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22 February, 2007

Tamed or not? Part 2

The Fed's insistence on maintaining a tightening bias after applying the brakes on rate hikes paid off yesterday with the release of higher than expected core inflation figures. A stark reminder that the inflation threat is still very real and could easily flare up in the event that oil prices rise or that the economy shows signs of overheating considering the tight labor market and close to full capacity utilization. We nevertheless are leaning more towards the scenario where inflation will be contained by the unfolding economic deceleration. Potholes remain on the horizon in the form of a potential rise in defaults, a reversal in commodity prices or an unwinding of the numerous carry trades and other hedge fund strategies......stay tuned!!!

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