Sage Advice Quarterly Market Review 2Q2007

Following the 1.3% gain in the first quarter, the economy has now logged a growth rate of under 3% for four consecutive quarters, an unusually long stretch of underperformance in the midst of an expansion. Despite this subpar performance, however, inflation has been slow to recede and remains above the Federal Reserve’s tolerance range of 1-2%. As a result, the Fed finds itself firmly ensconced between the proverbial rock and hard place. If it eases policy to cushion the housing-led slowdown, it risks the ire of the inflation hawks and may validate some of the nascent cost-price pressures seeping into the economic landscape. Conversely, if it raises rates to extinguish inflation embers, it would heighten the housing drag and risk bringing on a recession.