I had something else planned for The 10th Man today and scrapped it because of the stupendously amazing Fed meeting yesterday.

There are some things we need to talk about—immediately. I’ll save the other piece for another time. I know you’re accustomed to my grandiloquent prose, but today I’m just focused on getting words down. And I’ll have a special announcement at the end.

So let’s review.

First we thought the Fed was going to hike four or five times in 2016.

Then we changed our mind and thought the Fed was not going to hike at all.

Then we changed our mind again and priced in four Fed hikes.

The rates market has been really schizophrenic about this, and the guidance from the Fed has been less than clear.

So going into the FOMC meeting yesterday, a consensus was building that inflation was starting to ramp and the Fed was going to have to address it. Nobody was expecting a rate hike yesterday, but people thought the Fed would be pretty hawkish and maybe start pricing one in soon.

Didn’t happen—it was the most dovish directive I have seen in some time. They explicitly took out two of the four rate hikes, moved down the dots on the dot plot, downgraded their assessment of the economy, and most important of all—expressed little or no concern whatsoever about inflation.

I have seen a handful of sea changes in Fed policy over the years, and this was a big one. This was a Fed that went from being concerned about inflation pressures building to being fairly glib about it. And the market did pretty much what you’d expect in response to a central bank being glib about inflation:

  • Gold went up
  • Emerging markets went up
  • The yield curve steepened dramatically
  • Base metals went up
  • Commodity currencies rallied

In other words, the inflation trade is back and bigger than ever, just like we’ve been talking about here and elsewhere.

This is no small thing. Pretend for a moment that I were credible. I am telling you that there is going to be inflation. How do you prepare?

The first question I would ask is: What percentage of your portfolio is in fixed income?

Let me parse this for a moment. Earlier, I said that the yield curve steepened dramatically yesterday, which means the spread between short-term interest rates and long-term interest rates increased. That is because short-term interest rates are driven by fed funds expectations and long-term interest rates are driven by inflation expectations. Two-year notes rallied hard, ten-year notes less so, and bonds were almost down on the day.