The Bond Market Is Calling The Fed’s Bluff – Things Aren’t Looking Good

Yesterday the Federal Reserve’s FOMC Minutes confirmed what we’ve been thinking – that the Fed will find a way to justify higher-inflation without rising rates faster.

But what really made me laugh were comments made by James Bullard – President of the St. Louis Fed Bank.

He said that the yield curve has a “nice slope” and there is currently no danger of an inverted yield curve. But – ironically – the yield curve got even closer to inverting after his words and the FOMC’s comments about expecting a rate hike in June. This news was supposed to make the spread widen.

Looking at the 2 n’ 10 Rule – the spread between the 2-year and 10-year rates – we still see the spread at its tightest since the 2008 recession. Remember, the last 9 out of 10 recessions were preceded by an inverted yield curve.

And today there is only a 0.46 spread between the two rates – and it’s closing in on negative.

So, what yield curve ‘slope’ is Mr. Bullard talking about? 

Besides his comments, what’s worrying me is that the annual inflation is well above the Fed’s ‘2% target’. And – even worse – the FOMC believes now this could be “helpful”. Since when is paying more for goods and services helpful?

The only thing helpful from all this was two revelations from the Fed Minutes.

First Revelation

We now know that the Fed will run the economy hot with inflation instead of hiking faster. The Fed could’ve justified hiking during the last meeting because of how much inflation is rising.

But they know that the very fragile U.S. economy can’t handle rising short-term yields. . .

Rising yields makes it harder for debtors to service their debt. And with American consumers indebted up to their necks – and the U.S. government’s growing deficits requiring more financing – this would be very damaging. One big example, banks depend on borrowing ‘short’ and lending ‘long’.

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The piece is from my original write-up at Palisade-Research.com - All ideas expressed and charts are my own.

Enjoy.

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Gary Anderson 2 years ago Contributor's comment

Long bonds are pricing in financial trouble. If inflation does not help workers and lack of inflation does not help them, helicopter money is the only answer.