Let\u2019s see if I have this straight. For the past dozen years or so, dating back to the 2008 financial crisis, the Federal Reserve and other major central banks have been trying to raise inflation and thereby generate economic growth. (I\u2019ve never quite understood that thinking; I always thought economic growth generated inflation, not the other way around. But that\u2019s just me.)<\/p>\n
So now it finally appears that inflation is about to rear its head, or so the bond market thinks, on the prospects of a nascent economic boom fueled by pent-up demand, fiscal stimulus, a decline in Covid-19 cases, and a vast rollout of vaccines. And what is the market\u2019s reaction? Total panic. Sell bonds and tech stocks that have soared during the pandemic. And beg Jerome Powell and the Fed to save them from losses once again.<\/p>\n
Let\u2019s see which Powell responds\u2014the one who has told us over and over again that the Fed will be \u201cpatient\u201d and be pleased to let inflation run hotter and longer if it means boosting the employment market; or the one who repeatedly rides to the rescue whenever investors start to lose money and beg for relief. <\/p>\n
On the surface, it should be the first one. Over the past month or so, bond yields have risen sharply on fears of rising inflation. Rather than a cause for worry, this should please Powell and the rest of the Fed. After all, they\u2019ve been preaching for months that this is what they want, so this should come as no surprise to anyone. Plus, it\u2019s a good thing \u2013 rising rates signal economic growth. Yet, the market\u2019s reaction is shock and dismay.<\/p>\n
It\u2019s a little hard to understand why the markets are so bent out of shape about all this. The stock market has been rising for over a year on the prospect that the pandemic would go away eventually, and we\u2019d get back to normal, which is where we seem to be heading. Under the conventional investor logic of buy the rumor, sell the news, a correction would be in order. And at the same time, the Fed wants more inflation, so the markets should be taking this in stride. Instead, we keep reading that we\u2019re in the middle of another \u201ctaper tantrum,\u201d even though the Fed has given investors absolutely no reason to think that. <\/p>\n
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