We are moving towards a stagflation situation, says Komal Sri-Kumar

Market & Economic Outlook - The market's muted response to Fed actions may change, particularly concerning the president's ability to fire Lisa Cook [2][3] - Markets anticipate lower short-term rates, expecting it to benefit risk assets [4] - Potential for a stagflation scenario, characterized by recession and rising inflation, similar to the Nixon era [7] Interest Rate Dynamics - A 1 percentage point cumulative decline in the federal funds rate from September to December 2024 saw a 90 basis points increase in the 10-year yield [4][5] - If markets perceive a Fed rate cut as unjustified by inflation expectations, long-term yields may rise, diverging from short-term yields [10][11] - A 50 basis points interest rate cut by Jerome Powell in September of last year was perceived as politically motivated, leading to market skepticism [11][12] Potential Triggers for Yield Increases - Firing of Lisa Cook and replacement with a nominee favoring rate cuts could trigger yield increases due to potential dissents from Jerome Powell [15] - A higher-than-expected PCE inflation report, such as 3.1% instead of the anticipated 2.9%, could cause yields to surge [16] - Presidential stacking of the Fed with favorable nominees, undermining its independence, could also lead to yield increases [17] Timing - The period between September and the end of the year is identified as a potential timeframe for significant market events [18]