It was late in 2018 and the Fed was tightening, the market was pricing in a federal funds rate of close to 3%; 10-year U.S. Treasury yields were heading toward 3.5% and tighter financial conditions, and markets began adjusting aggressively. In 2018, there were real yields in tow.

The Fed’s ultimate reaction function: broader financial conditions

In the fall of 2018, market participants urged the Fed to abandon its tightening campaign from 2015, accelerating with market-based inflation expectations running above the Federal Reserve’s 2% symmetric inflation target under their old framework of Flexible Inflation Targeting, which had been adopted in 2012. Fiscal forces were in play for the first time, in a long time.

Here’s some additional perspective in the evolution of the Fed’s thinking; 2012 was the first step toward Flexible Averaging Inflation Targeting (FAIT) that we have today.

Overnight Index Swaps (FF), U.S. 10-year yields and the Credit Default Swap Index (2016-2020)