“Powell has been talking a lot about the job market and that healing should include all workers who want a job. And Yellen is a labor economist,” said Quincy Krosby, chief market strategist at Prudential Financial. “So it’s possible that the Fed could be too squeamish and let inflation heat up.”
Inflation is not a concern at the moment. Consumer prices have risen less than 2% in the last twelve months, according to the Fed’s preferred measure of inflation, which takes personal consumption spending into account.
But some worries can lead to the formation of bubbles. Stocks are about to hit all-time highs and the real estate market is hot.
This is driven, in part, by a friendly Fed monetary policy and the hope of receiving more stimulus from the upcoming Biden administration.
Is inflation slowly moving backwards?
“Official figures don’t show the inflation that people see in their day-to-day lives,” said Patrick Leary, chief market strategist and senior operator at Incapital.
“Most Americans spend a lot on housing, food, education and health care,” he said. “They all go up in price. That doesn’t seem deflationary to me,”
And Krosby is concerned that the Fed will continue to intervene to make sure interest rates don’t rise to keep the Wall Street party going.
“Investors need the bond market to work properly,” Krosby said. “What if inflation starts to rise? What is the Fed ready to do then?”
This concern fuels concerns that the stock market may continue to rise, and will only fall sharply once the Fed and Yellen start pointing out that the economy is strong enough to be weaned off the stimulus.
Taper tantrum, part 2?
And it wouldn’t be the first time.
Wall Street provoked a rapid rage in 2013, when Fed Chairman Ben Bernanke began withdrawing from the Great Recession-era bond-buying program, which was similarly established to keep low interest rates and stimulate the economy.
This time the hope is that Powell has learned from the past, and some experts predict he won’t do anything fast or drastic.
“We continue to see the Fed, along with all other central banks in the developed market, as very accommodating,” Marvin Loh, a senior macro strategist on State Street, said in a report.
“To avoid a rage, President Powell has hinted that a change in the pace of asset buying will be well communicated,” he added.
Others argue that it is unwise to bet on the current market momentum. As long as the Fed and Treasury Department are in favor of more stimulus, the natural direction of action is to keep going up. Younger traders, the so-called Robinhood crowd, are unlikely to be able to afford the market yet.
“Professionals and some others probably understand that this market is partially out of touch with reality, but most disagree. This leads to a strange dynamic,” Sebastien Galy, macro strategist at Nordea Asset Management, said in a report on Wednesday. . “What we can conclude is that the market can remain irrational longer than it can remain solvent.”
But it may not be that simple. The big concern is that as stocks continue to rise, inflationary pressures will increase as people feel more secure in the economy.
Ultimately, the Fed may be forced to act faster than it would have liked to cool things down.
“Inflation can be transitory until it stays. If you can charge more for goods and services and you still see consumer demand, why will you lower the price? That’s just logical,” Learap of Incapital said. “The Fed can tolerate inflation growing more, but not exploding more.”