Inflated expectations?

RATE FUTURES REPORT: Markets In Free-Fall, See '09 Rate Hike

Traders sold U.S. interest rate futures contracts in droves Friday, sending prices so low that participants now believe the Federal Reserve will start raising its key short-term funds rate by the end of this year.

Late-2009 and early-2010 fed-funds futures prices fell by unusually large margins. The December contract was down 23 basis points, or almost a quarter percentage point lower, in the closing minutes. It was fully priced for the Federal Open Market Committee to raise its target to 0.5% by the end of this year.

Fed's Yellen: US Treasury yield rise disconcerting

A senior U.S. Federal Reserve official said on Friday that a recent surge in long-term interest rates would be worrisome if fueled by anxiety about inflation but that does not seem to be the case.

Speaking at a conference sponsored by the Fed and the Journal of Money, Credit and Banking, San Francisco Federal Reserve Bank President Janet Yellen did not close the door on the possibility inflation concerns were driving up yields, but made clear she was doubtful.

Fed Chairman Ben Bernanke on Wednesday said worries about skyrocketing U.S. government debt appeared to be a factor behind the rise in long-term rates and he said getting budget deficits under control was an economic necessity.

In an interview with The Economist magazine, New York Federal Reserve Bank President William Dudley also acknowledged that nervousness about budget deficits may be behind the rise in yields, but he said there is little to evidence a dangerous jump in inflation is on the horizon.

If inflation is not a worry, why this quote from that last article?:

[Yellen] was re-thinking her support for a an inflation target of 1.5 percent, and noted that "most" FOMC members now see a rate of 2.0 percent to be most consistent with the panel's dual mandate of fostering sustainable growth and low, stable inflation.