A fraught word resurfaced in the Federal Reserve’s lexicon again this week: “transitory.”
It came from Fed Chair Jerome Powell, who told reporters Wednesday his “base case” is that higher inflation stemming from President Trump’s tariffs will be “transitory” — reviving memories of how central bank policymakers talked about inflation during the early stages of the COVID-19 pandemic.
Because Fed officials expected pandemic-era inflation to be transitory, they argued there was no reason to raise rates aggressively — an expectation that turned out to be misguided as inflation rose to a four-decade high in 2022. The Fed eventually mounted the most aggressive campaign to bring inflation down since the 1970s.
The new admission from Powell this week sparked questions about whether the central bank will make the same mistake again.
Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments
“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,” Mohamed El-Erian, president of Queens’ College and chief economic adviser at Allianz, said on social media.
“It’s simply too early to say with any regress of confidence that the inflationary effects will be transitory, especially given that companies and households still have fresh in their minds the recent history of high unanticipated inflation.”
Federal Reserve Chair Jerome Powell speaks during a news conference Wednesday in Washington. (AP Photo/Jacquelyn Martin) ·ASSOCIATED PRESS
To be fair, Powell did qualify his statement. When asked during a press conference following the Fed’s interest rate meeting whether he views the impact of tariffs on inflation as transitory, Powell said, “I think that’s kind of the base case. But as I said, we really can’t know that. We’re going to have to see how things actually work out.”
Other Fed watchers were more sympathetic, noting that Powell’s overall commentary on the topic did, in fact, show some humility about past mistakes.
“I agree the word transitory is probably not ideal given they used it last time,” 22V Research president Dennis DeBusschere told Yahoo Finance, but Powell also made it quite clear that Fed officials “weren’t sure what was going to happen.”
The modern US economy, DeBusschere said, has not been through such an aggressive slate of tariffs before, and therefore stating that inflation could be transitory because of the tariffs “seems like a fair way to think about it.”
Powell does have a Trump administration ally in the transitory base-case view: Scott Bessent. In a speech earlier this month, the US Treasury secretary urged the Fed to look at any tariff-related price hikes that way — while also digging the Fed for its handling of inflation during the pandemic.
“I would hope that the failed ‘team transitory’ could get back together and think that nothing is more transitory than tariffs,” Bessent said at the Economic Club of New York on March 6.
US Treasury Secretary Scott Bessent speaks at an Economic Club of New York event on March 6. (Reuters/Jeenah Moon) ·REUTERS / Reuters
On Wednesday, Powell did acknowledge the Fed’s past “transitory” faux pas, noting that “we’re well aware of what happened, obviously, with the pandemic inflation. In real time, as we know, it’s hard to make that judgment.”
He also pointed out that the last time the US had tariffs imposed, during Trump’s first term last decade, the effects did indeed prove to be temporary.
Back then, he said, “the inflation was transitory.”
Powell noted the Fed has to look at the present environment as a “different situation,” underscoring that the central bank hasn’t gotten back to its 2% inflation goal and consumers aren’t in a position to swallow higher prices, as businesses intend to pass on higher prices from tariffs.
Wilmington Trust chief economist Luke Tilley said he is encouraged that the Fed is talking about tariffs as being transitory in terms of inflation.
“They are a one-time increase in the price level of imported goods,” Tilley said.
Tilley, however, believes the tariffs could ultimately hurt growth. “Once fully implemented, they amount to a significant tax hike and more likely to weaken consumer spending on all other goods and services.”
Read more: The latest news and updates on Trump’s tariffs
Matt Luzzetti, chief US economist for Deutsche Bank Securities, noted that even though the central bank textbook suggests the Fed should look through one-time price level shocks such as those driven by tariffs, the reality is more complicated for at least two reasons.
The first, Luzzetti said, is it will be impossible to identify inflation driven by tariffs versus organic price pressures in real time.
If inflation rates for auto repairs and car insurance rise in the coming months, he asked, is that because of ripple effects from duties on steel and aluminum or autos? Or would that represent something more fundamental?
The second reason, he said, is that inflation expectations are not clearly firmly anchored. Most other measures of inflation expectations show heightened uncertainty — something Luzzetti said could be a precursor to higher expectations if inflation stays elevated.
“In short, it is too early to brush aside elevated inflation this year as transitory,” Luzzetti said.
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