We often say that every recession changes an economy, so the subsequent recovery is different than the previous recovery. And we are clear that different is not worse. (The corollary of “economic expansions do not die of old age, they are murdered.”) The thread below lays out several post-COVID differences. All of them point to more inflation, which we have had for several years (core PCE is now in its 65th consecutive month above 2% and even above 3%, compared with just five months in total between 2009 and 2021). This inflation means the tools of 2009 to 2021 not only don’t work, but actually make things worse. * Cutting rates to zero (or negative in Japan/Europe) * Central bank balance sheet expansion (aka “money printing”) * Yield Curve Control (tried by several countries from 2009 to 2021 and effectively announced by Bessent this week) Again, these tools work if inflation cannot get above 2%. They make things worse when inflation cannot get below 2%. This is why we’ve been saying, “bond traders can stop panicking when the Fed starts panicking.” Currently, the bond market is seeing the wrong policies and is protecting itself from further loss of purchasing power (inflation) by embedding high levels of term premiums and/or real rates into nominal bond yields (a 19-year high in 30-year yields). This is the “panic” among bond traders. Once policymakers (such as the Fed and Treasury) understand that inflation is the problem in the post-COVID cycle and address it (they start to “panic”), rather than trying to suppress it with the previous cycle tools of cutting interest rates, printing money (“Reserve Management Purchases”), or twisting the yield curve via bond-buying programs, long-term yields will calm down. The more the Fed gives reason to not cut rates, and the more Bessent talks about his "big toolbox," the higher long-term yields will go. They will peak when they abandon this approach and confront elevated inflation and the anger over affordability.(Jim Bianco)