Last summer’s rate panic reached this same point–6.5 percent for low-fee 30-year loans–and then retreated, in nine months back to the sub-5.5 percent record.

This time there will be no retreat–not far, anyway. The bond market is oversold, and due for some “technical” improvement, but there are times when a market should be oversold. This is one of those times.

Last year’s panic ignited on news that the overall growth rate of the economy had suddenly shot out of post-bubble mire, but the Fed’s “…considerable period…” language quickly calmed the market, and the wintertime fade in job creation quieted things altogether.

This time–no help for the wicked.

The Fed is not going to reassure anybody. Its statement this week was clear: “…policy accommodation can be removed at a pace that is likely to be measured.” We all know that a 1 percent Fed funds rate is too low (too stimulative…too “accommodative,” in Fedspeak), but nobody alive knows the Fed funds rate at which accommodation would be removed. Not even Alan Greenspan can know, not now, not with the economy suddenly entering a phase-shift into hyper-drive in March, confirmed by this morning’s off-the-chart report of April job growth.

Maybe the economy is not as self-sustainingly hot as it seems, but equally maybe it is that hot. After the Fed removes accommodation, it may not even pause before tightening into the economy to slow it down. “A pace that is likely to be measured” may accelerate into unmeasured, disorderly and undignified haste.

There are times when the bond market is reassured by a Fed rate increase. A hike in the Fed funds rate is inflation prophylaxis, and the bond pit always hopes that the Fed will over-do the purgative and cause an economic downturn, credit fear, and marvelous profits from bonds.

This is not one of those times. Hope for a Fed over-do is an end-of-cycle trade. This is not even the beginning of a cycle: it is the pre-beginning. Remember every day that we are in the midst of the Fed’s first try ever to induce inflation, to “reflate” the economy. Stage one was printing free money until the inflation rate ticked up and out of the deflation danger zone. Nobody knew how long that operation might take, but all assumed it would be gradual.

It wasn’t: we now have a 90-day whipsaw turnaround in the best gauges of inflation; all-of-a-sudden wage growth, confirmed by a marked rise in state and local tax revenue (no, not enough to dent the deficit); and signs that the reflation may overshoot the Fed’s 2 percent target. Signs: the purchasing managers’ survey says that 88 percent of them had to pay higher prices in April than March–the last time so high was 1979, when the Consumer Price Index was popping 1.5 percent each month. Forty-buck-a-barrel oil and two-fifty gas are braking forces on the economy, but sure-fire inflation propellants.

Enter stage two of the reflation campaign: um…er, how do we stop this thing? Never having tried this before, we have no idea at what pace, measured or otherwise, the Fed has to reverse field. Before this morning, the bond market had built in .5 percent worth of Fed tightening; five seconds after…APRIL PAYROLLS PLUS 288,000…scrolled on-screen, the market added another .25 percent.

If the Fed waits until its June 30 meeting to act, it will not help, as traders fear the economy is running away from a pokey Fed. If the Fed does act with an intra-meeting hike, or goes .5 percent in one whack at the end of June, that won’t help either. At each tightening, the bond market will tack on a presumption of yet another tightening, until the economy cracks, or the stock market dives (a stage three reflation possibility), or the Fed with some transparent accuracy says how high it needs to go. Until then, this mad, elbowing trample in the exit will continue.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


Send tips, feedback or a letter to the editor to or call (510) 658-9252, ext. 124.

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