The last time that the Federal Reserve (Fed) was widely expected to start reducing, or “tapering,” its bond purchase program, earlier this fall, interest rates increased and the market tanked. Widely referred to as the “taper tantrum”—a term I wish that I had invented—the drop was quickly reversed when Fed officials came out and reassured the market that, in fact, they had no intentions of pulling back, ever. Really.

That was then. Since that time, the economy has shown improved growth, interest rates have ratcheted back down, and the stock market has recovered and powered up to new highs. With the recent good economic news—much higher levels of GDP growth than expected, higher employment figures and lower unemployment, and very positive business surveys, among other highlights—the Fed is at a point where a taper pretty much has to start soon. Maybe not this week, but soon. The budget deal in Washington also makes a taper more likely because the last reason for the Fed to continue its stimulus was worry about fiscal policy disruption.

I’ve been doing a number of interviews recently, and the one thing everyone wants to talk about is the new records being set by the market. With the S&P 500 touching 1,800 and the Dow touching 16,000, the question is whether this is the start of another upward run or whether it marks the peak.

There’s something about round numbers that gets people going. The end of the world in 2000, the hype over Dow 10,000 (both ways), and the repeated questions at every 1,000 mark suggest that somehow this number is different.

The photo below comes from an old B movie called Independence Day that I’ve always enjoyed. The plot is pretty simple: A race of space aliens shows up in orbit around the Earth and utterly destroys Washington, DC. Later on, though, it turns out the aliens are actually hostile.

Watch Brad’s interview on Reuters TV, where he discusses the Dow hitting a historic high of 16,000 and what this means for the markets going forward.

We talked yesterday about how consumer price inflation has been pretty moderate, and why that is. To recap: The speed at which money circulates has declined, even as the Fed forces bank reserves into the financial system, meaning that when the economy recovers, when the banking system gets its mojo back, and when lending starts to take off again, we can expect inflation to accelerate—potentially very much so.

A point worth mentioning here is that the Fed does have tools it can deploy to help limit inflation. And although the Fed has said it will wait to do so, inflation is actually a problem we know how to solve. This is something to watch, therefore, but shouldn’t become a long-term systemic problem.

Yesterday, we talked about how the money supply has not expanded unduly, given the level of economic growth. We also looked at credit growth and found that it too was running at or below the levels expected, considering the level of economic growth. There appears to be no sign of the Federal Reserve’s stimulus in these measures.

Does that mean we’re off the hook on inflation? The short answer is no, and the reason is interesting. First, though, a bit of background.

Hanging out in planes and in airports yesterday, I was prepared to write something fairly caustic about US Airways. But I have to say, at the end of the day, they did a pretty good job.

Looking at yesterday’s post, it is clear that there’s a disconnect between consumers and business again—but in the opposite direction from what’s been happening recently. Over the past couple of years, consumers have spent while business sat on its cash, refusing to invest or, more particularly, hire. While consumers had led the recovery thus far, it was apparent that, to take the next step, business had to start to hire and invest.

I mentioned yesterday that consumer confidence had declined since the shutdown, while business surveys had come in much more strongly, indicating that this transition might be starting. Today’s data points suggest that, while consumers are closing their wallets somewhat, businesses are beginning to open theirs.

Today’s news included a stronger-than-expected growth figure for the U.S. economy, which expanded 2.8 percent in the third quarter. Before we get too excited, though, we have to note that the increase came from inventory buildup—not exactly a sustainable growth engine. In fact, you can argue that the reason inventories increase is because sales are less than expected. If you take away the inventory effect and net foreign trade, you end up with a 1.7-percent growth rate for sales to domestic purchasers for the quarter, down from 2.1 percent in the previous quarter, which supports this argument.

Unfortunately, other data points confirm a slowdown last quarter. Personal consumption grew more slowly, at 1.5 percent (down from 1.8 percent the previous quarter), while business investment dropped from a growth rate of 4.7 percent to 1.4 percent.

Watch Brad's interview on Bloomberg TV here, where he responds to the question, "Will the rally continue?"