Jerome Powell's newest evolution

The way Fed chair Jerome Powell is talking about inflation seems to be evolving.

Why it matters: The Fed has been employing a very stimulative monetary policy, which is helping boost job growth. But inflation has been running above its target.

• Powell and his colleagues have argued for months that the forces currently boosting inflation have been "transitory."

Yes, but: As inflation rates rise by more than expected and for longer than expected, repeated references to "transitory" could hurt the Fed’s credibility.

• Even Powell himself on Thursday told the Senate Banking Committee that: "I think we're experiencing a big uptick in inflation. Bigger than many expected. Bigger than certainly, I expected."

The intrigue: Powell’s most recent written statement referencing inflation made no reference to "transitory." He also never used the word during his lengthy Q&A with committee members.

• The word "temporary" has come up, though.
• "The problem with ‘transitory’ is that it suggested a very short period of elevated inflation," SGH Macro Advisors economist Tim Duy wrote in a note to clients. "'Temporary’ suggests the period of elevated inflation may be on the longer side."

The big picture: Semantics aside, Duy’s bigger point is that the Fed is communicating that it’s willing to tolerate inflation as long as unemployment remains high.

• "Unless the Fed wants to revise the employment goal, it really has little choice but to lengthen the amount of time inflation can remain elevated without a policy response," Duy wrote.

Threat level: None of this is to say the Fed is turning a blind eye to inflation. Quite the opposite.

• "We're trying to understand whether it's something that will pass through fairly quickly, or whether in fact, we need to act," Powell said of surprising inflation data.
• Bespoke Investment Group macro strategist George Pearkes tells Axios it's significant that Powell is essentially saying "we're trying to figure that out."
• "[If] they do decide ‘we need to tamp down inflation’ that's going to be a huge pivot and means we'll get [rate] hikes in 2022 for sure, with a taper starting in September and running much faster than it otherwise would."

The bottom line: The Fed is clearly willing to tolerate a lot of inflation if it means getting employment up. But there is a limit and not even the Fed seems to know where that is.