boots,
You seem to understand bonds and their various vehicles.
What's you take on what's going on in the Bond world...!
Today there are conflicting signals being sent to the markets. One favors recession - one soft landing - one inflation is just heating up and bond rates will go up - another that world capital will flow out of the US Bonds - not to mention junk and corporate bonds being pressured.
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Report: Fed Leaning to Shift Economic Outlook
Reuters
NEW YORK (Dec. 4) - The Federal Reserve is "leaning heavily" toward softening its stance that inflation poses the greatest risk to the economy, warning that a sharp slowdown in growth poses an equal danger, the Wall Street Journal reported on Monday.
"The new view would likely declare that the danger of a sharp slowdown is at least as great as the risk of rising inflation - the first time officials have made such an assessment since early 1999, when fears of the Asia crisis were still lingering," the newspaper reported.
Wall Street analysts think the policy stance will shift when the Fed's rate-setting Federal Open Market Committee meets on Dec. 19 for its final meeting of 2000.
The Fed, which raised interest rates six times from June 1999 to May 2000 to keep a booming economy from fueling inflation, is not expected to to cut rates in December.
But many Wall Street strategists are upping the odds of a rate cut early next year, and U.S. bond markets have priced in several rate cuts next year.
The Journal said, however, that the Fed could give financial markets a Christmas surprise, slashing rates if two key economic reports -- Friday's employment report and next week's retail sales data -- come in weaker than expectations.
The world's largest economy has slowed from a rapid 5.6 percent growth pace in the second quarter to 2.4 percent in the third quarter, and many economists are revising down their forecasts for growth through the end of the year.
Fed Governor Edward Gramlich said on Friday that data released since the Fed last held rates steady in November have confirmed the U.S. economy is slowing and that credit conditions have tightened.
While few are predicting a recession is brewing at this stage, markets have begun to raise the odds of a contraction.
But the Journal quoted Fed Governor Edward Kelley as being skeptical the economy is careening toward a recession.
"I believe there's still a considerable amount of momentum in this economy, even though it's obviously slowing," Kelley said in an interview with the newspaper.
"Other than the fact that the stock market has been off considerably, I don't see many things in deep trouble," Kelley said.
Financial markets will closely watch a speech by Fed Chairman Alan Greenspan in New York on Tuesday for the latest clues in the central bank's thinking.
07:59 12-04-00
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YEARAHEAD-U.S. economy seen headed for leaner times
By Sarah Edmonds
WASHINGTON, Dec 4 (Reuters) - Few deny that leaner times await the U.S. economy after years of blockbuster growth.
While America may yet be able to avoid recession -- the dreaded R-word worrying an already fretful Wall Street -- life may feel comparatively bleak because of lost jobs, a downshift in capital spending and damage to corporate earnings.
``It's an economy that's going to surprise people on the weaker side. We've been used to everything being so perfect and so strong,'' said David Jones, chief economist at Aubrey G. Lanston and Co. in New York.
The key is the Federal Reserve, economists say, and whether it will be able to shake off the shackles of inflation soon enough to turn things around with rate cuts.
A recent string of data have indicated that the economy, in the record 10th year of expansion, is traveling at a noticeably slower pace. This has prompted many analysts to cut their growth estimates and start talking about the need for interest rate easing to lend relief next year.
Some see rate cuts as early as the first quarter and a majority expect that at its Dec. 19 meeting, the rate-setting Federal Open Market Committee will shift to a balanced assessment of economic risk from the current judgment that inflation poses the main threat to the economy.
But the drum-tight labor market and high oil prices are likely to constrain the Fed's freedom to loosen monetary conditions too much in the near term, economists say.
Therein lies the problem.
THE FED'S DILEMMA
``I think what's going to shock people is that even if the Fed does cut rates -- which I think it will perhaps do several times over the course of next year -- my bet is they're going to start behind the curve,'' Jones said.
``The way things are working...you get a tendency for inflation to still be going higher as growth is slowing. That's a nightmare scenario with respect to Fed policy,'' he added.
This is because high oil prices could create inflation expectations, and the competition for available workers is likely to maintain upward pressure on wages. Further complicating the situation is a forecast slip in productivity growth, which has helped prevent inflation pressures from building and kept unit labor costs low.
The Fed jacked up rates six times between mid-1999 and May of this year but has remained on hold since then, although it has continued to warn of inflation risks.
Despite all this, most economists are reluctant to forecast an actual recession -- strictly defined as two consecutive quarters of declining growth.
``I think there's still a lot of underlying strength in the economy. The consumer side is still pretty good. Capital spending is still good overall,'' said Gary Thayer, chief economist at A. G. Edwards & Sons Inc. in St. Louis.
``We do think growth is going to be slow next year. It's going to seem like a recession to some sectors...in comparison to what we had enjoyed for the last few years, this is going to be noticeably different,'' he added.
TRANSITION LOOMS
And while most economists put higher odds on a soft landing -- a deceleration to a slower sustainable pace without a tip into recession -- than on a contraction in the economy, tightening credit, declining stocks and still-high inventory levels make the road ahead a perilous one, said U.S. investment bank Goldman Sachs in a report released last week.
``A lot of the questions about a soft landing or not a soft landing revolve around what kind of transition it will be. What will capital spending do? Are credit conditions going to be so difficult that we'll have a bumpier landing?'' said Bank of America Securities senior economist Peter Kretzmer.
He remains in the soft landing camp but has recently doubled his odds that a recession could ensue because of softening economic data.
Goldman slashed its estimate for growth in the October-December period to a 2.7 percent annual rate from 3.8 percent and said recession risks were rising. It said that forecasts for the first half of 2001, which now average 3.1 percent, could also be lowered.
In the third quarter, the U.S. economy grew at its slowest pace in four years. The country's gross domestic product rose at an annual rate of 2.4 percent in the July to September period, down from an earlier estimate of 2.7 percent growth and substantially below the second quarter's 5.6 percent clip.
``The U.S. economy is losing momentum more quickly than we anticipated,'' Goldman said in a report describing the Fed's dilemma: how to address the inflation risk stemming from wage pressures without allowing endangering economic growth.
Wages and compensation can often trail the economy and could continue higher even after softening takes hold, in part because labor contracts negotiated during times of bounty often cover multiple years.
Fiscal policy could play a role since lavish spending plans and tax cuts planned by both contenders for the White House could harbor further inflation potential. However, gridlock in Congress may keep the next president -- be he George W. Bush or Al Gore -- from spending freely.
But even if the economy does downshift successfully without a contraction, most economists believe the average American and many business sectors are going to have a rough time with the shift from boom times to moderate growth.
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