Now that the FOMC is over lets get back to the benign environment. Ideal for the market. The year should see some monstrous rallies.
So far, the benign, moderate-tightening scenario is playing out nicely in the United States. Growth is staying at a sustainable trend rate of about 3.5 percent, and inflation has remained within a moderate range that is acceptable to the Federal Reserve. The absence of perceived macroeconomic risk lowers the long-term real interest rate, itself a moderate stimulant to the real economy, as Fed governor Ben Bernanke reminded the New York Economic Club in a speech on March 20.
Can this continue forever? No. Can it continue a lot longer than we expect? You bet it can. The longer the benign, low-risk scenario persists, the less risk is priced into asset markets and the higher they will drift until, eventually, demand growth presses inflation a little above the FedÂs strongly desired target range. Then we will (re)learn what tight money is.
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