Bond Outlook July 26th

We were perhaps the last to maintain our faith in the consistency and determination of Bernanke, while others accused him of flip-flopping. Now even our faith is being tested. His latest testimony was built around a classic non sequitur : the economy is now slowing down, therefore inflation has nearly been beaten. Yet, as a younger man he lived through the stagnation of the 1970’s, so from experience, never mind academic analysis, he must know that damping the economy is indeed needed to slow inflation but that inflation still has a life of its own. Bernanke is dismissing the importance of data showing that inflation is worsening, leading markets to believe that monetary tightening is nearly over. Although one of the objectives we supposed Bernanke to have set himself – to deflate the housing bubble – looks like being achieved, the other – to slow growth in credit – is still far away.

Moreover, as MSI point out in the context not only of the USA, but of most industrialised economies, both monetary and fiscal policies are still very accommodative, even as the world economy is in full expansion.