MNI: Fed Edging Away From Message Inflation Is 'Transitory'

The Federal Reserve appears to be gradually moving away from its description of the biggest burst in inflation in three decades as "transitory" now that price increases have lasted longer than originally forecast and may persist well into next year, former Fed officials and staffers told MNI.

A communications shift could see the central bank put less emphasis on the word "transitory" in spoken remarks, though it might be too soon to remove it from the November FOMC statement in case this sends too hawkish a message and unsettles markets.

"They do need to pivot from something like transitory to something like short-term. This was not something that was going to be just two or three months," former Fed Governor Randall Kroszner said in an interview. "I think they've been quite adept at finding ways to gradually change the language, change the perception of what they are likely to do, without jarring the markets."

GRADUAL CHANGE

Since April, the Fed in its FOMC post-meeting statement has put the blame for rising prices largely on "transitory factors." But higher energy prices, persistently higher labor costs, and tighter supply-chain knots, despite the Biden administration's efforts, may continue to squeeze prices for longer, the ex-officials said.

In remarks during a Bank for International Settlements webinar last week, Chair Powell omitted the term "transitory," and some regional Fed leaders in recent weeks have criticized the use of the term. Atlanta Fed President Raphael Bostic put the word in a "swear jar" during an event this month.

Stephen Cecchetti, a former research director at the New York Fed, said sustained inflation pressures have made Fed communication more difficult. "The idea that something's temporary becomes harder and harder to swallow the longer it goes on," he said.

"You have to always think through whether what you say today is going to hem you in next year, or the year after that, or even the year after that - you've got to be looking that far ahead with your communication policy," he said. "What the Fed has to do is say that they're going to remain vigilant in fighting inflation and at some point their forecasts for inflation are going to show that they are looking at longer-term problems."

One key issue is that economists view one-time price changes that do not persist as temporary, even though the resulting increase in the cost of living is permanent.

SERVED ITS PURPOSE

Laurence Ball, former visiting scholar at the Fed Board and the Boston Fed, said 12-month inflation averages should fall considerably next July and August as upward blips from last summer drop out. While he acknowledged doubts over whether the current burst of inflation would prove fleeting, he cautioned against any radical communications shifts such as changes to the FOMC statement.

"It is an accurate, useful communication that headline inflation has been high for months but is likely to be short-lived because of these well-understood specific industry shocks which are not going to continue indefinitely," he said.

Joseph Wang, a former New York Fed staffer, told MNI the Fed has bought itself time to pivot away from the transitory language because its policy sequencing seeks to end QE tapering before the start of rate hikes.

"In that sense what they can do for the next few months is set in stone. It's a hard place for them but in terms of what to do it's actually really easy," he said.

The term transitory had served the central bank's purposes by giving officials breathing room while waiting to see how price action plays out, said Karen Dynan, a former top macroeconomic forecaster at the Fed Board and former Treasury Department chief economist.

But the term may have outlived its usefulness, she said: "Inflation is not going to come down as much as the median [September SEP] Fed forecast predicts and the Fed probably will move [the fed funds rate] faster than what the Dot Plot currently indicates."