Economists are right to play down global recession fears, as the FT reports (August 6). Federal Reserve interest rate policy has been geared to slowing the economy as the means for taming inflation, which is nearing the Fed’s 2 per cent target, combined with falling prices. So, count the current slowdown as marking the success of the Fed’s effort.
Although investors seem to have been rattled by the slowdown, as evidenced by their flight from equities, the bond market has rallied, with yields falling. Declining bond yields, accompanied by rising bond prices, because of higher demand, expresses investor confidence that the government (in this case the Fed) is on the right track. The current sell-off of stocks will subside when the Fed cuts interest rates in September, in light of the new jobs and inflation data.
Emeritus Professor Albion M Urdank
University of California, Los Angeles, CA, US
