The Federal Reserve is facing a “can’t win” situation as chair Jerome Powell prepares his post-meeting statement for tomorrow.
If Powell indicates that the Fed is even a bit more worried about inflation, that the central bank is thinking that the recent 5% year over year rise in prices isn’t quite as temporary as it has been saying for months now, he risks feeding inflation worries in the financial markets. And of adding to speculation that the Fed will be forced to move sooner rather than later to reduce its monthly $120 billion in bond buying and to think about raising interest rates in, maybe, 2022 rather than 2023 or 2024.
If, on the other hand, Powell says nothing different and sticks to the Fed’s rhetorical stance on inflation, he and the central bank will add to fears that the Fed is behind the curve on inflation and risks losing control of prices.
“I think the Fed has got a problem on its hands because clearly inflation has gone well beyond what Richard Clarida and other Fed members said about a year ago,” Robert Dye, Comerica Bank Chief Economist, told Yahoo Finance. “They said they might tolerate inflation in the 2, 2.5% range. And we got the CPI [consumer price index] print at 5% year-over-year … And I think the Fed has got a lot of pressure on it to define or clarify or say something other than inflation is transitory, because inflation has been here for a while.”
If you listen with any attention to the words of money managers, bankers and CEOs, you can hear the rising skepticism that inflation is “temporary.” For example, Barbara Ann Bernard, founder of Wincrest Capital, told Bloomberg today that “The idea that inflation is transitory is nonsense.”
At the moment, I’d say, the consensus still believes in the Fed’s “temporary” call. Which, of course, raises the possibility of a market slip if that consensus erodes significantly.
One thing especially worth watching tomorrow the Dot Plot presentation of view of Fed officials on the course of interest rates and inflation. Look to see if the Dot Plot undercuts Powell’s “it’s all temporary” rhetoric.