Yoshikami: What Happens After Ben?
Ben Bernanke, Chairman of the Federal Reserve, has led an ambitious expansion of the Federal Reserve's activities embarking on multiple phases of quantitative easing. It's clear that he has been the most interventionist Federal Reserve Chairman in history.
While it is true that Federal Reserve policy is often led by the Chairman, it is clear that most governing members believe that the current course of action is the correct one in dealing with the significant financial downturn of 2008. This is not a dictatorship and the affirming opinions for current policy are overwhelming.
(Read More: Bernanke: More Work Needed to Quell Another Crisis)
Recent comments by the Federal Reserve suggest that they are interested in adjusting policy in the near future if economic activity begins to strengthen. Still, Federal Reserve governors make it clear that they continue to be very concerned about economic softness and have no aversion to continuing the stimulus policies that have been so controversial over the past 3 years.
In fact, the likely next Federal Reserve Chairman is Janet Yellen who currently serves as Vice Chairman under Ben Bernanke and also holds the same views that he does (that more stimulus is better rather than less in difficult economic conditions). The net result of continued Federal Reserve action is that interest rates will likely remain low, particularly on the short end, for a significant period of time.
When interest rates do increase, it will likely affect the long-end of the curve so mortgage rates will rise as well as long dated treasuries. These are the type of bonds most susceptible to capital loss if there is a perception that inflation is picking up and interest rates will be increasing.
While it is likely that active quantitative easing will end soon, it's important to recognize that the net impact of quantitative easing will impact markets and the economy for years. Quantitative easing entails significant bond buying activities on a monthly basis by the Federal Reserve to reduce interest rate levels. But even if the Federal Reserve ceases buying bonds, we expect the bonds currently on their balance sheet to remain part of the Federal Reserve's asset pool thereby continuing to maintain a lower interest rate bias for the economy.
(Read More: Cramer: Reports of Fed Exit, No Reason to Fear Rally)
Because of Fed policy, one can expect that inflation at some point in time will begin to creep up. It's a very simple recipe for inflation; when you add massive amounts of money from the Federal Reserve combined with huge stimulus efforts around the world from other countries the result is bound to be inflation. The real question is: "how high will inflation be?"
Hyperinflation looks not likely to be in the cards, but higher inflation seems almost a certainty and one should factor this into an investment strategy. Be ready for it; it will spring on investors with no obvious warning. The inflation bear will come out of nowhere and you need to be prepared.