Powell’s Fed Faces a New Question About Inflation
The central bank needs to decide whether rising consumer prices from tariffs is just another transitory phenomenon.
Fed Chairman Jerome Powell faces a tough question on inflation.
Photographer: Chip Somodevilla/Getty Images
Under the leadership of former chair Janet Yellen, the Federal Reserve successfully identified 2017’s slowdown in inflation as transitory. Now with tariffs threatening to accelerate inflation, the Fed faces the opposite question: Is faster inflation just another transitory phenomenon? If Yellen’s successor, Jerome Powell, can’t repeat her ability to distinguish between persistent and temporary inflationary forces, then expect the ride to get much bumpier, ending with either a recession or high inflation — or a combination of both.
When inflation rates fell in 2017, the Fed adopted the view that the decline was transitory due in no small part to a drop in mobile-phone service costs. This position allowed central bankers to keep pushing up their target for the federal funds rate throughout the year. That bet paid off, as inflation rates rose as expected and hence the Fed did not overtighten. It was a good call on Yellen’s part.