Powell reiterates the theory of "transitory inflation," will the Fed make the same mistakes again?

The argument for inflation being temporary seems to be gaining traction. On Wednesday, the Federal Reserve, in a closely watched policy meeting, announced that it would keep its benchmark interest rate steady at 4.25%-4.5%, but indicated that it expects to cut rates later this year. Federal Reserve Chairman Jerome Powell said in a press conference following the rate decision that his “base case” was that inflation would rise and growth would slow this year, and any price increases from former President Donald Trump’s tariffs would be temporary. Powell emphasized that the Fed “really can’t predict” the ultimate impact of the tariffs, and that officials would have to wait and see. Still, the comments brought back memories of the central bank’s slow reaction to the inflation surge caused by the pandemic. At the time, the Fed believed inflation would be temporary, and officials often used that word to argue that the supply constraints driving prices higher would dissipate relatively quickly. By the end of 2021, it was clear they were wrong. Powell told Congress it might be “a good time to stop using the word ‘transitory’.” The Fed then raised rates aggressively in 2022 and 2023. Powell reflected on the experience in August 2024, explaining that “transitory transients were crowded onto the transitory ship, and most mainstream analysts and central bankers in developed economies were on board.” Later, “it became clear that high inflation was not transitory, and that strong policy responses were needed to keep inflation expectations well anchored.” Tariff impact Now, Fed officials are grappling with the uncertainty about how the tariffs imposed by Trump on American trading partners (both those already in place and those yet to come) will affect the economy and their policy decisions. Treasury Secretary Janet Yellen believes the Trump administration’s tariffs will cause a one-time price adjustment. Earlier this month, she said: “While I agree that we should not talk about the future policy of the Fed, I would hope that the failed transitory inflation team could get back together and think nothing is more transitory than tariffs.” When the Fed was considering the tariffs during Trump’s first term, Fed staffers believed it was appropriate for officials to ignore the inflation rise if Americans’ inflation expectations were contained and the inflation impact was temporary. Powell seems to still hold that view. “If the inflation shock were to dissipate on its own, then tightening policy would not be the right policy, and that remains true,” Powell said. “Because when you do it, you are actually intentionally lowering economic activity and employment. And you don’t want to do that unless you have to.”