of people getting jobs was nearly double the number entering the labor force. (Confusingly, the number of payroll jobs, which comes from a different survey, rose by just 210,000, less than half what was expected.) The labor force participation rate rose to 61.8 percent, which was a 20-month high but still well below the prepandemic level of 63.3 percent in February 2020.
“The Fed’s problem is that current price hikes from shortages of goods and labor will pass, but the coming increase in wages will not,” Steve Blitz, the chief U.S. economist at T.S. Lombard, wrote on Wednesday. Contributing to the wage pressure, Blitz wrote, will be a shift in the mix of employment from low- to middle-skill jobs and a decline in the number of young people entering the labor market as the millennial generation is succeeded by the smaller Gen Z.
Powell seems to have concluded that workers will return, but more slowly than he once thought. He figures that the best way to get them back is to keep the economy growing steadily, and the best way to make that happen is to keep inflation from running too hot — because excessive inflation would require a sharp rise in interest rates that could cause a recession.
Along those lines, economists at Morgan Stanley wrote Wednesday: “Rather than setting high inflation aside as transitory while focusing on pushing the labor market toward maximum employment, Chair Powell reframed the inflation risk in his testimony, indicating that getting back to strong, pre-Covid-like labor market conditions would require a long expansion, and inflation threatens a long expansion.”
That answers why Powell changed his tune, but it doesn’t answer why now. I think it was because the evidence of high inflation and tight labor markets had become impossible to explain away as the months went on. Most of that evidence has been statistical, but sometimes the most persuasive evidence is a telling anecdote. On Wednesday, after Powell’s Senate testimony, the Fed released its latest Beige Book, which comes out eight times a year and compiles observations gathered from business contacts by the 12 regional banks that make up the Federal Reserve System.
Here are a few of the more interesting observations:
The Cleveland Fed reported that “several firms indicated that they were reluctant to mandate vaccines because doing so would likely disadvantage them in an already competitive labor market.”
The St. Louis Fed said one employer in Kentucky “lamented that its only option was to hire individuals with the potential to perform key roles after a year or more of training.”
The Atlanta Fed said a trucking company that had trouble finding drivers with commercial licenses was “covering more routes with smaller box trucks or pickup trucks pulling trailers.”
And the San Francisco Fed said, “A contact in education mentioned that inability to hire teachers forced some schools to close in the Pacific Northwest.”
In light of stories like these, maybe it’s not surprising that Powell chose now to get more hawkish on inflation. Still, those falling commodity prices and declining inflation expectations in the bond market are sending a different signal. There’s a risk that the Fed will overreact and kill the expansion it’s trying to sustain.
(I promised to run a reader’s letter about gratitude today, but I got so many of them that I’ve decided to wait and run a bunch at once. Stay tuned.)
I question the effectiveness of the INFORM Consumers Act to discourage the sale of stolen goods online, which you mentioned in your Dec. 1 newsletter. What if the group stealing has its own outlet to sell the stolen goods? The goods can be sold to friends, neighbors, in their communities. Even at a discount this could generate lots of cash and be nearly untraceable. I do agree with the proposal, but wonder if that is enough to stop or severely curtail organized retail crime.
Marcellus, N.Y.Quote of the day
“California is a garden of Eden, a paradise to live in or see/ But believe it or not, you won’t find it so hot/ If you ain’t got the do re mi.”
— Woody Guthrie, “Do Re Mi” (1940)
Note: A reader of my Monday newsletter wrote to me to say that my suggestion of $100 billion for the possible value of prizes for early detection of Covid-19 variants seemed too high. That’s fair and I am grateful for the comment. The International Monetary Fund said in October, “If Covid-19 were to have a prolonged impact into the medium term, it could reduce global G.D.P. by a cumulative $5.3 trillion over the next five years relative to our current projection.” So even a small reduction in losses from early detection of variants would be worth billions of dollars — though probably not $100 billion.
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