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EG Fisher Authored by EG Fisher, co-CIO, Mariner Investment Group, LLP.

With vaccinations in course around the globe, the financial markets are looking for signs of when the global economy will shake off the coronavirus hangover and what a post-COVID economy might look like.

Two recent moves in the U.S. over the past few weeks - one related to rates and market volatility and the other related to Treasury issuance and Treasury financing - are muddying the waters as investors struggle to get a clearer sense of what lies ahead in terms of moves by the Federal Reserve and Treasury markets in these rapidly shifting market dynamics.

The market has reassessed its expectation of how soon the Fed will have to start tightening.

Fed's impact on US Treasury market

Back in August 2020, the Federal Reserve made a critical change to their monetary policy stance when they formally shifted from targeting 2% annualized inflation to "average inflation targeting." For the first time, the Fed communicated that they will tolerate above-average inflation for some period of time in an effort to make up for years of undershooting their 2% target. While it is unclear what inflation rate is "too high" in their view, it became very clear that they intended to keep short-term interest rates at historically low levels even if the economy recovers, the unemployment rate declines, and inflation exceeds 2% over the next several quarters.

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