When good news is bad news: Investors have become addicted to low rates

to the evolving Fed tone – underscore how acutely sensitive financial markets now are to any suggestion that the Fed might start to wind back its bond and mortgage buying and raise rates.Given that the Fed will only act if the economic news is better than expected, the market reaction was quite telling. Investors have become so dependent on ultra-cheap central bank provided liquidity that good economic news provides a sell signal.

The Fed was always going to respond to a surge in inflation – even the “transitory” one it has consistently forecast – and at some point try to create more normal monetary policy settings, or at least less abnormal ones.Bringing forward the moment when US rates might start to edge up from 2024 to 2023 shouldn’t have been a shock to investors who have been focused on inflation readings for much of this year.

Bond yields could have been expected to spike and the yield curve to steepen at the prospect of the Fed tapering its bond purchases and bringing forward the moment when it would start to raise rates. They didn’t. The bond market has bought the thesis the Fed has been promoting that there will be a near term spike in inflation as the economy bounces back from its pandemic-driven nadirs but it will decline relatively quickly once the economy has reopened and is functioning normally.

Fed has to choose between the US$ reserve status or the bubble, they can't have both

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