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

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“The key concern reflected in the bond market is that the highest growth has been reached and the benefits from fiscal policy are beginning to wane,” Sophie Griffiths, market analyst at foreign exchange brokerage Oanda, said in a research note.

Evidence of a more restrained growth path, for example, report This week from the Institute for Supply Management. It showed that the service sector continued to grow rapidly in June, but much slower than it was in May. The anecdotes contained in the report supported the idea that supply problems were hampering the pace of expansion.

“Business conditions continue to improve; however, as elsewhere, the challenges in the supply chain are numerous,” reported an unnamed retailer in the ISM survey. “We continue to see cost increases, delayed shipments, delayed lead times, and a lack of clarity on when the estimated balance will return to this market.”

Changes in the bond market could cause the Federal Reserve to take the wrong step in considering its plans to relax its efforts to support the economy. At a policy meeting three weeks ago, some Fed officials were ready to continue reducing their bond purchases in the near future, and some were expecting to raise interest rates next year, contrary to the more patient approach of Fed chairman Jerome Powell. argued.

In one of the more bizarre paradoxes of monetary policy, what was perceived by markets as the Fed’s more openness to raising interest rates contributed to the long-term interest rate declines. Global investors are betting that potential preventive monetary tightening will result in a stronger dollar, slower growth and lessening the Fed’s ability to raise interest rates in the future without rattling the economy.

“The market is reading the views of the minority within the Fed on lowering and raising interest rates as signs that it is winking at the Fed’s decision to allow the economy to warm up,” said Steven Ricchiuto, Chief Economist at Mizuho Securities US. “A weaker global economy and stronger US dollar mean greater potential for us to import global deflation.”

There are silver linings for the revaluation that takes place in the markets. Low long-term rates make borrowing cheaper for Americans—whether Congress and the Biden administration are considering how to pay for infrastructure plans, or home buyers trying to buy a home.

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