WHY DOES BOND SELL PRESSURE INCREASE WHEN YIELDS MOVE ABOVE 3

When yields move above 3 00%, it is my opinion that the Federal Reserve no longer fears deflation and is coming to believe that the recovery is gaining traction When this happens, the Federal Reserve responds by increasing the Fed Funds rate As a result, money markets and bonds sell off Here is the logic: when the economy is weak, the Fed Funds rate is kept low, which increases the demand for money When the economy is strong, the Fed Funds rate is raised, which reduces the demand for money As a result, when the Fed Funds rate is raised above 3%, money markets and bonds sell off because investors fear that the economy is gaining traction and that there will be an increased demand for money WHAT IS INFLATION? Inflation is a rise in the general level of prices for goods and services in an economy over a period of time This is often expressed as an increase in the Consumer Price Index (CPI) WHY IS INFLATION IMPORTANT? Inflation is important because it erodes the purchasing power of the dollar For example, if inflation was 3% per year, the purchasing power of the dollar would be cut in half in approximately 1 5 years WHY IS THE CPI USED INSTEAD OF SOME OTHER MEASURE OF INFLATION? The CPI is the most widely followed measure of inflation in the United States The CPI is also used by the United States government to determine inflation rates WHAT IS THE TREND IN THE CPI? Over the past 10 years, the CPI has trended higher From 2008 to 2013, the CPI has trended higher by approximately 1% per year The most recent reading (July 2014) was 2 0% WHAT IS THE FEDERAL RESERVE’S OBJECTIVE FOR THE CPI? The Federal Reserve€™s long term target is 2% inflation The Federal Reserve believes that this inflation rate is low enough to spur growth in the economy, yet high enough to prevent the purchasing power of the dollar from dramatically decreasing