Thursday, February 28, 2008

70s Redux?

Allan Meltzer has an editorial in the WSJ which asks if the Fed is repeating the mistakes of the 70s. His answer is yes:

Is the Federal Reserve an independent monetary authority or a handmaiden beholden to political and market players? Has it reverted to its mistaken behavior in the 1970s? Recent actions and public commitments, including Fed Chairman Ben Bernanke's testimony to Congress yesterday -- where he warned of a steeper decline and suggested that more rate cuts lie ahead -- leave little doubt on both counts.

If he's right (and I think he may be) at some point bonds are in for a big hit. The 10 year Treasury Note currently yields 3.75% while inflation is over 4%. That can't last; either inflation will come down or rates will have to rise.

No comments: