Please note Powell revived from the dead, the word “Transitory”.
I missed this real time. But while researching past statements regarding inflation, I stumbled on a Bloomberg article Powell Revives ‘Transitory’ With Remarks on Tariff Inflation written March 19, 2025.
Fresh off the Federal Reserve’s new economic projections showing officials expect higher inflation and slower growth this year, Chair Jerome Powell said Wednesday it’s his “base case” that any bump in price-growth due to President Donald Trump’s tariffs policy would prove transitory.
To be sure, Powell emphasized the Fed “really can’t know” and said officials will have to see how tariffs ultimately play out. Still, the remark conjures up memories of the Fed’s slow response to the pandemic-driven inflation surge.
“It’s still the truth if there’s an inflationary impulse that’s going to go away on its own, it’s not the right policy to tighten policy,” Powell said. “Because by the time you have your effect, you’re in effect, by design, you are lowering economic activity and employment.”
Base Case Is Transitory
Given transitory is the base case, that means the Fed will be slow to act on it when it happens.
It might be a year before the Fed realizes the inflation isn’t transitory.
Perhaps this is answer to my puzzlement earlier today when I posted Despite Hot Inflation, the Market Still Expects a Fed Rate Cut in June
There is still a 78.6 percent chance of at least a quarter-point cut in June.
How to Make Sense of This
If the Fed does cut in June for no reason other than it has penciled one in (this is certainly possible), I would expect long-term yields to rise, and they did.
The other possibility is the market expects a recession sooner rather than later. As for the long bond in this recession scenario, it makes perfect sense for worries over long-term budget deficits.
Ta Da! It’s Transitory
Now it all makes perfect sense. The jump in PCE inflation is transitory and whatever inflation comes from Trump’s tariffs will be transitory as well.
And since transitory is the base case, it makes perfect sense for the market to expect cuts that the Fed penciled in to happen.
As usual, the market front runs Fed expectations.
Another Way Powell Could Be Right
Powell has two chances to be right. The first is transitory happens and we all live happily forever more.
The second way is Trump’s tariffs and other economic policies crash the markets bringing asset price deflation in a big recession coupled with crashing interest rates.
Alternatively, we could have a huge bout of stagflation with Powell looking like a fool for reviving the word.
I discount the happy forever more scenario. But number two and the alternate are both possible.
This is why I haven’t answered repeat questions one where long-term yields will be at the end of the year.
Related Posts
March 27, 2025: Second Massive Wave of Imports Shows More Tariff Front Running
The advance import-export data for February is another doozie. Three charts.
March 27, 2025: US Debt Will Grow to a Staggering 156 Percent of GDP by 2055
If Congress extends the TCJA tax cuts with no offsetting savings, the deficits will surge.
March 28, 2025: GDPNow Nowcast Takes a Steep Dive Into Negative Territory, What Happened?
Another blast of imports and a poor spending report impacted the Nowcast.
Regarding the surge of inflation in the lead chart, please see Hot PCE Inflation Data and Weak Spending Sure to Give the Fed Headaches
There is no good news on inflation or spending in recent data.
If your base case is stagflation, then this post, including the above links makes a nice case.
I am not convinced of that outcome, however.
No one really knows what Trump will do or the ultimate impact of a huge wave of tariffs if he goes ahead.