The Fed is probably right that this burst of inflation is transitory. But investors need to pay attention to the risk that it is wrong, too, writes jmackin2
Investors have faith in the Fed. Over the past three months consumer prices, excluding volatile food and energy, have risen 2%, equivalent to a shockingly high annual rate of 8.2%. Rather than panic and dump bonds, investorsand pushed 10-year yields back down to where they stood in late February. Confidence in the central bank is absolute.
But investors need to consider the possibility that the Fed is wrong, too. The risk that inflation continues to overshoot is clearly much higher than usual, while the risk of undershooting is lower. Instead of leaving a larger margin of error around forecasts, bond markets are leaving little, perhaps none, with a yield of just 1.45%
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