Let's check in on the market's reaction to the idea that the Fed may "discuss", not do, asset purchase tapering and hike rates.

The WSJ notes a selloff in the stock market after Bullard issued a rate hike trial balloon. 

The Dow Jones Industrial Average lost 1.6%, or about 530 points, in 4 p.m. trading Friday. The index of blue-chip stocks dropped more than 3% this week. 

Policy makers had signaled Wednesday that they expect to raise interest rates by late 2023, sooner than they had previously anticipated. Sentiment waned again on Friday after Federal Reserve Bank of St. Louis leader James Bullard said on CNBC that he expects the first rate increase even sooner, in late 2022.

The Fed has faced more inflation than it expected, and policy makers need to be nimble, he added. But it will take several Fed meetings to organize the debate over tapering its bond-purchase program, he said.

It isn’t surprising that equities are falling, said ThinkMarkets analyst Fawad Razaqzada. U.S. stocks have hit a series of record highs and have been outpacing the economic recovery since last year. Now traders are repricing that “reflation trade” as they watch the Federal Reserve slowly start to alter its stance on monetary policy.

“It was coming,” he said. “This kind of selloff was coming because the market got ahead of itself.”

Got Ahead of Itself?!

What a hoot. Yes, indeed, by light years in fact.

Fed’s Bullard Pencils In Rate Increase in 2022

In addition to tapering talk, please note Fed’s Bullard Pencils In Rate Increase in 2022

Speaking Friday on CNBC, Mr. Bullard said that when he submitted forecasts at this week’s Federal Open Market Committee meeting, “I put us starting in late 2022” with the first move up from near-zero short-term interest rates currently. Ahead of the FOMC meeting, Mr. Bullard had said he wasn’t ready to call for a shift in monetary policy while the coronavirus pandemic was still a major force for the economy.

Mr. Bullard doesn’t currently have a vote on the FOMC, and he was the first official to weigh in after this week’s meeting. Seven of 18 Fed officials expect one or more increases next year.

Despite that shift, Fed Chairman Jerome Powell at his press conference after the FOMC meeting cautioned that “rate increases are really not at all the focus of the committee” right now. “The real near-term discussion that we’ll begin is really about the path of asset purchases” and when the central bank will be able to pull back on that, he added.

 

Flashback January 8, 2021

In a Reuters interview, Fed presidents say rising bond yields, inflation expectations are a possible win.

• Richmond Fed: “I am encouraged to see the rise in market indicators of inflation expectations. That is what we are trying to support.” Barkin said he regarded a recent rise in interest rates on Treasury bonds as also part of a “reflation trade,” a sign that investors were factoring future hikes in prices into their decisions by demanding higher interest rates, rather than representing a worrisome tightening of financial conditions.
• St. Louis Fed: “The ingredients for higher inflation are in place,” St. Louis Fed President James Bullard said in separate comments to reporters. “You have very powerful fiscal policy in place and perhaps more to come,” with Democrats now about to control the White House as well as the U.S. Senate and House of Representatives.
• Philadelphia Fed: President Patrick Harker called the early U.S. vaccination figures, with fewer than 5 million inoculated so far, “incredibly disappointing.” “We are looking at a long period where the fed funds rate will stay at essentially zero,” Harker said. He saw "no signs that inflation is going to go out of control.”
• Chicago Fed: President Charles Evans expressed more skepticism about the inflation to come. The boost to inflation from added fiscal spending, he told a bankers group on Thursday, is "not nearly as strong as I would like.” He said he believes inflation won’t reach 2% until 2023, and that it would not be unreasonable for the Fed to wait until mid-2024 before raising short-term rates from their current near-zero levels.
• San Francisco Fed: President Mary Daly, in an event Thursday put on by the Manhattan Institute’s Shadow Open Market Committee, said she believes a stronger labor market will eventually give rise to higher inflation, though the upward push on prices from a tight job market is likely weaker than it was in the past, making a sudden surge unlikely. At the same time, Daly said she was reassured by a recovery in inflation expectations, which showed market participants, households and businesses are beginning to believe the Fed will deliver on its aim to overshoot 2% inflation.

Please recall Five Fed Presidents Praise Inflation, Not Threatened by Rising Yields written January 8.

Overshoot Inflation

If these market manipulators actually understood markets, they would realize they already overshot their 2% inflation target.

They don't see it because they don't know where to look and are clueless about what inflation really is.

Inflation is rampant in home prices and asset prices in general. Speculation in equites and Bitcoin is massive. 

Medical inflation is undercounted. 

The Fed does not see any of this because they have never spotted a bubble in real time and never will. 

Bullard Now Concerned 

Bullard went from praise of inflation to concern over it.

There's nothing wrong with changing your mind, but ....

Talk is Cheap 

Not only is talk cheap, but despite his new huffing and puffing, Bullard's concern is not even immediate. 

Rather, Bullard's concern is sometime next year, subject of course to stock market gyrations more so than anything that is happening with actual inflation.

One or two days does not mean much after this stock market runup, but the last time the Fed tried to taper, it quickly retreated in the face of the market's reaction. Then by the time the Fed finally started hiking, the economy was already slowing.  

Ring! Ring! Goes the Long Bond Bell, Are You Listening?

Meanwhile, Ring! Ring! Goes the Long Bond Bell, Are You Listening?

Here we go again.