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Bond Battle: Will Fed Cut, Hold Or Raise Rates?

The bond market is making a bold prediction on Fed rate cuts. It appears to be pricing in at least two cuts for 2007. Vince Boberski says even that isn’t enough. According to the fixed-income portfolio strategist at FTN Midwest Securities--analysts across the board are underestimating the impact that a declining housing market is going to have on the economy – and as a result, the U.S. labor market as well.

Housing has been a lag on the economy, Boberski says, and it’s only going to get worse next year. Julia Coronado disagrees. She’s the senior U.S. economist at Barclays Capital. She says housing is down, but it has been for a year – and that hasn’t curbed consumer spending. The financial markets are doing well, and the broader economy is strong. So if anything, the Fed’s eye is on inflation. Her firm is taking the Fed’s language at face value, which is leaning toward a tightening rather than an easing of rates.

“Given where inflation is, the Fed isn’t going to consider easing unless we’re in a pretty dire economic situation – and I don’t think that’s the most likely outcome,” Coronado says.

Boberski doesn’t see a change in Fed policy at Tuesday’s meeting. But with more housing data on the way, there could be an easing at the next two-day gathering at the end of January.