The Bond Market Is the One Behind the Curve Now
Traders are wrong if they doubt the Federal Reserve’s newfound resolve to do whatever it takes to get inflation under control.
Federal Reserve Chair Jerome Powell is committed to getting inflation under control.
Photographer: Valerie Plesch/Bloomberg via Getty Images
The bond market needs to take the Federal Reserve at its word this time. After pushing the central bank to accept that the current high rate of inflation was not transitory, bond traders have turned relatively sanguine on how much the Fed is likely to tighten monetary policy now that it has acknowledged it needs to act. So much so, that Fed Chair Jerome Powell had to twice make clear in less than a week that the central bank will do whatever it takes to bring down inflation rates that are hovering around 8% annually. And he managed to surprise the market both times!
There was no doubt after last Wednesday's policy decision, when the Fed raised its key interest rate for the first time since December 2018 --boosting it from near zero to a range of 0.25% to 0.5% — and signaled more were on the way, that Powell had given up his dovish leanings and become a true hawk. But it wasn’t until Powell doubled down on his message this week that the Treasury market finally started to take heed, even assigning a greater chance that the Fed will engineer one or more supersized rate increases of a half percentage point at policy meetings in coming months.