I'm not certain this is a function of complacency, but a recognition of reality. The reality is that, despite occasional rallies in bond yields, like the one we've seen over the last week, and despite notable improvements in the U.S. economy since the crisis crested, the world is still vulnerable to shocks. The risk of shocks, more precisely, further bouts of deflation, will likely keep interest rates lower for longer than many currently anticipate. And the so-called terminal fed-funds rate, which many believe is 4 percent, the rate at which interest rates are normalized, may be much lower — say closer to 2 percent!
Investors know economies cannot handle, nor will likely tolerate, a rapid rise in interest rates, either at home or abroad.
Interest rates are falling in many parts of the world, reflecting the global risk of deflation. The yield on the 10-year German Bund is about 1.4 percent. Published reports have shown that German interest rates, and more broadly, the average of pan-European interest rates are the lowest they have been since the Napoleonic Wars, roughly 1815. In Japan, 10-year yields are roughly 60 basis points, after briefly flirting with 1 percent late last year.
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Bond markets are telling us something from all quarters that the deflation fight is not yet over and to declare victory would be premature. At many points in the fight against inflation, throughout the 1970s, it was thought the war was won. It took a great deal of patience, fortitude and the right mix of policies to win that war.
This Fed is on course to do just that while investors need to show more patience and a deeper understanding of the process.
Many battles are won in a long campaign, but the war is not won until the enemy surrenders. Deflation has yet to hold up the white flag and beat a hasty defeat and the Fed won't rest until the enemy surrenders.
Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He also delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter