Federal Reserve & Interest Rates

Yields on Treasury Securities with maturities of between one and five years have climbed at least half a percent since the start of the month as investors have begun fleeing the safety of government fixed income securities despite the fact the economy continues to worsen.  Investor flocked to Treasuries in earnest back in March in the wake of the Bear Stearns collapse but now inflation concerns have overridden fears about a recession.

It seems that Wall Street isn’t buying into the Fed’s reassurances that it is committed to combating rising inflation expectations and right now they have about as much creditability as the administration does in it’s commitment to the “strong” dollar policy.  The steepening yield curve is actually beneficial to the struggling financial services sector at the moment as it borrows short and lends long.

American consumers are also starting to feel the brunt as high energy prices are beginning to bleed into the general economy with core inflation starting to creep up the last couple of months.  The weak dollar as also had a significant effect as America’s insatiable appetite for imports has also become more expensive.

With the Fed looking to delay raising rates for as long as possible with the housing and financial markets still a major concern, inflation will most likely continue to grow for some time due to the lag effects of Fed policy actions.  It is unlikely they will take any action next week at their regularly scheduled meeting and most analysts aren’t expecting any kind of change at least until September.

Oil exporting countries have resisted calls to increase production, calling current prices unjustified based on supply and demand dynamics.  As investors have continued to flock to the commodities market as an inflation hedge, prices have risen in an ever growing bubble that many are calling for the Fed to burst in order to give some sort of relief from soaring energy prices.