The Bond Market Is Telling Us To Worry About Growth, Not Inflation

“The major concern that appears in the bond market is that peak growth has been reached, and gains from fiscal policy are beginning to dwindle,” Sophie Griffiths, a market analyst at forex brokerage Oanda, said in a research note.

Evidence of a more measured growth path was evident, for example, in a report This week from the Institute for Supply Management. This showed that the services sector was expanding rapidly in June, but much less rapidly than in May. Anecdotes included in the report supported the idea that supply problems were holding back the pace of expansion.

“Business conditions continue to improve; However, like everywhere else, the challenges in the supply chain are many,” said an anonymous retailer who participated in the ISM survey. “We see no clarity on costs escalation, shipment delays, push-out lead times, and when predictive balance returns in this market.”

Changes in the bond market could leave the Federal Reserve unfairly considering plans to curtail its efforts to support the economy. At a policy meeting three weeks ago, some Fed officials were prepared to reduce bond purchases in the near future and raise interest rates next year, in contrast with Fed Chairman Jerome Powell advocating a more patient approach.

In one of the odd contrasts of monetary policy, which was perceived in markets as the Fed being more open to raising interest rates, has contributed to the decline in long-term interest rates. Global investors are betting that a potential pre-emptive monetary tightening will lead to a stronger dollar, slower growth and a reduced ability for the Fed to raise rates in the future without tanking the economy.

Steven Ricciutto, chief US economist at Mizuho Securities, said: “Markets read about tapping minority views within the Fed and signals about raising rates as the Fed reacts to its decision to allow the economy to warm.” Took a nap.” “A weak global economy and a strong US dollar all indicate a greater potential for us to import global deflation.”

There is a silver lining to the revaluation taking place in the markets. Lower long-term rates make it cheaper for Americans to borrow — whether it’s Congress and the Biden administration considering paying for infrastructure plans, or homebuyers trying to buy a home.

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