Today's nervous bond investors should recall the memorable quip of James Carville, President Clinton's first campaign manager: "I used to think if there was reincarnation I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone."

Yes, the stock and bond markets cratered last week on fears that the economy is running too hot for the Fed. Yet Wall Street's incessant chatter over whether the Fed may or may not hike rates obscures a fundamental shift in economic policymaking. The Fed matters less than before when it comes to managing the economy, and the bond market matters a lot more. Like other elite institutions that occupied the economy's commanding heights during the post-World War II era, the Fed is losing some of its power to millions of investors and their portfolio decisions. Carville got it right.

Simply put, fixed-income investors won't stand for a sustained resurgence in inflation. Instead, the bond market is a powerful regulator for ensuring price stability as rates rise and fall in anticipation of changes in the general price level. And bonds do well when inflation is tame, so long as you are a fixed-income investor and not a bond-market trader.

Even more telling for long-term investors, the bond market may be signaling a far more optimistic economic story than the current turmoil suggests. Interest rates are high, after taking inflation into account. For instance, with inflation running at a 2% annual rate, the inflation-adjusted yield on Treasury bills is some 3%. Yet the real or inflation-adjusted rate on Treasury bills has averaged 2% over the past half-century.

What accounts for the higher than normal real interest rate? Most likely, it's America's remarkable transformation into a vibrant, high-tech, information-based economy. The dynamic runs something like this: The new economy is driving business to invest enormous sums in computer networks, the Internet, and other high-tech gear. Real fixed investment rose to a record high for the post-World War II period last year, and the share of overall fixed investment spending devoted to information processing equipment jumped from 28% in 1995 to more than 40% this year. The investment boom has companies competing fiercely for finance. The soaring demand for credit has sent real rates higher, since rising real rates is a credit market mechanism for allocating capital to the most productive ventures.

William Poole, president of the Federal Reserve Bank of St. Louis, recently put it this way: "Thus, in explaining the level of U.S. real rate of interest, I put my emphasis on the robust U.S. economy and the tremendous investment opportunities it offers." In other words, he goes on to say, "A high real interest rate in the bond market today is a forecast of productivity gains in the future."

Don't let another inflation scare in the market distract you from the fundamental transformation of the U.S. economy.