The way Federal Reserve chair Jerome Powell is talking about inflation seems to be evolving

The way Fed chair Jerome Powell is talking about inflation seems to be evolving.

Why it matters: The Fed has been employing a very stimulative monetary policy, which is helping boost job growth. But inflation has been running above its target.

Powell and his colleagues have argued for months that the forces currently boosting inflation have been “transitory.”

Yes, but: As inflation rates rise by more than expected and for longer than expected, repeated references to “transitory” could hurt the Fed’s credibility.

Even Powell himself on Thursday told the Senate Banking Committee that: “I think we’re experiencing a big uptick in inflation. Bigger than many expected. Bigger than certainly, I expected.”

The intrigue: Powell’s most recent written statement referencing inflation made no reference to “transitory.” He also never used the word during his lengthy Q&A with committee members.

The word “temporary” has come up, though. “The problem with ‘transitory’ is that it suggested a very short period of elevated inflation,” SGH Macro Advisors economist Tim Duy wrote in a note to clients. “‘Temporary’ suggests the period of elevated inflation may be on the longer side.”

The big picture: Semantics aside, Duy’s bigger point is that the Fed is communicating that it’s willing to tolerate inflation as long as unemployment remains high.

“Unless the Fed wants to revise the employment goal, it really has little choice but to lengthen the amount of time inflation can remain elevated without a policy response,” Duy wrote.

Threat level: None of this is to say the Fed is turning a blind eye to inflation. Quite the opposite.

“We’re trying to understand whether it’s something that will pass through fairly quickly, or whether in fact, we need to act,” Powell said of surprising inflation data.Bespoke Investment Group macro strategist George Pearkes tells Axios it’s significant that Powell is essentially saying “we’re trying to figure that out.””[If] they do decide ‘we need to tamp down inflation’ that’s going to be a huge pivot and means we’ll get [rate] hikes in 2022 for sure, with a taper starting in September and running much faster than it otherwise would.”

The bottom line: The Fed is clearly willing to tolerate a lot of inflation if it means getting employment up. But there is a limit and not even the Fed seems to know where that is.

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