What’s On Peoples’ Minds? Not Inflation

There are a few pretty good indications that inflation hysteria is long dead. Since this was one of the more extreme forms, it’s also relevant in parsing any shift from reflation back to deflation. There are any number of markets suggesting as much already. Still, this one really has to sting for sunny, confident Jerome Powell.

From the St. Louis branch of Powell’s Fed, keepers of the big database, two days ago:

For as long as we can remember, the most popular series in FRED has been the consumer price index (CPI). Well, not anymore. Recently, the series describing the difference between the 10-year and 2-year Treasury constant maturity rates became the most popular. Why this sudden interest?

Why, indeed. It’s not economic overheating and rampant consumer inflation that seems to be on everyone’s mind at the moment. Not with curves the way they are. Stocks can soar and consumer confidence can closely mirror the upward trajectory of share prices, in economic terms those mean very little.

The primary issue, as I write often, isn’t whether Powell is hawkish or dovish, rather it’s whether or not he has any basis for being either of those. He may be dovish or hawkish by turn, presenting what may appear to be different cases by the speech and appearance. Doesn’t matter a bit which one if behind each of them the FOMC’s econometric models are still so badly calibrated.

There is every reason to suspect they are; from the renewed misbehavior of federal funds to the lack of effective IOER solution, from perpetual, unshakable economic optimism through each and every “unexpected” and “transitory” downturn to the lack of skepticism warranted by eleven years of poor performance, to put it mildly, you might at least understand the position of the long end of the bond market. The Fed only wishes it could raise rates.

The yield curve isn’t really about looming recession, though admittedly that’s what sparks all the interest in it. The UST market alongside eurodollar futures (and interest rate swaps to a certain extent) are calling Powell’s inflation, “rate hike” bluff. It’s the highest stakes poker, a game at which the long end is undefeated.