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How the Bond Markets React The Federal Reserve Board has often be accused of being the strongest political influence in Washington. When the Federal Open Market Committee meets in September, many of the numbers that it once saw as a sign of economic growth have slowed considerably. The 2.8% GDP growth, a number revised downward for the second quarter hardly points to the same strong economy that prompted the Fed to begin to raise interest rates two meetings ago. Oil prices have taken center stage, even if they are well off their speculative highs. Fed governor Ben Bernanke seemed concerned by the inflative effect that these prices can have but added, "it won't create a longer term increase in inflation". Perhaps not which should leave the rate increase in September as good as done.
The question remains though, will it be priced in when the jobless numbers do not fall within the expected range of 50,000 to 100,000 new jobs created in August? Will hurricane Charley be blamed along with seasonal adjustments to show a number that I believe will be less than 25,000 new jobs with the manufacturing sector gaining the most during the month? That will be a surprise to many but will be based on a stronger European demand for goods - even if it won't have any effect on the trade deficit.
As long as a gap exists between the fed funds target and inflation, the Fed will raise rates. This will signal to the fixed income markets that the nation's top bankers are looking though the current slowdown believing that their economic crystal ball foretells better times ahead.
That could be true from a presidential standpoint as well. Historic increases in short term rates in the months prior to the election have served to undermine the incumbents.
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