As a kid growing up I would have thought big time university professors would know better than this.

It should be obvious to him that markets follow expectations of future Fed policy, they don’t cause it.
The fed funds rate changes only when the Fed votes to change it, and the NY Fed has a good enough understanding of its own monetary operations to implement the FOMC’s will. The fact that under Geithner they never could hit a fed funds target is another story for another time, but rest assured it had nothing to do with bond vigilantes.

Yields are probably going up for two reasons. The first is the expectation that fiscal expansion does work and therefore the Fed is more likely to hike that much sooner. Note that GDP forecasts being raised by most all economists, who also were ready to lower forecasts if the tax cuts are allowed to expire.

The currency is a public monopoly, and as a simple point of logic (not theory or ideology) a monopolist sets two prices. One is how the item exchanges for itself, what Marshall called the ‘own rate’ and for the currency is the interest rate.

In other words, the Fed/govt. sets the entire term structure of risk free rates, one way or another, whether it likes it or not and/or knows it or not.

A monopolist also sets the terms of exchange for his item vs all other things, which for the currency is called the ‘price level’.

In other words, the price level is necessarily a function of prices paid by govt. when it spends, also whether it knows/likes it or not.

(Kindly send this along to the good professor if you have his contact info.)

Bond Vigilantes Could Target US: Roubini

Economist Nouriel Roubini on Wednesday voiced concern over a compromise on extending tax cuts struck by US President Barack Obama and Republican leaders, saying the agreement could expose the US to bond vigilantes who will drive up the price of yields.

Bond vigilantes – the term was coined by economist Ed Yardeni in the 1980s to describe major investors who demand higher yields to compensate for the perceived risks resulting from large deficits – could derail the country’s precarious recovery, some economists say.
Roubini, who has been dubbed Dr Doom since he accurately forecast the latest financial crisis, said on Twitter: “Obama-GOP tax deal costs $900 billion over two years. US kicking the can further down the road. Are bond vigilantes starting to wake up?”

Republican leaders and the White House agreed earlier this week to extend tax cuts on all income groups for two years and extend unemployment benefits in a deal which they hope will spur economic growth and cut unemployment.

Roubini is not alone in thinking the deal could worsen the US deficit and put the country at risk.

Chinese central bank adviser Li Daokui said on Wednesday the fiscal health of the United States was worse than Europe’s, and that the dollar had so far been shielded from trouble because markets are still focused on debt-laden European countries.

US bond prices and the dollar would fall when the European situation stabilizes, Daokui said.