Fed Pauses then Traders Will Focus on Inflation

Longer Term US treasuries all yield below 5%; the yield curve is inverted.  Both of these are signs that inflation is expected to decline. 
However, I see signs of inflation all over the place.
1. Congress still talking about increasing the minimum wage - yesterday's defeat will not make this go away.
2. Municipalities and states are raising local minimum wages.
3. Gasoline prices are not showing signs of declining. 
4. Emerging market demand for commodities is still growing. 
5. CPI numbers are as reported by the Bureau of Labor Statistics are high. 
6. Employment is not falling apart - even after yesterday's employment report.
7. Declines in the US Dollar are starting to pass through to the prices of imports.
8. Restricting immigration is also inflationary as non-immigrant wages may go higher.

I think the Federal Reserve Open Market Committee (The Fed) will pause raising interest rates at the coming meeting.  Traders will then stop focusing on the pause in short term rate increases and instead focus on inflation.  When they do that they will realize that the Fed cannot be done with interest rate increases.  You will also start hearing the term stagflation a lot more often.  Stagflation is a condition of both inflation and an economic decline.  This is what undid Jimmy Carter in the seventies.  That period saw the economy pay the price for running an expensive war in Viet Nam and decline in the value of the US Dollar as global confidence in the government finances of the US waned. (sound familiar?) 

I think Bonds will decline.  I am staying short and am using put options to increase my position. 

This is also not a bad time to lock in a low mortgage rate.


Disclosure:
My speculative futures positions benefit from a rise in long term interest rates.

I am short ten year ECBOT US treasury futures and have various options positions that enhance a short position in US Treasuries. (ZN DEC 06), ZNZ6, ZNU6,

I am short 30 year ECBOT treasury futures and have various options position that enhance a short position in these futures positions. (

Disclaimer:
Nothing in this blog is meant to be specific financial advice or a recommendation to buy or sell.  I do not give investment advice.  Do your own research.  Do not rely on anything in this weblog to make investment decisions.  I do not log all my trades here. I only describe or mention those that I think might be interesting. Consult an investment professional familiar with your specific financial situation before buying or selling any security.