It seems that all you hear from regarding the Fed is inflation, inflation, inflation… Why is that so?
Bonds, mortgages and all other interest-rate denominated instruments move to the dangers of inflation. It is simple economics. If the inflation rate is 10.0% and I lend someone $100,000 for one year, at the end of the year if I am paid back $100,000, it is now only worth $90,000. So I have to charge approximately 10.0% interest rate just to break even and banks are not in the business to break even. In essence, the inflation rate becomes the base for interest rates. I have to charge 10.0% plus something.
Everything we measure that seems to affect interest rates is really being watched for the long and short-term affect on inflation. If the unemployment rate gets too “low,” then wages will rise because employers will be bidding for jobs. The Fed raises rates to slow down the economy that will protect against inflation. Basically, the bond market trades on the psychology of guessing about the future of inflation while the stock market trades on the psychology of guessing about the future of corporate earnings. 
Dave Hershman
dave@hershmangroup.com
Click here to read Dave's bio
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