The UK inflation number came out unchanged today at 3%. That’s a number that marks a significant acceleration in inflation from lows in 2015. Yet, if you look at UK 10-year yields, they’re at 1.6%, a full 140 basis points lower than the headline inflation rate. This is a clear sign that bond markets expect UK policy rates to move up slowly with the uncertainty surrounding Brexit a major dampener on expectations.

Now that we’re on the backside of a huge unexpected bout of equity market volatility, it makes sense to challenge the conventional narrative surrounding the build-up to the selloff and what the selloff signifies about future equity gains and bond yields. And the UK story is a good clue to how to interpret this.

What I have said is that the central bank exerts a dominant influence across its yield curve, not just on the short end. And what that means is that, over time, movement in long-term yields largely reflect the bond market’s collective view of the path of central bank policy on short-term rates. When yields move up and stay elevated, that is a sign that the market expects future policy rates to climb.

This is what happened in the US before the equity market correction; markets started pricing in a greater likelihood of 3 or even 4 rate hikes in 2018 and yields climbed. But that’s not what happened in the UK, where real interest rates stay deeply negative. And so, the dichotomy is instructive.

What the experience in the UK is telling us is that, despite the rise in inflation, markets in the UK expect the UK policy rate to remain low due to the uncertainty surrounding the UK’s exit from the European Union.

From a US perspective, what this means is that Fed policy matters most to interest rates. Bond markets can send long-term interest rates up over the short-term. However, if, as in the UK, the Fed were to signal that it was not ready to raise interest rates, long-term rates would fall again. Therefore, the way to interpret the recent rise in interest rates in the US is as the bond market front-running Fed policy action, anticipating less accommodative monetary policy.

To date, most of the move upward in yields has been due to the term premium normalizing. And that says the deflation risk has waned as the global economy enters a growth spurt. There is no need to flee to safe assets like Treasuries. But going forward the question is whether the recent rise in inflation expectations back to their long-term post-crisis 2% level will last, and whether the Fed will respond to those expectations.

What the UK experience tells us is that, even if inflation expectations rise further still — well above 2% in the US, for example —it only matters if the Fed acts. The Bank of England has decided to stand pat again and again, despite inflation rising to 3%. It has even been forced to explain in writing why it has allowed inflation to rise so far. And even though the letter explained the central bank’s view that they would need to raise rates “earlier” and by a “somewhat greater extent” than they had last indicated in November, British 10-year yields remain deeply negative in inflation-adjusted terms. That speaks to the dominance of expectations of central bank policy.

On the US, my view here has long been that the Fed has been and probably will be more hawkish than you think – or at least than the market has thought. I have said that the Fed is prepared to raise rates three or four times this year. And now the market is coming around to that view. Hence rising yields.

So forget about the deficit; this is what matters — whether the Fed moves rates up, and how fast.

The first piece of economic data to which the Fed has a chance to react, the consumer price index, is released tomorrow morning. The forecast is now for a 1.9% year-on-year rise, with the rise 0.3% on a month-over-month basis. If the numbers are greater than this, we should see bond yields rise and renewed pressure on equity markets.