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Bond Outlook December 12th

Against his better judgment, Bernanke has cut the Fed rate, thereby dissatisfying everyone, including himself. What the USA needs, and Bernanke knows this, is lower consumption for economic rebalance.

Bond Outlook [by bridport & cie, December 12th 2007]

A month ago we described the Fed's dilemma in that it has simultaneously to fight inflation and seek to rekindle a faltering economy. This week's 25 bps cut in the Fed rate showed how a compromise to steer between the two objectives satisfies no one. Inflation is not being checked, and the economy will not be rekindled by somewhat cheaper money (which even the stock markets recognised!).

Having to cut even by 25 bps must have left Bernanke very dissatisfied too, and feeling the victim of his predecessor's policies. However, political and market pressures to save the stock markets and the financial system are hard for Fed members to ignore, especially when the foolhardy actions of mortgage lenders, banks and rating agencies in proposing a silk purse made from a sow's ear (= an AAA investment built on mortgages unlikely to be repaid) will likely come to a head around the time of next year's Presidential election. We believe Bernanke to know in his heart of hearts that a slow down in the US economy due to a cut back in consumer borrowing and spending is desirable in the long run, though painful in the short.

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