Big Inflation Scenario

Don't need money
Don't take fame
Don't need no credit card to ride this train
--Huey Lewis & the News

First, interest rates start to rise, driven by a combination of factors such as: Fed increasing short rates, general expectations of a strengthening economy, evidence of rising prices and wages in some areas, and realization that more federal debt will floated to fund a growing budget deficit.

This is where we are now. Then the following sequence of events unfolds:

The rising rates tank the financial markets and cool interest rate sensitive markets sectors such as housing.

The Fed responds, as it always does, with a bail out. Despite evidence of rising prices in goods and services, the Fed lowers the Fed funds rate.

Interest rates do not move lower, particularly at the long end of the curve, as market participants fear further inflationary effects of the Fed's easy money policy.

The Fed responds again, this time by beginning another program of 'quantitative easing' to buy bonds directly to push rates lower.

The money that the Fed prints out of thin air to buy those bonds gets circulated into the economy, thereby stoking inflation fear and evidence some more.

Big Inflation thus arrives.