As the new administration starts to take shape and policies are implemented, for those that have a direct effect on the economy we have to understand where the Fed fits in. For the better part of eight years it is extraordinary Fed policy that acted as a 'backstop' to the domestic AND world economy. Not only with monetary policy but also with leading the world toward fighting deflation. That fight, mind you - is not over yet.

The Fed, wanting to remove the generous accommodative policy for years finally sees some daylight to start removing this, being in the form of fiscal stimulus and higher inflation. The latter is the catalyst to push rates back up to normal levels. The desire here is not to disrupt the economy with panic and fear and choking off business opportunities. It's been 8 1/2 yrs since the financial crisis but it is fresh in everyone's mind.

The most recent speeches and statement from the Fed indicate they are still on course to raise rates more this year, perhaps up to 1.25% on the Fed Funds. So far, the data has been market friendly with employment, production and sentiment - there is a less than 20% chance of a rate hike in March, so the market probably has this one right (very low probability).

If bond investors believe the Fed is making this move due to higher inflation AND growth we'll see that long end of the curve extend upward, at least as much as Fed Funds in order to keep the curve steep. Just talking about it won't work this time.