Softer economic data coupled with a complete dearth of evidence showing actual signs of monetary inflation may now close the door on the Federal Reserve's assault on growth for the balance of the year. At least one more rate hike cannot be ruled out. Because there was a run-up in actual inflation expectations at that time, long bond yields moved higher, discounting reduced dollar purchasing power. The current environment is fundamentally different. The financial press continues to credit the Treasury debt buyback program with pushing yields lower yesterday, but Treasury is not buying back two, five or ten-year notes, all of which had commensurate gains along the yield curve.
Oil remains a temporary risk factor.
June's intensified oil squeeze remains a problem, as it likely will bias the next round of price indices. Writing in today's New York Post, John Crudele makes this argument and asserts that, coupled with a rebounding stock market, this may spark a Fed rate-hiking response right through the elections, foiling Al Gore's presidential aspirations. This scenario is plausible, but very unlikely. If there is no excess dollar liquidity available to push up the general price level, spillover from the oil squeeze will be limited. Oil gradually will be pulled down into its traditional trading locus of 15-1 with gold.