Fed raised the discount rate a quarter point and has begun what will be a pattern of rate increases to extend over the next several years. The dollar will benefit with this change in policy direction although the initial impact of the current move is primarily a psychological one. The curve between the 2 and 10 year, at a record yesterday, was not necessarily the issue for the Fed since it was responding to the structural elimination of some liquidity guarantees for banks which have already been closed down. The steepening yield curve move reflects a natural reaction to an almost organic insisting, that over time, inflation will be a problem. There is almost no other way the curve to go, it is reasoned, but as we know that does it make it a sure thing.
So many of the old trade tendencies may be tested as we deal with systemic complications created by the most recent collapse. Easy money during boom times historically leads to inflation. Easy money in an economic collapse limits but does not eliminate deflation. What is left is a trading industry trying to catch the next move, and since the last big war was against inflation, traders just cannot put there arms around a deflationary strategy. Not after all that stimulus. But if the velocity of money in the system is limited to providing liquidity to financial institutions and not to finance economic expansion through broad public use, jobs and asset growth will be limited. Inflation trades will implode.
