Senior economist Mohamed El-Erian has criticized Federal Reserve Chair Jerome Powell’s use of the word “transitory” to describe the potential inflationary impact of tariffs.
What Happened: The Federal Reserve held rates steady in the range of 4.25%-4.5% on Wednesday. Despite maintaining their median forecast of two rate cuts for the year, the Fed’s ‘dot plot’ projections revealed a subtle shift toward one cut, though not quite definitively.
Powell revived the term ‘transitory’ when discussing inflation. Additionally, the Fed announced a slowdown in their balance sheet reduction, decreasing quantitative tightening from $25 billion to $5 billion starting in April. However, he admitted it is "very challenging" to isolate tariff-driven inflation from broader price pressures.
El-Erian, the chief economic advisor at Allianz and former CEO and CIO of PIMCO expressed disappointment in the Fed’s language following its press conference on Wednesday.
He highlighted the Fed’s previous use of “transitory” to describe inflation in the early 2020s, a prediction that proved to be significantly wrong. This previous misjudgment led to the Fed being behind the curve on raising interest rates to combat inflation.
“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,” said El-Erian.
Why It Matters: As tariffs imposed by President Donald Trump increased the risk of inflation in the economy, El-Erian argued that it was too early to say with any degree of confidence that the inflationary effects of tariffs would be transitory.
He also emphasized that businesses and consumers still remember the recent period of “high unanticipated inflation,” which could influence their expectations and behavior, potentially leading to persistent inflation.
The University of Michigan Consumer Sentiment Index pointed to a significant surge in inflation expectations, fueled by concerns over impending tariffs. However, Powell dismissed it, characterizing them as an ‘outlier’ when compared to other indicators of long-term inflation expectations.
Price Action: The use of the term “transitory” pushed the stocks higher on Wednesday, while Powell said policymakers can "wait for clarity" before making moves.
The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, rose on Wednesday. The SPY advanced 1.09% to $567.13, and the QQQ also jumped 1.34% to $480.89, according to Benzinga Pro data.
On Thursday, the future of Dow Jones rose by 0.30%, whereas the S&P 500 and Nasdaq 100 advanced by 0.46% and 0.63% respectively.
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