William Poole, the President of the St. Louis Federal Reserve Bank, said yesterday that the Fed’s interest-rate policy ought to be "risk-averse." That may not seem like a big deal, but in the carefully-worded world of central bankers, that's considered to be going ape shit. I'm surprised Poole wasn't taken down with a Taser.

In English it means, or the market is taking it to mean, that the Fed is going to raise rates three more times. Until now, the market was expecting two more rate hikes—one on December 13, and another on January 31, which is also Greenspan’s last day. Now the market is also expecting another rate increase at the Fed’s March 28th meeting. That will bring the Fed funds rate up to 4.75%.

Here’s a graph of the futures contract for the Fed funds rate for next May. You can see the spike around the time of Katrina when the market thought the Fed might put off its rate hikes. Even though that was just over two months ago, the market’s perception has since changed quite dramatically.

The 10-year Treasury bond is currently yielding 4.64%, so the yield curve could be slightly inverted in just a few months. The 30-year Treasury is yielding 4.82%. Actually, it’s a 26-year bond; the U.S. Treasury hasn’t issued a 30-year in four years. But thanks to budget deficits, they’ll be returning in February.

The interest rate gap between the U.S. and Europe has been getting steadily wider, which has helped the dollar rally this year. Two straight weeks of rioting has also helped the greenback. On the other hand, the trade deficit surged to a new record in September. The trade deficit jumped 11.2% to $66.1 billion. The deficit with China was over $20 billion.