Federal Reserve Chairman Jerome Powell, who repeatedly downplayed the risk of inflation earlier in 2021, now says he is retiring the word “transitory” to describe the inflationary outlook and believes that the omicron variant could threaten the U.S. economy.
Speaking to Congress on Tuesday, Nov. 30, Powell acknowledged the growing risk of more persistent inflation and said Fed policymakers will stop describing the rapid pace of price increases as transitory.
The central bank had been using the T-word since the beginning of 2021, when it warned that supply chain bottlenecks and year-over-year comparisons and would lead to skyrocketing inflation readings, Yahoo Finance reported.
Hopes that high inflation readings would recede toward the end 2021 evaporated in October, when prices rose 6.2 percent year-over-year, the fastest annual increase on the Consumer Price Index since 1990.
“We tend to use (the word “transitory”) to mean that it won’t leave a permanent mark in the form of higher inflation,” Powell told Congress on Tuesday. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”
What he means, Powell said, is that although the “risk of higher inflation has increased,” he expects inflation to be closer to the central bank’s 2-percent target during 2022.
To get a handle on inflation, the Fed may try to pull back on its asset purchase program faster than planned. It kicked off the process in November. The central bank hoped to end open-market purchases of mortgage-backed securities and U.S. Treasuries by the middle of 2022, but Powell said Tuesday he could accelerate that timeline, Yahoo reported.
Ahead of his comments to Senate lawmakers on Tuesday, Powell warned that the emergence of the omicron variant could threaten employment and economic activity. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions,” Powell said in a statement released Monday by the central bank.
He also said it now appears that “factors pushing inflation upward will linger well into next year.”
Powel’s comments came just days after investors dumped U.S. stocks and flocked to safer havens such as Treasury bonds over fears of the new omicron variant and future Fed interest rate hikes. The Dow Jones Industrial Average was down 900 points (2.5 percent) on Friday — its worst session of year, CNBC reported.
“Generally, the higher prices we’re seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy,” Powell said during a hearing with the U.S. Senate Banking Committee. “But it’s also the case that price increases have spread much more broadly … and I think the risk of higher inflation has increased.”
His comments raised questions on Twitter.
“Was Powell prepared for a stronger strain before he made his case for a sooner taper? If not, why not wait, unless he really thinks higher rates won’t hurt this economy no matter what,” tweeted Jim Cramer, who hosts “Mad Money” on CNBC and runs the CNBC Investing Club.
“Powell can’t ease using an Omicron downturn because COVID causes supply chain disruption and greater inflation. He must tighten into a downturn,” Tom @stock_driver_ responded.
Sven Henrich, the founder of Northman Trader, compared Powell’s downplaying of inflation risks to
former Fed Chairman Ben Bernanke’s comments in 2007 during the subprime mortgage crisis.
“March Powell: Powell downplays inflation risks
June Powell: Powell plays down inflation
November Powell: ‘The threat of persistently high inflation has grown.’ 2007 Bernanke: Subprime is contained & not a threat to the economy. How do these guys keep their jobs?” Henrich tweeted.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?