You would think central bankers would show more humility after being wrong the last time. But they never cease to surprise come what may. Yesterday, Fed chair Powell brought back the term transitory to markets. This time in saying that the base case for tariffs inflation is that it would be “transitory”.
He did make sure to include some caveats in that the Fed “can’t really know” if the impact will be temporary. However, that is all drowned out by the noise of just one word. And when you bring that back after having been humbled the first time during the 2021-2022 inflation surge, it’s bound to echo more strongly.
I want to say that Powell might have underestimated the impact of using the word. But judging from all of this, it seems like that was his way of responding to markets. I guess Rohan did somehow answer to Gondor’s call for aid.
Besides that, the other key takeaway was that Powell reaffirmed the Fed is not in a hurry to change its current policy stance.
That is going to be the most important passage in the next few months in looking for any hints on when the next rate cut will come. If Powell starts to subtly change that tone or drop it completely, that will be the tell.
As for the dot plots yesterday, they were not too interesting. The median dots remained the same as in December, though more policymakers did see rates higher in 2025 than previously.
But unless we get a better idea on the impact of Trump’s tariffs, it’s still a waiting game. And in trying to soothe markets, Powell dug into the discard pile and pulled out the “transitory” card. I don’t think this was on the bingo card for many this year.
