Sage Advice Quarterly Market Review 2Q2006

Despite the economy’s muscular growth rate in the first quarter, Fed Chairman Bernanke indicated that the two-year old rate-hiking campaign would be put on hold after this past FOMC meeting on May 10, in which the Fed increased its target fed funds rate by 25 basis points to 5%. The Fed chief’s recent comments before the Joint Economic Committee ruffled the feathers of some bond hawks who believe that Bernanke may be acting prematurely. After all, with the economy still growing well above its long-term sustainable pace and pushing up against capacity ceilings in both the labor and product markets, the inflation threat has hardly been eradicated. But the financial markets are forward-looking, and many participants believe that enough has been done to curb growth over the balance of the year. Not only are the lagged effects of recent tightening moves yet to be felt, but the recent runup in long-term rates will reinforce the growth-retarding influences already in the pipeline.