'Retire' The Word 'Transitory': Powell Inflation Testimony Shakes Stock Market

The SPDR S&P 500 ETF Trust SPY traded lower by 1.8% on Tuesday after Federal Reserve chair Jerome Powell changed his tune on the outlook for U.S. inflation.

What Happened? In testimony to the Senate, Powell said he will no longer be using the term “transitory” to describe the environment of elevated U.S. inflation.

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“The word transitory has different meanings for different people. To many it carries a sense of short-lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation,” Powell said. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”

Powell also said the Fed will be discussing a potential acceleration of its monthly asset purchase tapering. The Fed reduced its monthly purchases of U.S. Treasury bonds and mortgage-backed securities from $120 billion to $105 billion in November.

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner,” Powell said.

Why It’s Important: Last week, President Joe Biden announced he will be re-nominating Powell for a second term as Fed chair. Powell and the Fed face an extremely challenging economic environment heading into 2022. U.S. inflation levels have been at multi-decade highs for months, but the economy is still struggling with labor shortages and supply chain disruptions.

Meanwhile, the new omicron variant of COVID-19 has once again raised concerns about the potential ongoing economic impact of the pandemic. On Monday, Biden said there is no need for Americans to panic about the omicron variant and said U.S. lockdowns are off the table “for now.”

Benzinga’s Take: Federal Reserve tapering is removing a massive monthly stimulus to the U.S. economy, so it’s understandable why concerns over a more aggressive tapering would trigger weakness in stock prices. However, assuming the omicron variant is not significantly more deadly or vaccine resistant than previous COVID-19 variants, Powell’s commentary on the health of the U.S. economy is actually good news from a fundamental perspective.