Fed Foresees Moderate Inflation

Most significantly, Federal Reserve chairman Ben Bernanke said that inflationary pressures are expected to ease later this year and next, in a speech in Jackson Hole, WY. The Federal Open Market Committee has maintained a relatively low target for the federal funds rate in part because of the expectation that prices would ultimately stabilize, he observed--and it looks as though that is beginning to happen. "The recent decline in commodity prices, as well as the increased stability of the dollar, has been encouraging. If not reversed, these developments, together with a pace of growth that is likely to fall short of potential for a time, should lead inflation to moderate later this year and next year."

The Street seized on these comments, as well as other unrelated events, such as the news reports that the Korea Development Bank was interested in Lehman Bros., possibly as an acquisition target. By mid day on Friday the Dow had risen 131 points; the S&P 500 was up by seven points and Nasdaq, 15 points. Lehman shares closed at $14.41 per share, a 5% jump attributed to the acquisition talks. "Any connection with sovereign wealth is a help if it can assist in raising more capital," Dave Dessner, national director of Sales for Guardhill Financial, tells GlobeSt.com.

Also on Friday, Moody's Investors Service downgraded Fannie Mae and Freddie Mac's $36 billion in preferred stock to Baa3, from A1, intensifying shareholders' panic that these stocks will soon prove worthless. But while confidence in the GSEs is clear at a low, their slump might prove to be a good thing for mortgage rates, Dessner adds. "If the government moves to an explicit guarantee of the GSEs spreads should be lower."