Powell drops the market: “The word ‘temporary’ to describe inflation is inappropriate”

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“I think it’s time to take the word ‘temporary’ out of use, and try to explain more clearly what we are talking about. The word ‘temporary’ has a different meaning to different people. Many think it speaks to the short term. We mean something else – that’s inflation. “It will not stay higher on a regular basis,” the Federal Reserve chairman said tonight in a speech to the U.S. Senate.

“An imbalance in supply and demand related to the epidemic has contributed to significant price increases. Problems in the supply chain have made it difficult for manufacturers to meet strong demand, especially for goods. Rising energy prices and rents are also pushing inflation upwards. “Long of 2%, with the price index for personal consumption expenses rising by 5% during the 12 months ended in October.”

“Most forecasters, including the Fed, continue to expect inflation to fall significantly over the next year as supply imbalances and demand subside.

According to Powell, the Corona variant, Omicron may threaten the US labor market and lead to higher inflation than the Bank’s forecasts: “The recent rise in Corona cases and the emergence of the Omicron variant pose negative risks to employment and economic activity and increased inflation uncertainty. “Greater concerns about the virus may reduce people’s willingness to work, which will slow down labor market progress and increase supply chain disruptions.”

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Will the Fed complete its bond purchases sooner than expected?
The Fed chairman also addressed the issue of reducing the bond purchases by the central bank, beyond $ 15 billion a month, which he recently announced, and said that at the next meeting the Fed will consider increasing the pace. “At this point, the economy is very strong and inflationary pressures are higher, so I think we should consider ending the decline in our property purchases – maybe a few months earlier,” Powell said. “I expect we will discuss this at our next meeting.”

Under the current schedule, bond purchases are expected to be completed around next June. If the commission chooses to accelerate, that could mean closing earlier in the spring, allowing the Fed to raise interest rates thereafter.

In fact, the Fed’s bond purchases “inflated the Fed’s balance sheet to a monstrous number of more than $ 8.7 trillion, while Powell said the purchases” supported economic activity “- others would say it was the most brilliant exercise the Fed performed and inflated the stock market beyond reasonable proportions According to Powell today, “the need for this has clearly diminished as the economy has continued to strengthen, as we have seen continued significant inflationary pressures, which is why we have announced a reduction, and this is why we are now saying we are going to discuss increasing pace at our next meeting.”

In response, the declines in Wall Street markets, which stood at less than 1%, soared and now the Nasdaq is down 1.9%, the Dow Jones is down 1.8%, and the S & P500 is down 1.8% (for the full review).

Diplomatic withdrawal from the Bank’s stated policy of calling for temporary inflation
In practice, this is the diplomatic language of the Fed chairman’s withdrawal from the Bank’s stated policy of calling for temporary inflation, after considerable criticism in the past year, including recently from the deputy chairman, Richard Claride, who said that inflation is rising at a much higher rate than desired. , And if this trend continues then it will indicate a “policy error”

One can also understand that the focus of the Federal Reserve has changed and now its goal is to try to slow down inflation, and no longer stop the disruptions in economic activity in the economy following the corona plague and the various variants.

As you may recall, last year Powell stated that the Fed is changing its approach to inflation in the US – so instead of aiming for a 2% inflation target, the bank will aim for “symmetrical inflation” which will average around 2%. The market did like this news and responded Increases, as it means he is not going to raise interest rates anytime soon (because over most of the last decade the actual inflation rate has been lower), but even this weapon in the Fed’s arsenal has exhausted itself.

According to Powell, the main theory of the modern economy is dead
Here at BizPortal, Dr. Avichai Snir and Shlomi from Mania explained that the decision of the American governor to abandon the inflation target in favor of “average inflation” is an admission of something that was taboo. It has been 12 years, since the beginning of the subprime crisis, that monetary economists have been arguing over the role of the Phillips curve in the modern economy. Powell’s announcement says the US Federal Reserve is willing to let economists continue to argue as much as they want. For him at least for now, she’s dead.

The Phillips curve describes the inverse relationship between the unemployment rate in the economy and inflation. According to the theory, when there is high unemployment companies in the economy need less ‘effort’ to attract workers and therefore should not raise wages too much, while when unemployment is low (i.e. everyone works) companies have to pay more to recruit good workers, wages go up and with it inflation.

The fact that in the eyes of the Governor of the Bank of America the Phillips curve is irrelevant is important, because for about 60 years, the Phillips curve has been the basis for everything we know about monetary policy. Any model that attempts to explain the role of central banks starts from the assumption that there is an inverse relationship between inflation and unemployment. As unemployment falls, inflation rises, and vice versa. Powell actually said – friends, leave this theory, it is not relevant at the moment.

Today Powell actually admits that the Fed’s attempts to reassure and claim that inflation is temporary – may not have been really accurate.


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