Federal Reserve Chairman Jerome Powell holds a press conference following a two day Federal Open Market Committee policy meeting in Washington, January 30, 2019.
Leah Millis | Reuters
It only took one word from Fed Chairman Jerome Powell on inflation to send the markets reeling, and that word was 'transitory.'
Traders have been speculating that the weaker inflation readings would concern the Fed so much that it would cut interest rates later this year. Powell knocked that idea, by explaining that the Federal Reserve still sees the weakness as the result of 'transitory' factors, such as portfolio management services, lower apparel prices and airfares.
The Fed's target on inflation is 2%, and the core PCE rate watched by the Fed fell to a surprising 1.6% in the first quarter.
"We suspect transitory factors may be at work," he said, adding inflation should return to the Fed's objective over time, and then be symmetric around its objective.
"If we did see inflation running persistently below, that is something the committee would be concerned about and something we would take into account when setting policy," he said.
Powell said the Fed believes a number of issues were holding back inflation but it's likely they are transitory like the change in cell phone rates that impacted inflation several years ago. "We're going to be watching these things carefully to see if that's the case," he said.
Treasury yields fell, the dollar strengthened and stocks sold off after Powell's comment, and also after he described some of the risk factors impacting the economy as moderating.
"The market was pricing in this rate cut. They want a rate cut and this was basically Powell saying, 'sorry but we're not.' You have gold down, the dollar rallying and Treasurys selling off," said peter Boockvar, of Bleakley Advisory Group
On Tuesday, President Donald Trump criticized Fed policy, saying it was holding back the U.S. economy. He said the Fed should cut by one percentage point and start up quantitative easing.
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