MV Weekly Market Flash: The...
At Wednesday afternoon’s press conference following the two-day conclave of the Federal Open Market Committee (FOMC), Fed chair Powell repeatedly invoked two words. Those words were: uncertainty, and transitory. Uncertainty, as it pertains to the inability to make informed decisions about anything when variables like tariff policy change on a near-daily basis. Transitory, as in the likely trajectory of higher inflation resulting from those tariffs. If we could try to distill this all into one statement it might look something like this: We still don’t understand the actual timing or magnitude of the proposed tariffs well enough to make detailed forecasts about their impact – but in principle, the inflationary impact of any such tariffs should be a one-off, short-term phenomenon that will increase prices in the near term but not have long-lasting effects thereafter.
2021 Flashbacks
Powell’s specific use of the word “transitory” awakened the collective muscle memory of the assembled journalists who, like survivors of a bad acid trip, experienced a sudden flashback to 2021. That was the year inflation kicked in from the twin stimulants of pandemic-era fiscal stimulus on the demand side and manufacturing and logistics bottlenecks on the supply side. At the end of 2020 the Consumer Price Index stood at 1.3 percent (year-on-year growth); one year later it was at 7.2 percent on its way to a peak of 9.0 percent by June 2022. Throughout most of 2021 the Fed insisted that higher inflation would be a transitory shock, a brief response to those one-off demand-side and supply-side factors. It was no such thing, of course. Four years later, inflation remains stubbornly above the Fed’s two percent target. Even if the additional inflation created by higher tariffs is transitory – according to the FOMC’s own economic projections released on Wednesday – that two percent target is unlikely to be reached before 2027.
The Uncertainty Is the Problem
The stock market’s hot take from the Wednesday afternoon press conference leaned dovish, meaning more attention paid to “transitory” and less to “uncertainty.” But, as is often the case when investors sleep on it and then reconsider, sentiment in the days since seems to have pivoted back to uncertainty. Observers of corporate earnings reports are hearing the word come up more and more on the quarterly analyst calls. FedEx, a bellwether proxy for general economic sentiment, noted a “very challenging” macro environment and lowered its forward revenue and earnings guidance on – you guessed it – uncertainty during its management call after the market close on Thursday (FedEx stock is down more than 10 percent since this morning’s opening bell as we write this).
It is important to note, as Powell himself did on Wednesday, that the uncertainty is not due to any organic changes in the underlying economy. Yes, consumer spending would probably be slowing somewhat anyway, from the fast pace of recent years but, generally speaking, the US economy started the year in strong shape and is still, based on most current variables, healthy. No, the uncertainty is the product of human hands, and those same hands could choose to take away the uncertainty tomorrow, if they were to so choose (we are of course under no illusion that they will). If you take away the tariffs, you take away the uncertainty and also the resulting threat of higher inflation, transitory or otherwise. In which case Powell could spend his next press conference on other more salutary topics, without the need to invoke on repeat loop those two words.