I am currently working on an article for The Hill, discussing all of the reasons why monetary policy became too expansionary in late 2021. One reason I cite is the Fed’s reluctance to move fast. They’ve seen evidence of overheating for several months, but fear another “taper tantrum” if they move too quickly to tighten policy.

In fact, the 2013 taper tantrum is widely misunderstood. The problem was not that the Fed tightened policy unexpectedly, it’s that the Fed tightened policy inappropriately, at a time when unemployment was 7.5%. The markets don’t fear unstable policy instruments, they fear bad macroeconomic outcomes.

Today, a tightening of policy is overdue. A new article in the Financial Times discusses how things are very different from back in 2013. Here’s the headline:

Bond market signals room for Fed to raise rates without stalling economy

This paragraph is the key:

The rising yields, coupled with steady inflation expectations, have pushed returns bond investors can expect to earn after inflation is taken into account sharply higher since the end of last year. Analysts say this increase in so-called real yields indicates traders are expecting the US economy to continue expanding in the years to come even as policymakers withdraw stimulus measures to slow intense price growth.

I am less optimistic than the FT about inflation, but that’s mostly because I don’t view 2.5% inflation over the next 5 years as good news.