The Fed will back off using the word transitory to describe inflation

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The Fed will back off using the word transitory to describe inflation

The economic steward of the nation said it would back off of using the word transitory to describe the rapid pace of price increases, as Federal Reserve policymakers acknowledge the increasing risk of more persistent inflation.

The word transitory tends to mean that it won't leave a permanent mark in the form of higher inflation, Fed Chairman Jerome Powell told Congress on Tuesday. I think it is a good time to retire that word and try to explain more clearly what we mean. Since the beginning of the year, the central bank had been using the T-word when it was warned by Fed officials that nuances in year-over-year comparisons and supply chain bottlenecks would lead to eye-popping inflation readings.

The hope was that those high readings would fade in the later part of 2021. In October, prices rose by 6.2% year-over-year, the fastest annual rise seen in the Consumer Price Index since 1990.

Powell acknowledged that the risk of higher inflation has increased, but he said his baseline expectation is for inflation to fall closer to the central bank's 2% target over the course of 2022.

The preferred measure of inflation by the Fed is the Personal Consumption Expenditures Index, which rose by 5% on a year-over-year basis in October.

Other Fed officials have backed off of using the word transitory. On November 23, San Francisco Fed President Mary Daly told Yahoo Finance that the word was intended to link higher inflation to disruptions specific to COVID - 19.

Daly said that the first principle of effective communication is that if people aren't getting it, don't speak more loudly and emphatically.

The Fed is trying to get ahead of inflation by reducing its asset purchase program, a process it kicked off this month. The central bank hoped to end its open market purchases of mortgage-backed securities and U.S. Treasuries by the middle of next year, but Powell opened the door to accelerating that timeline on Tuesday.

We now look at an economy that is very strong and inflationary pressures that are very high, and that means it's appropriate for us to talk about whether it would be appropriate to wrap up our purchases a few months early, Powell said.

The Fed's next policy-setting meeting is scheduled for December 14 and 15.

Brian Cheung is a reporter covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter at bcheungz.