Powell's shift to the hawkish camp

The Fed is being aggressively criticized by Summers and others for being too optimistic about addressing inflation, and for lagging in responding to inflation.

In other words, they are blamed for Chairman Powell stubbornly insisting that inflation was temporary.

However, Chairman Powell had no choice. At that time, some Democratic senators were dove-leaning, and if Powell did not advocate dove policies, his renomination might have been rejected. Details are omitted, but there were a variety of factors that delayed the decision on renomination.

Therefore, once Powell's renomination was secured, he immediately shifted to a hawkish stance.

In this process, former Fed Chair Janet Yellen, who was Secretary of the Treasury, also supported Powell’s claim that inflation was temporary, but more accurately she supported Powell’s renomination rather than Powell himself.

If Powell had not been renominated, the Fed chair would have changed every two years with each presidential term, something undesirable for the Fed. Secretary Yellen continues to have the Fed’s interests at heart.

Nevertheless, there was some basis for Powell’s temporary claim. There are three points.

However, all three points now indicate that inflation may rise further.

(1) Crude oil prices

The inflation metric targeted by the Fed is the PCE price index. This index is highly correlated with oil prices. After all, the United States is a country of cars and transportation. Energy prices have a large impact on prices.

Powell believed inflation was temporary because, in 2020, crude oil prices fell so low they briefly turned negative, and as a result, the year-over-year price in 2021 jumped tremendously. Therefore, he seemed to think that once the rate of increase in crude oil prices slowed, the overall price level would settle. Since around November, it has become clear that this pattern has not been occurring. That’s likely bad.

From here on, it’s a metric that is not typically discussed.