Sage Advice Quarterly Market Review 3Q2005

In the 1967 movie, Cool Hand Luke, the prison guard famously said to Luke, the Paul Newman character, “What we have here is a failure to communicate.” Fast forward to the past year and that sentiment could easily apply to the dialogue between the Federal Reserve and the bond market. The Fed, by repeatedly raising short-term interest rates has been saying that the economy is strong and the risk of inflation is rising. Instead of heeding the Fed’s warning, however, the bond market has steadfastly refused to budge, keeping long-term rates below the level that prevailed at the start of the rate-hiking campaign.