Transitory Was "Not Conceptually Wrong"- Jerome Powell
Inflation was transitory after all. What Powell said seemed innocent enough; but the evidence suggests it was a slow move towards him saying he was right all along. The market was wrong.
During Chairman Powell’s two days of Congressional testimony, nothing materially changed in his message about rate hikes or inflation. There had been strong talk of a 50bp hike in the week leading up to the testimony. But the Russian invasion of Ukraine and the subsequent oil supply disruption quickly killed that idea.
Rough Spots At the Hearing
The most tense moments in the hearing were when Powell took some grief for the absence of the usual section on monetary policy rules in the latest report. as JPM notes: “ Some of the questioning implied that Powell was sweeping an inconvenient truth under the rug”.
In their most recent economic commentary after the speech, JPMorgan noted that the need to pivot from easy to tight monetary policy had been unusually swift.
In some ways those [monetary policy] rules visually make the case that Powell has been trying to make over the last few months: the swing in economic fundamentals and thus the implied policy rates has been unprecedentedly rapid, going from negative to strongly positive in two or three quarters.
We take this to mean, that JPMorgan believes Powell was on the right path, but too slow to move.
Transitory Was Right Conceptually
What caught our ear was a subtle pivot that the Chairman was actually starting to renege on his transitory me culpa in recent months. What Powell said seemed innocent enough; but to us it was a slow move towards him saying he was right, and it was transitory after all.
In the clip below, Senator Richard Shelby asks Powell if the reason for their error in predicting transitory inflation was a byproduct of not having the data he should have, or the result of misjudging the data outright. His question was prefaced in light of noting so many private industry economists had gotten it right. Notice, neither person says the word transitory.
We were right conceptually…
Powell’s response was in short order:
They followed the text book rules
We were surprised by unprecedented supply chain issues
We were right in principle
Let’s look at those 3 points he made in the 2 minute clip.
The Textbook Said It Should Come and Go”
First off: Powell’s comment about following the text book is classic