Investors knew that his predecessor, Janet L. Yellen, was an inflation dove, meaning she was more willing to keep interest rates low for longer. However, with the Fed soon to be dominated by President Trump appointees wedded to a low interest rate policy, I am not holding my breath that the Fed will make the right policy choice. The labor market is tight and stock prices are high, but there is no obvious place in the economy displaying some major distortion comparable to the dot-com era, the housing bubble, or the inflation and energy shocks of the 1970s and ’80s. If inflation runs faster than previously estimated, the Fed will need to speed up the pace of hiking rates from three to possibly four or five in 2018.
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The volatility has been triggered by fears of rising inflation in the United States and a policy error from the Federal Reserve, which caused bond yields to widen to 2.73% on 29 January, the highest since April 2014. “But I do want to say high”, Yellen said on CBS’s “Sunday Morning” in an interview recorded Friday as she prepared to leave the central bank. Economists debated whether this would be too much, or too little – a question with higher stakes in light of the market’s dramatic movements over the last two days.
While giving a speech during Monday’s sell-off, Trump made no mention of stocks. And the favorable economy those fatter raises reflect should be good for corporate earnings and stocks, no? JPMorgan Chase dropped 4.80 percent to close at $108.80.
And we’ve seen what happened to the market in previous instances when it seemed like the Fed was going to change course.
As a former investment banker, Powell will be the first Fed chairman in 40 years who does not have a PhD in economics.
“We believe the current correction in risk assets is a healthy consolidation as the market needs to pause for breath after the sharp rally over the past year”.
Now, as Powell takes the reins, he and the rest of the Fed Board of Governors will have to determine if that long-running trend is starting to reverse – and how to respond. That is unnerving for investors accustomed to the last decade’s rock bottom rates.
And there are other factors that may push up interest rates, and push equity prices down in the process. That includes the $1.5 trillion, deficit-financed tax cut passed in December, as well as costly proposals for an infrastructure package, Mexican border wall, and upgrading our nuclear arsenal. But if prices go up, you should do it more often. Private saving finances productive investment that increases future real income and consumption.
Yellen’s final act at the Fed was to hit one of the largest USA banks, Wells Fargo & Co., with an unusual ban on growth that follows the San Francisco-based lender’s pattern of consumer abuses and compliance lapses.
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As interest rates return to normal and the Fed exits its unconventional policy, there will be some financial turmoil.
