NEW YORK – Inflation always threatens to turn into stagflation, when consumers balk at higher prices and producers throttle output because input costs are too high to pass on to reluctant consumers.

We’ve seen a few warnings of US stagflation as inflation spiked to the highest levels since the 1970s: for example, slower-than-expected employment growth, larger-than-expected weekly unemployment claims and disappointing May retail sales.

On Thursday the Fed gave the most indirect, pusillanimous and faint-hearted signal that it might raise its overnight rate in 2023. The bond market reacted as if the barbarians already were at the gates.

The “real” 5-year yield (the yield of inflation-indexed 5-year Treasury notes) jumped. So did the “real” 30-year yield, but it immediately dropped back to where it had been before the Federal Open Market Committee’s Wednesday statement.

The bond market is saying that the slightest move in the direction of monetary tightening will throttle future growth.

Never mind that the Fed’s statement recalled the proverbial boarding-house chicken soup made from the shadow of a chicken that had died of starvation. The US economy is living on a bubble, and any hole in a bubble is a big hole.

Not surprisingly, cyclical stocks got hammered in New York’s Thursday session, with financials down the most. Financials had soared as an inflation trade. They fell sharply at the threat of Fed tightening, with Wells Fargo lagging the most in the S&P 100 with a 6.1% loss. Caterpillar, the weathervane for industrials, gave up 3.55%.

Historically, the yield curve tends to flatten when the Fed raises the federal funds rate.

A flattening of the yield curve when the Fed indirectly suggests that it might raise the federal funds rate two years from now, however, shows a hypersensitivity born of fears for the health of the economy.

Keep in mind that both the 5-year and the 30-year “real” yield still are negative: Investors pay the US Treasury to keep their money for them. Investors fear that with any tightening, the long-term Treasury “real” yield will turn even more negative.

They’re very afraid. You should be, too.