Transitory

“As I’ve mentioned, it can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us, if it’s transitory."

~Powell, yesterday

So that I can procrastinate on the things I’m meant to do, let’s have a quick discussion about the term, “transitory”.

Linguistically

"Transitory" derives from the Latin transitorius, meaning "passing through" or "temporary." It describes something impermanent, emphasising a state of transition rather than a specific duration. For example, "The transitory nature of the storm calmed their fears" suggests it’s passing through, not necessarily that it lasted only briefly.

In contrast, "short-lived" explicitly denotes brevity. Derived from "short" and "lived," it refers to something that doesn’t endure long. For instance, "The short-lived trend faded in weeks" directly highlights its limited lifespan.

Thus, while a transitory phenomenon might be short-lived, it doesn’t have to be -its defining trait is temporariness, not a precise timespan. A "transitory government" could persist for years yet still be viewed as a passing phase, whereas a "short-lived government" implies a rapid collapse.

Technically

Reproducing this part from a previous post for new readers, (“persistent” was also discussed in that post):

The opposite of "persistent" is "transitory." The technical meaning of "transitory", debated intensely on Twitter in recent years, doesn’t imply that an inflation shock will be short-lived.

"Transitory" indicates that changes from shocks are mean-reverting, meaning the variable (e.g., inflation) eventually returns to its prior trend, though possibly at a higher price level. Conversely, if shocks alter a variable’s mean, variance, or autocorrelation structure over time, the changes are "persistent," potentially ushering in a new regime -say, a more volatile CPI. Expectations of mean reversion, moreover, should be conditional on the data.

According to Hooper, Mishkin, and Sufi (2019), an economy can shift from a stationary to a non-stationary regime in an instant. Picture a Jenga tower: stable at the game’s start, precarious by its end. Stationary inflation shocks have "transitory" effects, while non-stationary shocks are "persistent," leading to unanchored inflation expectations (IE).

The term "transitory" isn’t new to the Fed’s lexicon. Pre-COVID, Yellen used it in 2016, referencing "asymmetric transitory effects", or, in another example, as David Andolfatto put it, "transitory might take a long time." Thus, "transitory" isn’t about how quickly high inflation resolves but whether we emerge in a new regime. The test of "transitory" hinges not on what caused the inflation -supply-side, demand-side, or both -but on whether long-term IE remains anchored.

Determining whether inflation will be "persistent" or "transitory" can be challenging. To reiterate, the test, applied over a specific period, rests on whether long-term inflation expectations stay anchored, not on what drives mean reversion, be it Fed rate hikes, resolving supply/demand shocks, or a mix of factors.

What May Trigger A Change in Policy?

Policymakers typically tighten (or hold, if rates are sufficiently restrictive) when they perceive risks to price or financial stability. In this cycle, with a focus on normalizing inflation, they’re likely to downplay employment and growth concerns for as long as possible. The key risk arises if employment or growth deteriorates urgently enough to demand Fed action.

That said, Powell noted yesterday - to paraphrase - that when balancing inflation and unemployment, the Fed evaluates how far each deviates from its target, considers the lags in correcting both, and adjusts its approach to fulfil its dual mandate effectively. In other words, it’s a fine balancing act.