This article first appeared in the Morning Brief. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Tuesday, November 9, 2021

Investors are more worried about inflation than the Fed seems to be

Amid the market’s debate over whether inflation will prove transitory or permanent, closely tracked indicators, such as bond yields, are sending us mixed signals about the future.

That in part is because the real economy is also fighting through competing impulses of its own. The supply chain crisis, and the upward pressure it’s putting on soaring inflation remain the two biggest themes of 2021.

COVID-19 of course, remains a force multiplier behind everything, with the pandemic doing little to curb insatiable demand. October’s jobs data, which blew the doors off the figurative barn and helped propel stocks to new record highs, did little to resolve the debate. And yields — which themselves should be true north of inflation and Federal Reserve policy expectations — are also sending mixed signals.

Still, evidence is growing that investors are getting really restive about the central bank’s ability to contain inflation. As Yahoo Finance’s Brian Cheung wrote on Monday, a “sharp rise in real interest rates” and “inflation surge” were the second and third most cited shocks cited by a New York Fed survey.

In the wake of the Fed’s decision to begin pulling back on its stimulus, the Morning Brief discussed the way in which interest rates on government debt should be a barometer of the Fed’s next moves (both its plans to taper bond purchases and upcoming rate hikes).

“Should” is the operative word here, given the topsy-turvy way in which the pandemic, the massive government response to mitigate its effects, and the lingering impact of bygone crises, is making a muddle of investors' ability to read the financial tea leaves. Bond yields have also been whippy, telegraphing the market’s confusion about where things are headed.

But among Wall Street watchers, a clear picture is emerging about whether they think the Fed will be able to sit tight on rates — and it’s less than encouraging.

Sam Stovall, chief investment strategist at CFRA Research, suggested that trying to compare the Fed’s current plans to curtail stimulus to that of 2013-14 (the last time the central bank tried to unwind crisis-era policy) will “prove challenging, at best, since fundamentals are very different from that of eight years ago.”

For a bunch of reasons these days, the past isn’t necessarily prologue, but it can provide useful markers for where things are headed. In a research note, Stovall pointed out that at the time, headline consumer prices were below 2% (they’re now above 5%), and the benchmark 10-year yield was nearly double its current levels. Meanwhile, gold was trading at a substantial discount.