Powell Flirts describes inflation in a Risky Manner

It came from Fed Chair Jerome Powell, who told reporters Wednesday that his “base case” is rising inflation because President Trump’s tariffs will be “transitory” — bringing back memories of how central bank leaders discussed inflation during the early stages of the COVID-19 epidemic.

Because Fed officials expected pandemic-era inflation to be temporary, they concluded that there was no necessity to hike interest rates rapidly – an assumption that proved incorrect when inflation reached a four-decade high in 2022. The Fed finally launched the most aggressive drive to reduce inflation since the 1970s. Powell’s admission this week raised doubts about if the central bank will make the same error again.

“I would have thought that, particularly after the big policy mistake earlier this decade and given all of the current uncertainties; some Fed officials would show greater humility,” Mohamed El-Erian, president of Queens’ College and senior economic adviser at Allianz, remarked on social media. “It’s just too soon to say with any regress of assurance that inflationary impacts will be transitory, particularly given that companies and households still have the recent record of high unanticipated inflation in their heads.”

To be fair, Powell qualified his comments. When asked during a news conference following the Fed’s interest rate meeting if he believes the impact of tariffs on inflation is temporary, Powell answered, “I think that’s kind of the base case. But, as I already stated, we cannot know that. We’ll have to see how things turn out.”

Other Fed observers were more sympathetic, pointing out that Powell’s overall comments on the subject demonstrated some humility regarding past missteps. “I agree the word transitory is probably not ideal given they used it last time,” 22V Research president Dennis DeBusschere told Yahoo Finance. However, Powell also said that Fed officials “weren’t sure what would happen.” According to DeBusschere, the contemporary US economy has never faced such an aggressive slate of tariffs; therefore, claiming that inflation may be temporary due to the tariffs “seems like a fair way to think about it.”

‘The unsuccessful team is temporary’

Powell does have a Trump administration buddy in the temporary base-case scenario: Scott Besent. In a speech earlier this month, the US Treasury secretary asked the Fed to consider potential tariff-related price increases in that light – while also criticizing the Fed’s handling of inflation during the epidemic. “I would hope that the failed ‘team transitory’ could get back together and think that nothing is more transitory than tariffs,” Bessent remarked at an Economic Club of New York meeting on March 6.