Bonds rallied sharply as oil prices fell, but it’s not just oil: Inflation-protected Treasury yields also fell. That should tell the Federal Reserve that it hasn’t yet exorcised the specter of deflation.

Fed Chair Janet Yellen unsettled markets last week with the claim that the Fed’s hugely-discredited inflation forecast really was correct, even though the Consumer Price Index has been flat for three months (for the first time since the 2008-2009 crisis). The problem, Yellen said was a set of “idiosyncratic” price changes that all coincidentally moved down rather than up.

Yellen’s assertion violates common sense, not to say arithmetic. The drop in the oil price has all sorts of idiosyncratic features (shale drilling, Libyan oil output). But the plunge in inflation expectations as gauged by the difference between ordinary 5-year Treasury notes and inflation-protected TIPS amounts to a full half-percentage point since the beginning of March. And it tracks the most important traded price in the commodity universe. Yellen said that inflation expectation signals from the Treasury market were “unreliable” — compared to the Fed’s model.

The Phillips Curve trade-off between inflation and employment isn’t working because US companies have figured out ways to eliminate higher-cost employment. The hottest sector in the venture capital universe is now business services that replace corporate white-collar personnel with computers, for everything from automated customer service systems to management of patent portfolios. Although wages are rising for workers within specific job categories, a lot of those job categories are being eliminated in the drive for greater efficiency. The rise in employment has come overwhelmingly in the lowest-wage sectors, holding average wage growth down.

When the Fed rattles its saber, bond yields are supposed to go up, not down. Today’s bond market rally shows that the Fed is not in the real world, and that’s a significant risk in and of itself.