Inflation: “How does anyone know it will be transitory?” - it wasn’t.

It wasn’t, it turns out.

And listening to St. Louis Fed President James Bullard speak yesterday provided evidence in its clearest form that this a genuine monetary tightening phase, notwithstanding significant risk to markets and economies if the Ukraine crisis escalates. Bullard is an influential voice within the Fed, so it’s remarkable we can hear his unvarnished words on how he sees the situation, and how he speaks of ‘persuading my colleagues’ to move early and fast. By any standards that is an extraordinary change in the Fed’s language from 6-9 months ago.

However, it’s worth reflecting on his recommended action for a speedy, front-end loaded rise in rates:

“I do think we need to front-load more of our planned removal of accommodation than we would have previously. We’ve been surprised to the upside on inflation. This is a lot of inflation.”

There is a plausible scenario that wouldn’t be the worst one imaginable, where ‘something’ happens in Ukraine which could slow growth through higher energy prices and general uncertainty; the post pandemic disruptions and bottlenecks ease; more people trickle back to work which eases wage cost inflation; and a short sharp tightening cycle gets most of the work out of the way. At some point the Fed deliberations would become more balanced between the risk of inflation and the risk to the wider financial system.

Considering the above menu of concerns - conflict in Ukraine, potentially accelerating inflation, essentially ‘baked in’ tightening for goodness knows how long, equity markets are still hanging on (after a fashion), as they have done through so many crisis points in the last decade or so. The key question is will this time finally be different?