The Federal Reserve provided a bit of a balm to Wall Street's pain this week. Market participants roiled by U.S. President Donald Trump's trade war got some relief after chair Jerome Powell called any effects of tariffs on inflation "transitory."
Powell stressed that the "hard data" on the economy was still showing a "solid" picture. He also said policymakers were not dismissing "soft data" such as inflation and consumer confidence surveys.
Latest data from the University of Michigan last week showed year-ahead inflation expectations in March jumping to their highest reading since November 2022. Moreover, long-run inflation expectations surged by the most since 1993.
"Financial conditions matter to us because you know, financial conditions are the main channel to the real economy through which our policy has its effect. So they're important. But what matters from a Fed standpoint for the macro economy, is material changes to overall financial conditions that are persistent. That last for a while. Long enough to actually affect economic activity. So that's what we're looking for," Fed chair Powell said on Wednesday.
"And I would just point you to the bigger picture again, you know, the real economy, the hard data, are still in reasonably good shape. It's the soft data, it's the surveys, that are showing, you know, significant concerns, downside risks, and those kind of things," he said.
"We don't dismiss that, we're watching it carefully, but you know, we don't want to get ahead of that. You know, we want to focus on the hard data, if it's -- if that's going to affect the hard data, we should know it very quickly and of course we'll understand that. But you don't see that yet," Powell added.
The Fed's updated dot plot showed lower GDP projections and higher core PCE inflation expectations, but no change in interest rate estimates.
"Median Fed dot still looks for two cuts this year, but the distribution skewed toward fewer cuts and uncertainty increased," JPMorgan's Michael Feroli said on Friday.
"In his press conference, Chair Powell resuscitated the dreaded 't' word. Mirroring the (monetary policy committee's) projections, Powell suggested the inflationary impact of tariffs would likely be transitory, a comment which raised a few eyebrows. In so reasoning, the Chair downplayed the message from short-run measures of inflation expectations, notably the University of Michigan survey, and instead pointed to the stability of longer-run measures," Feroli added.
Powell on Wednesday said policymakers look at the University of Michigan's long-run inflation expectation readings and "don't dismiss data that we don't like, we force ourselves to look at it."
"But it is an outlier compared to market-based and compared to other survey-based assessments of longer run inflation expectations. So we've got to keep that in mind, and again, I would just say, we look at all of them. And that one's kind of an outlier, but you know, nonetheless we take notice of it," the Fed chief added.
Meanwhile, the last time chair Powell had used the word "transitory" to describe inflation was in 2019, and it proved to be an incorrect assessment as prices had soared by 2021.
"The word — 'transitory' — is back at the Federal Reserve as Chair Powell characterizes the price effects of tariffs as a one-off," Mohamed El-Erian, chief economic advisor at Allianz, said on X (formerly Twitter) on Wednesday.
"I would have thought that, particularly after the big policy mistake of earlier this decade and given all the current uncertainties, some Fed officials would show greater humility. It’s simply too early to say with any regress of confidence that the inflationary effects will be transitory, especially given that companies and households still have fresh in their minds the recent history of high unanticipated inflation," he added.
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