Inflation Still a Concern

[Jun 3, 2007.]

Inflation remains a key concern for economists, if the price of bonds is any indication.

The 10-year benchmark note recently increased 2/32 or 63 cents on a $1,000 note to yield 4.88%, while the 30-year note jumped 5/32, or $1.56 on a $1,000 note. The price increase came after revelations that the Federal Open Market Committee continues to be concerned about inflation.

Despite the inflationary fears, however, concerns about a sudden economic downturn appear to have lessened. The Federal Reserve has reiterated its concern about inflation but does not believe the bottom will drop out of the economy anytime soon.

Minutes from the committee meeting stated, "Members continued to view the risks to economic activity as weighted to the downside."

However, the minutes also stated, "Some noted that a failure of inflation to moderate could entail significant costs, particularly if it led to an upward drift in inflation expectations."

While there appears to be unrest in a segment of the mortgage market, it is unlikely that the problem will spread. And, while business spending has been lax recently, it may be headed for a turnaround.

Because of the optimism expressed by the Federal Reserve, the stock market rallied, pushing the Dow industrials to a new high.

Brian Bethune, an economist for Global Insight, was quoted as saying, "Even though the Fed now believes that the housing contraction will be more severe than previously expected, a pick-up in manufacturing and business spending pointed to a slightly more encouraging outlook."

Bethune added, "With a slight improvement to the short-term growth outlook, our conclusion is that the Fed will keep rates steady for several more months."

Still, the Fed has concluded that inflation is "uncomfortably high" and needs to come down. As the minutes said, "Members agreed that considerable uncertainty attended the prospects for inflation, and the risk that inflation would fail to moderate as desired remained the committee's predominant concern."

Julie Ann Amos
June 3rd 2007