April US interest rate outlook

The Fed minutes were released yesterday (see http://www.federalreserve.gov/monetarypolicy/fomccalendars.htm) and showed that (apart from one member) the FOMC was not worried about inflation quite yet, but it obviously doesn't stop the hawks ruminating on when the current "super-easy" monetary policy will be reversed.  Clearly this is now on the market's mind, and with impeccable timing a  friend recently pointed me to a site http://www.stocktiming.com/Tuesday-DailyMarketUpdate.htm which has an interesting graph of 30-year bond yields breaking out from a 17-year declining trend.  Several comments are in order from a macro perspective.

First, a declining trend cannot continue forever - a break was inevitable, it is the timing that is interesting - we are at a point where clearly the balance of risk is beginning to shift from deflationary pressures to inflationary pressures.  This has clear implications for investors - while the US bond market was a great place to be during the downturn, it will not be such a great place to be anymore!!

Second, the inflation hawks really need to relax - there are so many uncertainties as to how and when the US economy will really pick up steam that it really doesn't make a whole lot of sense to worry about inflation quite yet.  An orderly withdrawal by the Fed and a falling US budget deficit will help to ease pressures as well, so the pressures are likely to be moderate at best.

Third, if this were a short, sharp recession (like the early 1980s recession), then I would say that indeed there is a risk of a strong bounce back which could put the authorities off balance, but given the depth of the recession and the mixed economic signs that we continue to see coming out of it, this looks like it is going to be a slow recovery, which will allow policymakers to make adjustments in a timely fashion which will put the lid on runaway inflation.