Why Jerome Powell pivoted on inflation

A surge in wages and benefits got his attention. Other data soon confirmed his concern

Inflation has been building for months. But it was over 13 days this fall that Jerome Powell, the Federal Reserve chair, decided the central bank needed to get more serious about trying to choke it off.

The story of the latest Powell pivot — the abrupt move toward tighter monetary policy announced on Wednesday — shows a great deal about the decision-making approach of the man US President Joe Biden has nominated for a second term as the nation’s top central banker.

In short: He may stick to his chosen policy path in the face of public pressure as long as evidence doesn’t undermine his assumptions, but he’s willing to change course quickly when data emerges that suggests the world is different.

The Fed’s policy committee announced on Wednesday that it would speed up the end of the central bank’s bond-buying program and was likely to raise interest rates sooner than had been envisioned as recently as early November. The mantra of Fed officials through the summer months that inflation was likely to be transitory is now, officially, history. More than usual in a Federal Reserve news conference, Powell narrated the events that caused his policy pivot.

Complaints about high inflation have been surging since the spring, but Powell and the Fed stuck to their view that it would fade and that they needed to move gingerly in pulling back on stimulative policies. That started to change with a piece of economic data on October 29 that is closely followed by economists but gets relatively few headlines — a surge in the employment cost index.

That surprisingly high number suggested that employers’ spending on wages and benefits was rising faster in the summer months than economists had thought. 

That, he said, made him consider adjusting plans for a Fed policy meeting five days later, to wind down the central bank’s bond-buying program faster than analysts expected. He and his colleagues on the Federal Open Market Committee instead stuck to the plan, but two more data points in the ensuing days were making clear that inflation risks were building.

First, on November 5, a robust employment report showed strong job creation and a rapidly falling unemployment rate. Then, on November 10, the Consumer Price Index showed a surge in inflation. That was enough for Powell. As colleagues began giving speeches and interviews in the days that followed, they made clear that a more hawkish approach to monetary policy was in the offing, which Powell affirmed in congressional testimony last week.