It’s worth understanding the mechanics of how the Fed kept rates down despite all the pressure for them to rise. It did that via yield curve control, which kept interest rates anchored even when there were massive shifts in growth, inflation, and government bond issuance. In the charts below you can see how long-term bond yields stayed stable around 2% through the huge economic swings of the war (with its massive growth boom and the price controls required to keep inflation from skyrocketing), the postwar slump, and the recovery that followed. Inflation reached a postwar extreme of close to 20% in 1947 and a low of about -3% in 1949, while yields barely budged.
I gave a presentation to the Federal Reserve Bank of New York last week to share our views on inflation and Fed policy. The bottom line: we think the Fed should taper immediately and begin raising rates as soon as possible.
As we have previously disclosed, we have put our money where our mouth is in hedging our exposure to an upward move in rates, as we believe that a rise in rates could negatively impact our long-only equity portfolio.