How Can Anyone In Their Right Mind Say This Much Inflation Is Transitory?

Friday, July 14, 2000, was a bad day to be in Treasuries. The 10-year UST yield spiked 9 bps after the Census Bureau reported June 2000 retail sales growth had been nearly 10% year-over-year. That plus a similarly pleasant reading from the Federal Reserve for Industrial Production left bond traders rethinking their trades, a sudden burst of inflationary confidence which spilled over into the following Monday, July 17.

For just the two days combined, 10-year yields had added a sharp and painful 16 bps.

Before then, however, rates had been falling not rising. LT yields had peaked all the way back at the start of the year. Directly contradicting Alan Greenspan’s Fed, the latter had been increasingly concerned about consumer prices becoming a sustained threat from what was judged to be an economy ready to overheat (the “maestro”, as he was known at the time, didn’t pay much attention to the NASDAQ).

The bond market disagreed with bids on safe instruments pushing up their prices even as Fed models and official positions hardened on the inflation side with June retail sales and IP temporarily backing them. In early May 2000, the FOMC had voted for a double rate hike to stay ahead of this possible inflationary monster, a whopper of 50 bps that followed already a series of five 25 bps increases in the federal funds target (monetary policy) begun the prior June.

By that November, the FOMC got together in light of weakening demand more consistent with what the bond market had been trying to warn, yet members remained convinced anyway of the greater threats from rising inflation rather than rising recession risks. Judging it nothing more than a slowdown in growth, something like 1998 and early 1999, the committee heard mostly about non-transitory price risks.

In his November 15, 2000, presentation reviewing data, interpretations, and modeled projections, staff economist Dave Stockton agreed that overheating not recession should be policymakers’ primary focus:

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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