If one were to review what are known as "forward rates," 1-year interest rate "forwards" are showing very big bets that short-term rates will be lower four years from now, than they are today … another worrisome indicator. That is most acutely obvious in Europe. Inflation is in danger of falling to zero, or below, as growth slows across the euro zone. Like inflation, deflation can be exported, as can weak growth, or recession. This must have central bankers from Brussels to Beijing to the post-Bernanke Fed increasingly nervous about what to do next.
The trouble with the curve, globally, is that a whiff of deflation is being discounted in many, many bond markets.
Indeed, the Cleveland Federal Reserve published its annual report on Wednesday, pointing to the dangers of inflation that is far too low, here at home.
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The implications of the paper, coming from Sandy Pianalto's bank, a regional Fed president not known to be overly "dovish" on monetary policy, suggests that even skeptics are growing concerned the economy is not fully responding to the Fed's massive, multi-year efforts to get it accelerating toward its full potential, i.e.., full employment AND inflation that tops the Fed's stated target of 2 percent.
The message of the market is becoming more and more clear, particularly if one believes the bond market, rather than the stock market, is the best forward-looking indicator of future economic conditions.
Stocks are getting nervous that the relentless drop in current global interest rates, interest rate forwards, and yield curves everywhere, are reigniting fears of DEFLATION, not inflation.