With growing signs that rising inflation is anything but transitory, as the Federal Reserve keeps assuring us, there are ominous signs that the bond market vigilantes might once again be saddling up. Indeed, over the last couple of months, 10-year U.S. Treasury bond yields have risen sharply to 1.6 percent, or to more than double their level last year. The continuation of the bond market sell-off could pose a serious challenge to the U.S. economic recovery by triggering the bursting of today’s “everything” asset price and credit market bubble.

The latest run-up in long-term bond yields suggest that the markets are not nearly as sanguine as is the Fed about the inflation outlook. Whereas the Fed believes that inflation will soon return to its 2 percent inflation target and that there will be no need to raise interest rates until 2023 to keep inflation in check, the markets seem to be fretting that the Fed could soon fall behind the inflation curve.

In seeming to be concerned about the inflation outlook, the markets seem to have in mind the many troubling tell-tale signs of future inflation. It is not only that world food prices have increased by over 30 percent. Or that ahead of the Northern Hemisphere winter natural gas prices are skyrocketing and international oil prices have more than doubled over the past year to around $80 a barrel. It is also that a policy-induced rapid increase in domestic aggregate demand is running into global supply chain problems and domestic labor shortages that could last longer than U.S. economic policymakers expect.