An epic battle is setting up. For the past year, the Federal Reserve has been pumping money into the system via bond buying and zero interest rate policy. Through it all, the Fed sidestepped a potential second Great Depression, or perhaps even worse. The economy fell hard in 2020 as Covid ran reckless over the globe. Jobs were lost, savings wiped out, massive illness - we all know the stories, over 500K deaths in the U.S. from Covid-related illnesses.
At some point the economy was bound to recover, but if not all that money printing would create some big problems. Like inflation, the boogeyman the Fed has been fighting for more than 40 years. It is the one thing fixed income investors (bondholders) hate to see. They fear inflation with a passion -- so obsessed the bond market has called seven of the last two recessions!
Over the past 12 months the bond market has pretty much taken monetary policy in stride, knowing that if/when inflation were to perk up then yields would be on the rise. That simply means bondholders would be selling their bonds outright, choosing not to fight the inflationary fans. That is very normal behavior, abhorrence to inflation.
But here we see interest rates slowly rising on the back end of the curve. In what appears to be a normal curve, the Fed seems to be tone deaf to what might be happening. Or are they? Last week, Chair Powell was bold in is own right about the economy and what further needed to occur. Simply put, stay the course.
The bond market sees things differently though, and we'll soon find out who is driving the bus. It's an important event to watch. Will the Fed eventually see the inflation winds blowing, or will they allow the economy to heat up enough to spark rampant inflation?
Lastly, we often see gold as an alternative to inflationary dollars, but that has not been happening yet. We have seen a move to bitcoin, and perhaps that inflationary price is telling us something, too.