A troubling about-face at the US Federal Reserve

"I have seen a handful of sea changes in Fed policy over the years, and this was a big one," says Jared Dillian on MauldinEconomics.com. The US Federal Reserve has gone from being concerned about a possible return of inflation "to being fairly glib abut it". Last week, we heard that US core, or underlying inflation (excluding volatile food and energy prices) rose at an annual rate of 2.3% last month, the highest figure in almost four years. Overall inflation, depressed due to the drop in oil prices, was up 1% year-on-year.

"The data are troubling," as Rex Nutting puts it on MarketWatch.com. "Six months ago, inflation barely had a pulse." On the Fed's preferred measure, the Personal Consumption Expenditure (PCE) index, it was climbing at 0.2% year-on-year. The PCE figure today is 1.25%. The Fed's target is 2% on this gauge. Nonetheless, Fed chair Janet Yellen said "we haven't yet concluded" that there could be a sustained rise in core inflation. Moreover, the Fed released a chart indicating that it only expects two interest-rate hikes in 2016, down from a projected four last December.

Yellen "shrank from her own insights", says Ambrose Evans-Pritchard in The Daily Telegraph. She admitted that the labour market is close to the point where unemployment is so low that wage pressures start to "gathersteam". She also acknowledged that inflation would rebound rapidly once the oil-price slide drops out of the annual comparison. What's more, "stimulus is building up". There will be a net fiscal boost this year as state and local governments up spending. Much of the windfall from lower oil prices has yet to be spent by consumers. The global backdrop has steadied.

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It's also worth noting that another inflation measure, the Cleveland Fed's median index of underlying inflation, is rising by 2.8%. Small wonder then that many fear the Fed is "falling behind the curve": allowing inflation to take hold, implying that it may haveto raise interest-rates faster and further than expected. That would endanger growth and cause widespread turbulence in markets especially in absurdly overpriced bonds.

The Fed may be loath to rattle liquidity-addicted markets now by raising rates, given the potential knock-on effect on growth, but waiting looks the worse option. A sharp sell-off in bonds amid a return in inflation would send yields implied long-term interest rates up sharply. The danger is that the bond market "is going to tighten for [the Fed]" anyway, says the Lindsey Group's Peter Boockvar. "That would not be a pretty place for them to respond from."