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Jun
18
Jonathan Yates
Is Inflation a Tell that the Economy is still Weak?
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While there have been numerous signs of a strengthening American economy, the recent CPI rate of 1.36% is still concerning.  If the economy was healthy, inflation should be around 2.0%.  While the recent 1.36% is better than the 1.06% for April, it is still below a comfortable margin.

The stock markets need for the economy to be strong enough to hold off the Federal Reserve pulling back on Quantitative Easing III, the acquisition of $85 billion monthly in Treasury Bonds and mortgage-backed securities to finance the US budget deficit.  When Kansas City Federal Reserve Bank President Esther George stated in a speech that she supported its end, the Dow Jones Industrial Average plunged.  The reason why George supported the cessation was due to what she saw to be an improvement in the American economy.

If the Federal Reserve continues Quantitative Easing III in its announcement tomorrow, that is a sign that the US economy is still weak.  Federal Reserve Chairman Ben Bernanke has hinted that it will continue.  The US can certainly not look to China to pick up any drop-off as Beijing could not sell all of its government bonds at a recent auction, so that is certainly a sign of weakness in that country.  As some economists have pointed out, Europe is in a depression with Japan a basket case.

If the Federal Reserve does not continue Quantitative Easing III tomorrow in an announcement, look for global markets to soar.  More good news, such as the recent jobs report and bullish home builders sentiment, buttress the bullish tide in bourses.

At present, bearish sentiment outweighs the bullish outlook by a 2-1 margin.



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