Bond Market Investors Remain Inflation Skeptics
"Is galloping inflation around the corner? Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation. But a deeper look suggests that the story is not so simple."
Mankiw ends with this somewhat non-committal conclusion:
"Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era."
MP: The top chart shows 10-year yields on Treasury notes back to the mid-1950s, and like the current 30-year yields that Mankiw mentions, are not showing the classic, inflation-inflated high nominal bond yields of the late 1970s and early 1980s that reflected both: a) high actual inflation, and b) rising expectations of future inflation. The bottom chart shows that annual M2 money supply growth just fell to 1.9% in early January, the first time since mid-1995 that M2 growth has been below 2%. Like the bond market investors (and maybe Mankiw?), I'm still an inflation skeptic.
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