Two-year note yields are higher today than they were two weeks ago even though the federal funds rate is 50 basis points lower. The Fed is getting a smaller bang for its buck, at least in terms of market yields, with each successive rate cut. In the long end, bond yields are higher now than they were at the start of the year, when the funds rate was 200 basis points higher. The Fed can continue to lower short-term rates, which the policy-makers seem ready to do, but there's no guarantee long rates will follow.
The ghost of inflation future may be starting to look worse than the ghost of inflation past. And it's not only bond investors who are starting to sniff it out.
Asked about inflation expectations, consumers surveyed by the Conference Board in April said inflation would be 4.8 percent a year from now, the highest since October 1993. It's one thing to say that; it's another thing to behave as if prices are going to be higher tomorrow than they are today.
That's something that would concern Fed Chairman Alan Greenspan and undercut his current agenda.
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