- Wall Street kicked off 2021 with its worst first trading day in years amid signs of increasing inflation.
- If inflation rises faster than expected, that could be toxic for investors.
- "There's this idea that central banks are constantly in control of things. If there's one thing that will change that, it's the kryptonite of higher inflation," said Peter Boockvar of Bleakley Advisory Group.
A man wearing a face mask walks past the U.S. Federal Reserve in Washington, D.C., the United States, on Dec. 2, 2020.Liu Jie | Xinhua News Agency | Getty Images
The Federal Reserve enters the new year with a fresh challenge on its plate, namely whether its commitment to higher inflation will bring power or poison to financial markets.
Wall Street kicked off 2021 with its worst first trading day showing in years, as major averages slumped Monday at a time when investors were still counting on the last days of a Santa Claus rally.
While some pundits looked at political uncertainty as a major underpinning for the plunge, an inflation trade also was at work.
A key indicator, which looks at the relationship between Treasury yields and inflation-protected bonds of the same duration, rose to levels not seen in more than two years.
The "breakeven" rate for 10-year inflation expectations briefly touched 2%, a level that policymakers consider healthy but also was indicative of a market that already is looking for pressure while the Fed's favorite indicator is closer to 1.4%.