By refusing to give calendar-based guidance as the market panics in the face of inflation and growth uncertainty, the Fed appears to be taking the hard route, taking on the role of most hawkish central bank in the G10.

Outcome-based guidance gives the market very little to go on ahead of a reopening, and this can only lead to more bond weakness as more term (risk) premium is priced in. But this is not just about Fed rate pricing. The issue here is that it is this risk premium that is causing problems and there’s nothing to contain it; given changing global dynamics, the US still has a funding problem. To fund the deficit through a weaker dollar and holding rates down was much more favourable for markets than by allowing interest rates to rise and doing it that way. When the current growth surge ends, the Fed will likely change course: there was a reason the market priced in the former coming into 2021.

This will also support the dollar, which brings extra complications as, all things being equal this is less good for reflation. Given this surprising turn, higher real rates and a higher dollar make risk market volatility a lot more likely. As such it is hardly surprising that US equities go into negative territory year to date and emerging market fixed income remains weak. The similarities with 2018 are growing as once again the US leads the growth and rates cycle aided by fiscal stimulus, but with global growth on the ascent we need to be mindful not to get too bearish on risk.

The likelihood of a protracted bond bear market is lower as dollar risks rise – bonds simply will not sell off a lot if the reserve currency powers ahead. However, in the near term, with good growth, bond markets are still at risk and an acceleration in higher real yields is a possibility as a US-led recovery and a strong dollar are not good for the US funding its deficits either. And, like in 2018, this isn’t good for emerging markets as the US outperforms, yields rise and the global private sector goes back to buying US assets.

The tightening in global financial conditions is a negative globally (all other things being equal) and, like with the 2019 repo crisis, the Fed may well be surprised again by how unsupported US yields are this time round. In the end the Fed will be brought back to the easing table as the growth surge comes to an end – possibly in H2 – and we are left with higher rates and a higher dollar, with risk as usual being the mover that forces their hand.

The world needs a weaker dollar and low real rates. As growth is strong this can be ignored for now, but risk asset trading conditions will be a lot more difficult all round as sensitivity builds up. It could be said that the Fed doesn’t seem to learn from its mistakes. Central banks don’t like to look impotent, and with hindsight, they may believe they have little choice but to remain nonchalant to yield moves ahead of a massive growth surge.