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

“The overriding concern being reflected in the bond market is that peak growth has been reached, and the benefits from fiscal policy are starting to fade,” mentioned Sophie Griffiths, a market analyst with the overseas alternate brokerage Oanda, in a analysis word.

The proof of a extra measured progress path was evident, for instance, in a report from the Institute for Supply Management this week. It confirmed the service sector was persevering with to broaden quickly in June, however significantly much less quickly than it had in May. Anecdotes included within the report supported the concept provide issues had been holding again the tempo of enlargement.

“Business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous,” reported one nameless retailer that participated within the I.S.M. survey. “We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market.”

The bond market shifts may depart the Federal Reserve wrong-footed in considering plans to unwind its efforts to assist the financial system. At a coverage meeting three weeks in the past, some Fed officers had been prepared to proceed with tapering bond purchases within the close to future, and a few anticipated to increase rates of interest subsequent year, in distinction with a extra affected person strategy that Jerome Powell, the Fed chairman, has advocated.

In one of many odder paradoxes of financial coverage, what was perceived in markets as higher openness on the Fed to elevating rates of interest has contributed to declines in long-term rates of interest. Global traders are betting that potential pre-emptive financial tightening will trigger a stronger greenback, slower progress and fewer capacity for the Fed to increase charges sooner or later with out tanking the financial system.

“The market read the views of the minority within the Fed about tapering and about raising rates as signals the Fed has blinked on its decision to allow the economy to run hot,” mentioned Steven Ricchiuto, chief U.S. economist at Mizuho Securities. “A weaker global economy and stronger U.S. dollar all imply greater potential for us to import global deflation.”

There are silver linings to the reassessment going down in markets. Lower long-term charges make borrowing cheaper for Americans — whether or not that’s Congress and the Biden administration contemplating how to pay for infrastructure plans, or residence consumers making an attempt to afford a home.