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Bond Outlook May 9th

The housing bubble deflation pushing toward a Fed rate decrease, and the tight labour conditions still threatening inflation and a Fed increase. Which will win the “race”?

Bond Outlook [by bridport & cie, May 9th 2007]

A few months back, reflecting on the Fed’s explicit fears about inflation, our view was that the next move in the Fed rate would be up. Then the impact of the sub-prime problem on GDP growth led us and many others to suppose that the US economy would slow so much that the only direction the Fed rate could move was down. Yet the Fed continues to stress the risk of inflation more than the risk of a slowdown. This is mainly because of the remarkable resilience of employment and earnings (household and corporate) in the USA, plus, of course, the continuation of household spending quite beyond earnings. It is precisely because unemployment is so low that the Fed fears inflation.


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