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Mohamed A. El-Erian

Powell's 'Transitory' Retreat Is Just the Beginning

The Fed chair finally retired a phrase that had become increasingly meaningless. Now he has to manage the communication and policy challenges of the late wake-up call on inflation.

It was all so avoidable.

It was all so avoidable.

Photographer: Al Drago/Bloomberg

By retiring the word “transitory,” Federal Reserve Chair Jerome Powell did more than finally correct a gross mischaracterization of inflation that he was wedded to for way too long. He also put the spotlight on inflation as a major risk to the economy and financial markets — not because the prospects for further price increases are inherently problematic (they aren't) but because the Fed’s communication process and policy responses have been lagging realities. The catch-up process – and a rapid one is required given the delays so far – could destabilize markets and the economy. It didn’t have to be this way.

For months, Powell asserted that inflation was transitory. Rather than revisit in a timely basis his assertion in the face of ample evidence to the contrary, he adopted an ever-more elastic concept of the word that favored longer and arbitrary time periods at the expense of economic analytical rigor. That ensured that the Fed continued with massive monthly purchases of market securities at a time when the economy was doing just fine, the housing market was red hot, and the liquidity-fueled “everything rally” in financial assets was showing growing signs of excessive risk-taking.