Jerome Powell, head of the US Federal Reserve, speaks during a press conference following a meeting of the Federal Open Market Committee (Washington, DC, September 26, 2018).
Andrew Harrer Bloomberg | Getty Images
It only took one word from Fed Chair Jerome Powell about inflation to send markets reeling, and the word was "transient."
Traders have speculated that the latest weaker inflation readings will worry the Federal Reserve so much that it would cut interest rates later this year. Powell beat that idea by explaining that the central bank still sees the weakness as a result of "transition factors" such as portfolio management services, lower clothing prices and air fares prices.
Fed's inflation target is 2% and the core PCE rate seen by the Fed fell to a surprising 1
"We suspect that transition factors may be at work," Powell said. Finally, inflation must return to the Fed's goal over time, and then be symmetrical around its goal. Powell commented on a press release, after the Fed's two-day meeting.
"If we saw that inflation was persistently underneath, it was something that the committee would be concerned about, and something we would consider when the policy was set," he said.
Powell said the Fed believes a number of issues have withheld inflation but it is likely that they are transient as the change in mobile phone rates that affected inflation several years ago. "We need to follow these things carefully to see if that is the case," he said.
The Treasury yields fell, the dollar strengthened and the shares sold according to Powell's comment, and even after describing some of the risk factors, the economy has a moderate impact.
"Transitory was today's word," said Michael Schumacher, executive director of Wells Fargo. "If you look at pricing on math futures by the end of 2019, it moved with about nine base points. The market looks much more sensible."
Before the Fed briefing, the math funds futures pricing were 25 basis pump of relief in December.
Schumacher said the market also responded to the fact that Powell stressed that the Fed is not moving in either direction at this time, but sees improvements in the world economy and less threat from risk factors, such as trade and Brexit.
"They are in the middle at this point, and are not sitting on either end of the teeter totter, that's what they had told people, but the market didn't believe it," he said.
Stocks were flat before the Fed Declaration and became negative when Powell started talking about inflation.
The interest rate on the 2-year government bond went to 2.30%. The 2-year-old correlates closely with expectations of the Fed policy, and it is low before the Fed is 2 p.m. the statement was 2.20%.
"The market was pricing at this rate cut. They want a rate cut and this was really Powell saying," sorry, but we're not. "You have gold down, the dollar rallying and Treasury's selling off," said Peter Boockvar, from Bleakley Advisory Group
On Tuesday, President Donald Trump criticized the Fed policy and said it held back in the US economy. He said the Fed should cut by 1 percentage point and launch a quantitative relief program, a political tool used in the financial crisis.