No fun for the Fed

Whilst the Australian economy seems to have a hit a sweet spot the US economy is plodding ahead in a series of fits and starts. The latest fit, Productivity for 1Q07 was revised down to 1.0% whilst labour costs were revised up to 1.8%. Not disastrous but both indicators are heading in the wrong direction. There is not much more disturbing to central bankers than sluggish economic growth and high inflation.

Not that the US is there yet but yesterday's data suggests it's a possibility. That would put the Fed between a rock and hard place. Obviously with the US economy struggling to find momentum the last thing the Fed wants to do is raise interest rates. Higher interest rates will only prolong the pain in the housing market dampening growth even further and running the risk of recession.


The graph above shows an interesting move in 10 year treasuries rising half a percent since March. Why? Well some of the reason probably lies in the fact that the fast-growing economies of China and India are beginning to diversify out of Treasuries. Also the current world wide liquidity binge has sent bond buyers in search of higher interest rates to compensate for the expected loss in buying power of both interest and principal. In case you weren't sure, none of this is particularly positive for equity markets.