Fed Chair Powell told everyone near the start of the year that he thought the high inflation rates we are seeing now will be transitory. That is because the base effect factor, he said, will work its way out of calculations and supply chain bottlenecks will get worked out as more people go back to work and economies rebound from the pandemic lockdowns/restrictions.

The Treasury market is reportedly treating Fed Chair Powell's view with reverential treatment, if not infallibility.

The tell is supposedly in the price action. To wit: look at the trend in the inflation-sensitive 10-yr note yield in the last three months when year-over-year inflation prints for April-June have been running hot, hot, hot.

Note: The 10-yr yield on day of CPI report

The popular narrative is that the Treasury market believes we are at, or near, peak inflation, meaning rates are due to decelerate, and meaning as well that it believes Fed Chair Powell is right.

An interesting development this week is that Fed Chair Powell in his semiannual monetary policy testimony confessed that he is fallible. He did not say that specifically, but he acknowledged it with the observation that inflation increases were bigger than the Fed expected.

So, if inflation rates are bigger than expected, how can there be abiding confidence in the theory that they will also be transient?

Maybe what we are seeing with the decline in long-term rates and the flattening of the yield curve is not because the market is comfortable with the idea that high inflation prints will be transitory. Maybe it is because the market is thinking the opposite: high inflation prints will be more persistent, thereby forcing the Fed to act (and perhaps overreact) to make them transitory.

That is, they will not be transient in the natural way the Fed Chair thinks they will be. Instead, they will be transient because tightening action will make them so.

To be fair, the stock market has not bought into that line of thinking yet. Or, maybe what we should say is that it has not sold into that line of thinking yet. If the stock market believed the Fed was going to have to tighten -- and tighten aggressively -- to contain inflation, the early reaction to such a view would be demonstrably negative. That has not been the case. The Dow, Nasdaq, and S&P 500 all recently hit record highs after the red-hot June CPI report.

Perhaps the Fed chair will be right about inflation. Then again, perhaps the Treasury market is really suggesting he will be right for the wrong reasons.