MNI:Fed To ​Replace ​Transitory With Conditional Price Outlook

The Federal Reserve next week will likely remove the word "transitory" from its post-meeting statement in describing the current bout of historically high inflation in favor of more conditional language, but will largely retain the underlying message that prices are expected to fall over time, former Fed staffers told MNI.

The evolution in the Fed's communications will also be accompanied by updated economic forecasts showing higher prices that will only gradually fall back to target in 2023 rather than in 2022, the ex-officials said.

"They could simply substitute 'expected to eventually recede' for 'transitory,'" former Fed Board research director David Wilcox suggested. "The 'eventually' stretches out the time period and leaves some ambiguity with regard to whether those inflation factors will disappear altogether."

"Some ambiguity on that front would be constructive because it’s becoming less obvious that those inflationary pressures are going to disappear altogether," he added.

SYNONYM

The FOMC's reliance on "transitory" to describe rising prices over the course of 2021 has increasingly provided fuel for critics of the Fed.

Chair Jay Powell announced to lawmakers last week that it is time to retire the term, but that doesn't mean the Fed will declare inflation persistent, ex-staffers said. Rather, officials will aim to retain the meaning of transitory while conceding that this spell of elevated inflation is more protracted than they previously imagined.

The new language "will reflect that something is temporary and lasting longer but not permanent" while conveying the central bank's nimble stance, prepared to adjust for risks both to the upside and to the downside, said Gerald Cohen, a former New York Fed economist.

"They still believe that inflationary forces in the last few months are not going to leave a permanent imprint on inflation," said Daniel Sichel, who spent more than 20 years at the Fed Board of Governors. "They'd find another way of conveying the notion that the high inflation is not likely to persist for a super long time, but they're not going to want to use a word like transitory that suggests that it's on the verge of dissipating."

LINGER INTO NEXT YEAR

Powell told lawmakers last week that factors pushing inflation higher are likely to "linger well into next year," a possible hint of the new statement language, and added that labor market "slack is diminishing." Fed economists have told MNI they see robust U.S. growth next year as the base case despite the Omicron variant and that the Fed must be ready to respond to the threat of more persistent inflation. (See: MNI INTERVIEW: Fed Bracing For Risk of Persistent Inflation)

"I wouldn't be surprised if their feelings were inflation is going to go down next year or the year after and it's still transitory but we're getting beat up about this so let's just change it," said Steven Kamin, a former director of the division of international finance at the Fed Board.

The statement "will indicate that inflation is likely to go down in the next few years." he said. "This is a semantic discussion."