THE HYSTERIA WAS FUN WHILE IT LASTED:

Since the accelerated taper talk began in earnest last month, the dollar is up, crude oil is down, and five-year inflation breakevens are down. The talk itself, in other words, is both directly reducing the prices of commodities and exports -- and reducing forward-looking expectations of inflation.

The whole idea that quantitative easing (which really just amounts to swapping one safe asset for another) has a large impact on the economy has always been a little bit puzzling. Former Fed Chair Ben Bernanke famously quipped that "The problem with QE is it works in practice but it doesn't work in theory." But other economists argue that it works perfectly well in theory because QE influences people's beliefs. Not necessarily those of random people on the street -- those of professional market participants, who pay very close attention to the actions of central banks.

But people with money on the line don't just wait around for Open Market Committee statements. Especially in the era of transparency and forward guidance, they pay a lot of attention to things Fed officials say. So talking about an accelerated taper isn't just idle chatter about a potential future slowdown in the pace of monetary stimulus; it's a real-time intervention in global markets. And while some Fed actions may operate with Milton Friedman's famous "long and variable lags," the essence of contemporary financial markets is that they operate with almost no lag at all.

That doesn't mean inflation is finished. To retain its credibility, the Fed still needs to issue an actual statement delivering on its chatter, then follow through. 

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