Powell, Whatever You Do, Don't Say the "T" Word
(Bloomberg Opinion) -- It's pretty unusual for a central banker in a consequential economy to get outflanked by politicians. That is the risk confronting Federal Reserve Chair Jerome Powell when it comes to the pace of rising prices, with potentially significant implications for the American and global economies.
The White House is shifting the way it talks about inflation, using plainer language that voters can better understand, Bloomberg News's Nancy Cook wrote. The move comes as polls show increasing concern about rising prices, and congressional Republicans try to use the issue to kill big spending programs. “Transitory,” a word favored by Fed officials to describe what they see as short-term spurts in inflation that don't warrant tighter monetary policy, has lost favor among Biden aides. U.S. consumer prices jumped in June by the most since 2008, pushing the rate to 5.4% from a year earlier.
Biden's pivot comes at an awkward time for Powell. The rate-setting Federal Open Market Committee meets this week and investors will closely scrutinize the panel's language, as well as the chairman’s press conference for clues about the timing of withdrawing stimulus. The central bank has indicated it wants to be patient, and many economists don't see a pullback before year-end. In the view of Fed leadership, the pickup in inflation is largely a response to the economy's rapid bounce after last year’s deep slump. Policy makers globally, from the European Central Bank to the Reserve Bank of India, have adopted the same wait-and-see view and are keeping conditions ultra-accommodative.
T-words like “transitory” and “temporary” have shown up frequently in speeches and interviews in recent months. At its June meeting, the FOMC said “inflation has risen, largely reflecting transitory factors.” Going forward, however, Powell likely will be wary of using language that has become tainted in the eyes of the White House. While the Fed makes decisions independently, the central bank keeps close tabs on the political climate. It has been loath to see much daylight with the incumbent administration, with the possible exception of Donald Trump’s.
The shifting political calculus is fraught given the approaching end of Powell’s term early next year. While presidents have tended to reappoint Fed chairs because of concerns about disrupting markets — Trump broke that mold by refusing Janet Yellen, now Treasury secretary, a second turn — Powell isn't a shoo-in. The last thing he wants to do is something that opens up a gulf, real or perceived, with Biden.
The trouble is, if Powell starts sounding more empathetic on the burden of inflation and begins highlighting the problems it can cause, he risks people thinking the Fed will taper bond purchases soon. The central bank got a taste of investor skittishness last month when officials pencilled in two rate hikes for 2023. Markets were taken by surprise. Soothing noises followed.
Why be so reluctant to surrender to inflation and take the foot off the monetary gas? After all, the U.S. is likely to post its strongest growth this year in about four decades. And while Covid-19 hasn't been vanquished, the economy is more open than it was last year and vaccinations are proceeding. The answer is partly history. In the decade leading up to the pandemic, the Fed worried that prices were rising too slowly. It began work on a new strategy that favored average inflation targeting. Now it is content to let inflation rise beyond 2% in the short term, so that it settles around that target over time. To walk away from that so soon — the new strategy was unveiled amid much hype less than a year ago — would be an embarrassing reversal.
The Fed also must be a little concerned about a softening global picture. The yield on the benchmark 10-year Treasury note tumbled to the lowest since February last week, at least partly reflecting concerns about the robustness of the world recovery. A few weeks ago, the People's Bank of China abruptly cut the amount of reserves banks are required to hold. Covid's delta variant and relatively slow rates of vaccination are eroding growth — or preventing recovery — elsewhere in Asia. The Reserve Bank of Australia, which just this month announced a slight tapering of bond purchases, may have to suspend even that gentle withdrawal of support, reckons Goldman Sachs Group Inc. Market speculation about early rate hikes from the Reserve Bank of New Zealand, which said recently it will end quantitative easing, look premature.
Powell probably thought the biggest communication challenge in the remaining months of his term would be to choreograph the very gradual beginning of the end of QE. Now, he has to keep markets happy with language that investors want to hear, while reassuring the political class. I sure hope “transitory” doesn’t become as radioactive as “contained,” the word used by the Fed and Treasury brass in 2007 to convey their view on the risk of subprime housing loans.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
©2021 Bloomberg L.P.