Bessent Echoes Powell: Inflation Still Seen as Transitory
0h ago|4 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
inflationfederal-reserve
Fazen Markets Editorial Desk
Collective editorial team · methodology
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Brookfield Asset Management's Chief Macro Strategist Keith Bessent restated a conviction that current inflationary pressures are transitory in commentary published on 27 May 2026. This view directly aligns with the Federal Reserve's long-held, though recently tested, policy framework. Bessent's analysis points to specific labor market dynamics and commodity price trends as evidence that underlying price pressures are moderating. His remarks come as the core PCE price index, the Fed's preferred gauge, shows a year-over-year increase of 2.4%.
The re-emergence of the transitory inflation debate occurs against a backdrop of persistent market skepticism. The last major consensus around transitory inflation broke down in late 2021 when CPI surged past 6%, forcing the Fed into its most aggressive hiking cycle since the 1980s. The current macro environment features a 10-year Treasury yield of 4.1% and fed funds target range of 4.75%-5.00%, levels that reflect a high-for-longer posture. The catalyst for Bessent's commentary is likely the recent softening in monthly core inflation prints and a deceleration in wage growth from the 5%+ peaks seen in 2025.
A critical shift is the bifurcation in commodity markets. While geopolitical tensions have kept oil prices elevated near $80 per barrel, industrial metals like copper have retreated 15% from recent highs. This decoupling suggests supply-driven energy inflation is not spilling over into a broad-based commodity supercycle. Simultaneously, the labor force participation rate for prime-age workers has fully recovered to pre-pandemic levels, adding supply-side slack that dampens wage-price spiral risks.
The argument for transitory forces rests on several concrete data points. The three-month annualized rate of core PCE inflation stood at 2.1% in April 2026, down significantly from the 4.5% pace recorded a year prior. Average hourly earnings growth slowed to 3.8% year-over-year in Q1 2026, compared to 5.2% in Q1 2025. The U.S. economy added 175,000 jobs in April, below the 240,000 average of the prior six months, indicating cooling demand.
Core inflation metrics show a clear disinflationary trend over the past year.
| Metric | April 2025 | April 2026 | Change |
|---|---|---|---|
| Core PCE (YoY) | 2.8% | 2.4% | -40 bps |
| Core CPI (YoY) | 3.4% | 2.9% | -50 bps |
| 3-Mo Annualized Core PCE | 4.5% | 2.1% | -240 bps |
This disinflation is occurring even as the S&P 500 has gained 8% year-to-date, demonstrating a decoupling from pure inflation fears. The 2-year Treasury yield, sensitive to near-term Fed policy, trades at 4.3%, 80 basis points below the October 2025 peak.
A validated transitory narrative would trigger significant sector rotations. Long-duration growth stocks (XLK, QQQ) would benefit most from reduced discount rate pressure and a sooner pivot to Fed easing. Specifically, mega-cap tech names like Microsoft (MSFT) and Nvidia (NVDA), with high future earnings visibility, could see expanded multiples. Conversely, sectors that thrived in a high-inflation regime, such as energy (XLE) and materials (XLB), may underperform as commodity premium unwinds.
The primary counter-argument is shelter inflation, which remains sticky with a 5.1% year-over-year increase. Owners' Equivalent Rent comprises roughly one-third of the CPI basket, and its slow-moving nature could keep headline prints elevated longer than the transitory camp expects. Market positioning data from CFTC shows asset managers maintaining a net short position in 10-year Treasury futures, indicating lingering inflation hedges. However, fund flows have begun shifting towards technology equity ETFs, capturing an early bet on disinflation.
The next major validation point is the May 2026 CPI report scheduled for release on 12 June. A second consecutive sub-3% core CPI print would materially bolster the transitory thesis. The subsequent FOMC meeting on 18 June will be scrutinized for any shift in the Summary of Economic Projections, particularly the dot plot's median rate path for 2024.
Key technical levels to monitor include the 10-year Treasury yield's 200-day moving average at 4.05%. A sustained break below this level would signal bond market conviction in disinflation. For the Nasdaq 100 (NDX), resistance sits at the 19,200 level; a breach would likely coincide with falling long-term yields. The performance of gold (XAU/USD) relative to breakeven inflation rates will also test the narrative's strength.
Transitory inflation implies that current price pressures will fade without requiring sustained high interest rates. This environment is bullish for long-dated government bonds (TLT) and corporate credit (LQD), as falling yields boost bond prices and compress credit spreads. Investors would likely reduce allocations to inflation-protected securities (TIPs) and floating-rate notes, which lose appeal in a disinflationary scenario. The yield curve would be expected to steepen as short-term rate cut expectations grow.
The 2021 argument relied heavily on base effects and resolved supply chain bottlenecks, which proved insufficient. Bessent's 2026 case adds a labor market component, citing the recovery in prime-age participation as a new source of disinflationary pressure not present three years prior. It also points to a lack of broad commodity momentum, unlike 2021 when industrial metals and agricultural goods rallied in unison with oil, signaling widespread demand-pull inflation.
The mid-1980s provide a relevant comparable. After CPI inflation peaked at 14.8% in 1980, aggressive Volcker-era hiking brought it down to 1.1% by 1986 without causing a prolonged recession. The 1990 episode saw CPI hit 6.3% in October 1990 before falling to 2.9% by July 1991, as a mild recession and oil price decline quickly cooled prices. These precedents show inflation can recede rapidly once monetary policy is restrictive and key commodity drivers reverse.
The resurgence of the transitory inflation debate signals a pivotal market shift towards pricing in earlier Fed easing and a sustainable economic soft landing.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. CFD trading carries high risk of capital loss.
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