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Next Fed Chair Inherits the Risk of Double-Digit Inflation

Janet Yellen's Final Bow

As with her predecessor, Ben Bernanke, Janet Yellen too had the fortune of passing the baton just in time to the next fed chair avoiding the cumulative consequences of a bad QE policy.

Jerome Powell, the new Fed Chair, may not be so lucky.

The Fed expects inflation to rise by 2% this year. But it also somehow expects inflation to “miraculously” stabilize at that level.

A few months ago, cautious optimism permeated the markets when the Fed announced that it expected no more than 3 interest rate hikes in 2018; the first of which was to be scheduled for March.

But last week, Robert S. Kaplan’s hawkish comments conveyed a different message–one that indicated the possibility of even more rate hikes; and one that betrayed a legitimate concern over the rate at which inflation had been steadily rising. The consequence of his statements were drastic, as the Dow plunged 666 points on Friday, February 2.

The slide continued the following Monday, with the Dow falling by 1175.21 points, and the S&P logging in its worst day in 6 years with a loss of 113.19 points (or -4.10%).

Prior to the initial slide, in the week marking Janet Yellen’s last FOMC meeting as Fed chair, the Federal Reserve left benchmark rates unchanged; a unanimous gesture that most of Wall St. seemed to have anticipated.

Janet Yellen

The week marking Janet Yellen’s last FOMC meeting as Fed chair, the Federal Reserve left benchmark rates unchanged.

However, the FOMC also stated that its inflation expectations had increased. Though the Fed believes that such an increase would stabilize around the standard objective of 2%, there’s no denying that the 10-year inflation breakeven rate–one of the Fed’s inflationary measures–had risen to a three-year high.

As for the rest of the economy, the Fed noted that “Gains in employment, household spending and business fixed investment have been solid…unemployment rate has stayed low,” and risks to the economy were “roughly balanced.”

The new Trump-nominated Fed chair, Jerome Powell,  is expected to maintain Yellen’s cautious approach to policy. Yet, as CNBC reports, it would be foolish to consider Powell a “carbon copy” of his predecessor, despite his reputation as the former chair’s “ideological ally.” 

To signal the possibility of yet even more changes, there will be plenty of new faces in the Fed, a difference that may give way to a much more hawkish Fed stance.

And perhaps that’s what is needed. For if we allow inflation to hit that “arbitrary” 2% ceiling, and if the Fed can’t add any bite to its inflation vigilance bark, CPI annual measured price increases will likely rise toward double digits.