(1888PressRelease)
April 19, 2007 - Walt Lecter went on to say “The yield spread between Treasury bonds and Treasury Inflation-Protected Securities, or TIPS, has widened in recent weeks as inflation hovers stubbornly above the Federal Reserve's 1% to 2% comfort zone. TIPS spreads are seen as good proxies for long-term inflation expectations. Nevertheless, the 10-year Treasury yield was 246 basis points above the comparable TIPS yield. That's essentially at the highest levels since early September.”
He continued by saying “Markets' inflation expectations underscore why the Fed has maintained its hawkish bias. But it also suggests some investor concern, at the margin, that the central bank won't keep inflation tightly under wraps. Core inflation, as measured by the core personal consumption deflator, rose 0.3% in February and was 2.4% above a year earlier. That's the 12th-straight month above the Fed's comfort zone and that's despite sub-3% GDP growth in the last three quarters of 2006. And the International Monetary Fund on Wednesday lowered its 2007 forecast for U.S. growth to 2.2% from 2.9%. It cited the housing slump and lower retail and durable goods sales.”
He further commented “This has raised some concern about stagflation, in which prices rise despite a sharp economic slowdown. The last time that happened was in the 1970s, when recession was accompanied by double-digit inflation. There's a huge difference between now and then.
Inflation, though a bit high, is still relatively tame and the economy continues to grow and enjoy full employment.”
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