Trump's fight with Fed Chair Jerome Powell may unleash one surprise economic consequence

Core Viewpoint - The ongoing conflict between President Trump and Fed Chair Jerome Powell may lead to inflationary pressures, potentially unanchoring inflation expectations [1]. Group 1: Federal Reserve and Inflation - The credibility of the Federal Reserve is at risk, which could undermine progress in controlling inflation expectations [2]. - Year-ahead inflation expectations remained steady at 4.2% in January, the lowest since January 2025, indicating some stability despite underlying tensions [5]. - The Federal Reserve's independence is crucial for maintaining stable interest rates, and any challenge to this independence could lead to increased inflation expectations [4]. Group 2: Market Reactions and Investment Strategies - Investors are advised to consider real assets, such as gold and energy stocks, as hedges against potential inflation risks [2]. - A potential sell-off in stocks may occur as investors adjust to the heightened risks associated with the Fed's independence being challenged [5]. - The situation is expected to evolve, with Fed independence risks becoming a significant theme throughout 2026 [5].