Treasurys Turn Back After Morning Rally - WSJ.com

Treasurys Turn Back After Morning Rally - WSJ.com: "Treasurys Turn Back
After Morning Rally
By MIN ZENG
February 23, 2008; Page B2

Treasurys were hammered in late-session trading as U.S. stocks turned around and following a hawkish warning about inflation risks from Federal Reserve Bank of Dallas President Richard Fisher.

The selloff Friday accelerated after CNBC reported that a bailout of financial guarantor Ambac Financial Group Inc. could be announced early next week, easing some concern about subprime-mortgage turmoil that has haunted the markets since last summer.

As investors dumped government debt to get into equities, the two- and 10-year sectors ended the week on a down note, giving up a rally in the morning session.

Mr. Fisher, in an interview with Bloomberg News, said he is hearing increasing expressions of concern about inflation from executives, which has 'gotten my attention.' He also said the U.S. probably will see slower economic growth rather than a deeper downturn.

Mr. Fisher, who is a voting member of the policy-making Federal Open Market Committee, voted against the Fed's half-percentage-point interest-rate cut Jan. 30 due to concerns about inflation and a belief the Fed's prior actions would be sufficient to get the economy back on its feet.

Worries over inflation have moved to the front burner after a higher-than-expect" consumer price index Wednesday, and as crude oil and gold set records. A weak dollar also added to the worries as it pushed up import prices.

"Fisher really hit the market's nerve. His comments play into people's fear of inflation," said T.J. Marta, fixed-income strategist at RBC Capital Markets in New York. Inflation eats into the returns on fixed-income securities. "The Fed is basically fighting a two-front war with one weapon, and that isn't a good recipe."

Fears of Stagflation Return As Price Increases Gain Pace - WSJ.com:

"A simultaneous rise in unemployment and inflation poses a dilemma for Fed Chairman Ben Bernanke. When the Fed wants to fight unemployment, it lowers interest rates. When it wants to damp inflation, it raises them. It's impossible to do both at the same time.

Stagflation, a term coined in the United Kingdom in 1965, defined the years from 1970 to 1981 in the U.S. Inflation rose to almost 15%. The economy went through three recessions. Unemployment reached 9%. Fed Chairman Paul Volcker finally conquered inflation, but only by dramatically boosting interest rates, causing a severe recession in 1981-82.

Today's circumstances are far from that. Inflation is lower. Unemployment has risen, but only to 4.9%.

Yet there are similarities. As in the 1970s, surging commodity prices are leading the way. Crude oil rose to $100.74 a barrel yesterday, a new nominal high and close to its 1980 inflation-adjusted high. Wheat prices have hit a record. And, as in the 1970s, the rate at which the U.S. economy can grow without generating inflation has fallen, because of slower growth in both the labor force and in productivity, or output per hour of work.

The biggest difference is that in the 1970s" the Fed was unwilling, or thought itself unable, to bring inflation down. The Fed today sees achieving low inflation as its primary mission.

'Suffer for a While'

"The reason we're so unlikely to see a repeat is we're not adding irresponsible policy," says Christina Romer, an economist at the University of California at Berkeley and a historian of Fed policy. That means if the Fed is wrong in thinking inflation's recent rise is temporary, it will tolerate economic weakness in order to get inflation down again. "They'd have to let us suffer for a while."

Castro Embodies Contradictions of a Movement - WSJ.com

"For all his political skills, Mr. Castro pushed oddball economic theories during his long tenure. In his effort to create a selfless 'New Man,' he tried to abolish money for a time. Later on, he promoted a program to create midget cows for distribution in Cuba's cities as a way of solving the country's endemic milk shortage. Even with the fat subsidies from the Soviet Union and Venezuela, Cuba has had to maintain austere rationing."