Bond Outlook June 29th

Two views are currently to be found about the future moves of the Fed on interest rates:

• The one says that the US economy is slowing, inflation under control, the low long-term yields point to a risk of recession, and the Fed will therefore stop further hikes after lifting the overnight rate to 3¼% or 3½%

• The other says that the Fed has announced a wish to return to a "normal" rate of 1% to 1½% above inflation, and that low long-term rates are all the more reason to raise the short end to curtail not so much general inflation but the housing bubble and its related spending spree.

We lean to the second view because it would be the more responsible. But why would we suppose Greenspan and company will behave responsibly when we have accused them of being in cahoots with the US Administration and its economic irresponsibility to ensure Bush's re-election last year? We give two answers: the first is that there is no longer a "re-elect Bush" issue, and the other is that Greenspan would rather fade out as the Chairman who actually did something about rebalancing as distinct from leaving the clean-up entirely to his successor.