Janet Yellen Admits “Rapid Inflation” Will Continue For “Months”

Treasury Secretary Janet Yellen

Over the last two days, Fed Chairman Jerome Powell pumped up bulls with his optimistic testimony to Congress. Not only did he say inflation was transitory in his remarks, but that even in longer-term projections, it wasn’t skewing particularly high.

Powell also added that now’s not the time to consider tapering bond purchases (quantitative easing). Full employment – AKA, 3.5% unemployment – is within reach if the Fed keeps cash flowing freely.

Had Powell been any more dovish, he would’ve sprouted wings before the House Financial Services panel and flown out the nearest window.

But stocks didn’t surge. They finished out Wednesday’s trading session for a muted gain. Then, yesterday, the S&P closed for a small loss in response to the Democrats’ newly agreed-upon $3.5 trillion tax bill.

Those losses were then quickly bought back at the open this morning. A few hours later, though, and stocks were back down again on the day.

Inflation fears overshadowed this morning’s better-than-expected US retail sales data. It may be due to Treasury Secretary Janet Yellen, who cast a pall on markets last night in an interview on CNBC’s “Closing Bell.”

Shortly before noon today, her remarks seem to have hit home with investors.

“We will have several more months of rapid inflation,” Yellen said.

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“So, I’m not saying that this is a one-month phenomenon. But I think over the medium term, we’ll see inflation decline back toward normal levels. But, of course, we have to keep a careful eye on it.”

This calls into question how Yellen defines the “medium term.” Is it one year? Two? Five? Longer-term Treasurys usually start with the 10-year Treasury note. Does that mean we’ll have to wait up to nine years before inflation declines in a meaningful way?

We can lump this type of talk into the same category as Yellen and Powell’s favorite “t-word:”

Transitory.

Nobody truly knows how long something has to stop rising for it to be considered transitory. On a long enough timeline, nearly everything’s transitory, of course. Maybe except for death and taxes.

“Measures of inflation expectations I think still look quite well contained over the medium term,” Yellen explained.

“Those expectations are actually a driver of price-setting behavior. And so it is important that we monitor it carefully. But I believe fundamentally, you know, that this is something that will settle down.”

The Treasury Secretary went on to conclude that “[she doesn’t] think we’re seeing the same kinds of danger in this that we saw in the runup to the Financial Crisis in 2008.”

Before Yellen served as the last Fed Chair prior to Powell, she spent six years (2004-2010) as the president of the San Francisco Fed. During which neither she nor any of her colleagues saw the Financial Crisis coming.

So, should anyone listen to her commentary on economic dangers right now?

Probably not. Yellen and Powell can’t provide truthful (thus hawkish) remarks. A spike in interest rates would unravel the entire financial system if they did. Servicing the national debt alone would become an impossible task at that point.

Nobody really expects the sitting Treasury Secretary or Fed Chair to bring bearish pressure to the markets these days as a result. Both Powell and Yellen know they’re in complete control. Powell more so.

That’s why investors continue to hear that everything’s a-okay with inflation despite the recent release of another blockbuster Consumer Price Index.

Will stocks continue rising despite all this? They certainly could. But with today – an options expiration day – drawing to a close, another bout of volatility may soon be “uncorked.”

And, if the market can’t start next week on a high note, equities may have a long way to fall before they eventually bounce back.

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