None. That is, as I write, there is almost no movement in the 10 year since yesterday's close. Indeed, at the moment, it has gained back a little bit of what it lost. Those who were expecting more bloodletting in the event of inflationary news might have been surprised. I was not expecting a huge sell-off, even with the 0.4% increase in the CPI. Yesterday's activity seemed like enough movement to price in the increased inflation expectations. I still think it a little strange that the jump in the 10 year yield waited until after the FOMC statement when there really wasn't a lot of new information in the statement. Then today when the CPI comes out higher than expected (I read that the expectation was for 0.3%), there is almost no movement.
Now, normally, when inflation begins to peek through the data it makes a splash in the bond market. That there was no additional reaction today would seem to suggest that even today's somewhat higher than predicted inflation was already priced in to some extent.
For some time, it seemed like the 10 year yield was "too low" and that was a puzzle. As David Altig at macroblog points out (citing Steve Leisman), maybe that's because the Fed was getting too predictable. For his part, however, Altig does not really put much stock in that problem, as he writes,
I'm not sure if this new language combined by with the old language solves the Leisman problem or not, because I didn't really understand the problem in the first place.
Nor did I. That is, I didn't feel that this is a problem for my own interpretation. But I clearly do think that the bond market was, at least to a point, thinking in those terms. My comments leading up to and immediately after the FOMC statement sort of give that away. Even if Altig and I don't happen to worry about such distinctions, bond traders might and so we ignore those distinctions at our peril.
And so I do think that the language of the statement does solve (or at least address) the Leisman problem, if you want to cast it in those terms. If, as has been suggested, bond traders were finding the Fed too predictable and were "undoing" Fed policy by undertaking leveraged carry trades, that bubble popped yesterday. I predict that there will be a slight premium on the bond yields as that uncertainty over when the more aggresive stance will translate to policy action heightens the market's sensitivity to inflation in weeks to come.
In light of this, it seems that what really was eating at the bond market yesterday was not so much a perceived lack of aggressiveness against inflation as much as a frustration with the increased uncertainty over how and when that commitment will translate to actual policy changes. As someone who favors greater central bank transparency, I'm not so sure I like that. I really hope it doesn't signal any weakening of the commitment to fight inflation. I don't think it will, but the proof is in the pudding.
Meanwhile the dollar continues to gain, which reassures me that the market isn't discounting the Fed's credibility.
Fed funds futures charts at macroblog. Right now the market looks to be saying the probability of a 50 b.p. increase in July is becoming increasingly likely. Unfortunately, I think this might rekindle some of the frenzy over the word "measured" leading into the May meeting. Time will tell.
Update: More on inflation (charts) at Angry Bear
Update: John Berry at Bloomberg has this to say:
First, it was responsive to a growing concern in financial markets that inflation pressures have worsened. Thus, even if officials aren't as concerned as some private economists -- and many aren't -- as a group they have said, "We are on the case."
My point yesterday was to ask whether that is enough. I hope it is, but it's a legitimate question.
Second, if incoming data confirm that inflation indeed is getting worse, the market has been warned that rates may be headed higher more quickly.
Yes.
Third, the door is open to removing the "measured pace" language which some officials have objected to from the beginning on the grounds that it is too predictive of where policy is headed. Whether that phrase actually will disappear in May is uncertain.
Proof that in spite of the incredible strides that Greenspan and Co. have made towards increasing transparency, it's not a perfect science.
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