Fed vice chairman Donald Kohn warned yesterday that it is too soon to become sanguine about inflation, notwithstanding an easing of price pressures. At a speech at the Atlanta Rotary Club, Kohn stated the recent drop in core inflation could reflect merely "one-time influences." His remarks indicate that the Fed retains its December outlook, when it labeled inflation its greatest concern and held short-term interest rates at 5.25%. Since December, manufacturing and business investment have weakened and inflation has been unexpectedly low, fueling speculation that in January, the Fed might announce that a rate increase is as likely as a cut. Kohn's comments suggest that such a neutral statement is unlikely. He expects the economy to accelerate this year, though the housing decline could deepen further. Kohn dismissed the concern that the inverted yield curve, which traditionally presages recessions, bodes ill for the economy. Overall, his prognosis is positive: "Conditions appear to be in place for a good year for the U.S. economy, one marked by growth that is moderate and sustainable and by inflation that will be lower than last year's."
• Sources: Wall Street Journal, Bloomberg, MarketWatch, Reuters
• Related commentary: The Bigger Picture: Fed Rate Cuts Aren't Everything, The Inverted Yield Curve's Predictive Power, The Bond Yield Curve as an Economic Crystal Ball, Market Hiccups As Fed's December Minutes Are Released, Split Decision at The Fed On Next Rate Move?, Inflation Unleashed?, Fed Leaves Short-Term Rates at 5.25%
• Potentially impacted ETFs: S&P 500 Index (NYSEARCA:SPY), NASDAQ 100 Trust Shares ETF (QQQQ), Diamonds Trust Series 1 ETF (NYSEARCA:DIA), iShares Russell 2000 Index ETF (NYSEARCA:IWM), iShares Lehman 1-3 Year Treasury Bond ETF (NYSEARCA:SHY), iShares Lehman 7-10 Yr Treasury Bond ETF (NYSEARCA:IEF), iShares Lehman 20+ Year Treasury Bond ETF (NYSEARCA:TLT), iShares Lehman TIPS Bond Fund (NYSEARCA:TIP)
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