In recent testimony before congress, Treasury Secretary Yellen averred that perhaps she and Federal Reserve Chairman Powell were a little hasty in their use of the word “transitory” to characterize the current bout of inflation. Shortly thereafter, an exclamation point was added to this admission when May Consumer Price Index data was released, showing a year-over-year rise of 8.6% (WSJ.com, 6/10/22), up from 8.3% the month before.
Never mind that much of the rise was concentrated in energy (+34%) and food (+11.9%); the number set off alarms across Wall Street and led to a weekly drop of -5.1% in the S&P 500,
-4.6% in the Dow, and -5.6% for the Nasdaq (FactSet, 6/10/22). Yellen rightly pointed out it would have been hard to anticipate Russia’s invasion of Ukraine and the impact that would have on the price of oil and wheat, as well as the ongoing supply chain problems that resulted from a global pandemic. However, inflation had already started to appear in the summer of 2021 when the term “transitory” was first used, at least 7 months before the Ukraine invasion. So perhaps the “mea culpa” was at least partially earned.
Nonetheless, that was then, and this is now. On Wednesday, Powell announced a 75 basis point rise (WSJ.com, 6/15/22) in the Fed funds rate, the largest increase since 1994 and above the previously telegraphed 50 bps. As has been the case before, equity markets at first rallied only to sell off the following day, reflecting the ongoing debate over whether or not central bank tightening will result in a recession.
Prognosticators will prognosticate
Through it all one thing has been certain: market prognosticators have continued to prognosticate. They have been tireless, but they have also often been wrong. At present, one school of thought has inflation spinning out of control and interest rates heading for double digits. A second sees it as in a phase that might be described as “transitory 2.0.” For the latter, inflation will recede as what are believed to be the underlying causes become less acute.
Of course, no one knows for sure. Certainly, the war in Ukraine won’t last forever, but it may go on longer than anyone may have previously believed. Supply chains issues will eventually be resolved. We appear to be learning to live with Covid. But in the meantime, have inflation expectations become embedded in the economy? The latest consumer sentiment survey from the University of Michigan (Bloomberg.com, 6/10/22) suggests the answer is “maybe,” as expectations for inflation over the next 12 months rose slightly, from 5.3% in May to 5.4% in June. At the same time, consumer confidence fell more than eight points, from 58.4 to 50.2. Attitudes do appear to be shifting.
In his press conference, Chairman Powell pointedly said, “We’re not trying to induce a recession now. Let’s be clear about that.”
Maybe not, but the central bank has nonetheless managed to ratchet up market anxiety along with the Fed funds rate and that is likely to persist until the path of the economy and future inflation becomes clearer.
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