Fedspeak Is Dead. Long Live Fedspeak.

Fed head Jerome Powell took a sharp break with Fed history this week, saying something that would have been unthinkable to his predecessors: “I think it’s probably a good time … to explain more clearly what we mean.” This was his stated reasoning for retiring the word “transitory” when describing inflation, a move we think the world is misinterpreting. Despite how many commentators couch it, nothing in Powell’s remarks suggested the Fed now thinks inflation is entrenched and set to last for years on end. Rather, Powell made it clear this particular 10-dollar word’s meaning is not self-evident to many observers, and it is time for policymakers to just come out and say what they mean without jargon and euphemisms. That, in our view, is the real news here.

Most commentary on Powell’s Senate testimony has taken his remarks on “transitory” out of context. Elsewhere in his appearance, he said the Fed will consider “tapering” its quantitative easing (QE) bond purchases faster than initially planned, citing a strong economy and higher inflation. He also acknowledged that prices have remained elevated for a skosh longer than the Fed initially forecast, due primarily to supply chain issues. So when he said of “transitory” that it was “time to retire that word,” pundits married that snippet to his other observations, implying “transitory” must be retired because it is no longer accurate.

Look at the full context of Powell’s linguistic musings, though, and we think it becomes obvious his message was different. They occurred during an exchange with Senator Pat Toomey, who asked whether inflation might outrun the Fed’s expectations. After tap dancing around the question with some observations about today’s inflation rate bringing average inflation over some undefined period in line with the Fed’s target, Powell said this: “It [average inflation at 2%] was not the case going into this episode—it had been many years since we had inflation at 2%. So, I think the word ‘transitory’ has different meanings to different people. To many, it carries a sense of ‘short-lived.’ We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation. I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”^[i]

Only a Fed head could rail against the central bank’s tendency to serve up word salads with … a giant word salad. But he did eventually get to a good point: If what you say isn’t clear to your audience, then it isn’t clear.^[ii] People think “transitory” is a synonym for “temporary,” but the meanings are different. Temporary literally means impermanent. Transitory implies impermanent, but it actually means something is just passing through. That actually fits the Fed’s view of today’s high inflation—their belief that a fast inflation rate is just passing through, and higher inflation won’t be a permanent or long-lasting feature of the economy. There is no set time window on how long a transient person stays in a given place without becoming a permanent resident. Workers can be on multiyear “temporary” contracts. If Powell and his Fed friends want to be more specific and clear, then yes, a new word seems necessary. Maybe they can call inflation a houseguest?

Being clear and direct is not traditional Fed behavior, making this a pretty radical change if Powell follows through and becomes Mr. Monosyllable. For decades, Fed heads have used their own language—dubbed Fedspeak—to say nothing while sounding like they are saying something of great import. Alan Greenspan, who was the master, once quipped: “Since I have become a central banker, I’ve learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”^[iii] To fend off those who tried to divine great meaning (and future policy decisions) from his speeches, he filled them with run-on sentences, passive voice, circumlocutions and SAT vocabulary words. Why say “currency swings” when you can say “the ongoing correction of global external imbalances”?^[iv] Why say “default risk” when you can say “the demagogic appeal of repudiating debts in the name of narrow nationalism and anti-capitalistic slogans was a major threat”?^[v] The alliteration isn’t quite in “nattering nabobs of negativism” territory, but it does have a certain ring.^[vi]

Fed heads since Greenspan have alluded to being more direct and transparent, then backed off once they realized clarity was a double-edged sword. Most notably, former Fed head (and now Treasury Secretary) Janet Yellen initially tried plain speaking, saying her first rate hike would come six months after QE ended. That deadline came and went, bringing accusations that the Fed was losing credibility, and Fedspeak returned. Squishy timetables, big words, passive voice.

So, what now? Old habits die hard. It won’t shock us if Powell and friends just pick new words and euphemisms and move on. Nor would it shock us if Powell’s flirtation with clarity had something to do with his pending confirmation hearing for a second term as Fed head—telling Senators you will be more clear is perhaps a good way to get Senators to vote for you. Either way, we wouldn’t make too much of it. This is all word theater, not a hint at future policy.