Examples of the change
At Jackson Hole, Fed Chair Jerome Powell confidently outlined why high prices would recede or flatten out. That was followed by a benign CPI report, giving Team Transitory a win in the data.
Since then, supply chain issues have gotten worse, energy prices have exploded and now bond yields are rapidly climbing.
In a month, that feeling of confidence has shifted to subtle expressions of angst. To be clear, they're small shifts but it's a trend worth watching very carefully.
Powell:
The confidence around transitory inflation is gone, and has many have pointed out, he didn't even use the word at the latest FOMC.
Today he said their "current view" is that the spike in inflation won't lead to ongoing higher inflation. Along the same lines, he conceded that it's "very difficult to say how long higher inflation will last" but that the "expect to get through it".
The bravado is gone.
Also missing is the 'two sides' rhetoric. Acknowledgements about low inflation -- which is the battle they've been losing for a decade -- are absent. . If supply shocks were to be resolved more quickly than anticipated and things like used car prices fall, there's an unmentioned risk of an undershoot.
Bailey:
Earlier this week, Bailey made a speech where he dove deeper into inflation questions and asked if this is the beginning of a structural change in the economy where people ask for more pay.
The most commonly talked about mechanism goes from higher inflation expectations, to companies feeling able to raise prices and employees asking for higher wages, to wage pressure and more persistent inflation. In this way, what start out as relative changes in price levels for some goods and services can become generalised and turn into persistent inflation. I take this risk very seriously
Today he added that they're keeping a close watch on inflation expectations.
The Fed's Williams:
Williams is a good barometer of the center of the Fed. In his most-recent comments he highlighted temporary forces behind the rise in inflation but added he's not seeing worrying signs of inflation yet "but it's something to watch closely."
Timing:
Another interesting shift is around timing. We've all seen central bankers push out the timelines for when transitory inflation will fade but it's also important to pin down the new timelines they're giving and to monitor those. In comments today, Kuroda said that "in the next few months" the supply chain pressure will be somewhat reduced while Lagarde said bottlenecks should fade in the first half of next year. Powell said inflation will run well-above target for the "coming months" before it eases and that supply chain issues "are still not getting better" and will continue into next year.
