3/29/2006

Goldilocks Economy is back


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 FedÂ’s strongly desired target range. Then we will (re)learn what tight money is.

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