The Bond Bubble is Poised to Burst

Greenspan tells Fischer don't worry about low interest rates because they're going to go up fast

Greenspan tells Fischer don't worry about low interest rates because they're going to go up fast

Inflation is turning into a conundrum for the Fed.

Personal-consumption expenditures, a measure of household spending on everything from washing machines to haircuts, increased a seasonally adjusted 0.1% in June from the prior month, the Commerce Department said Tuesday.

Consumer spending didn't offer much spark either, rising a tepid 0.1% for the month.

Personal income, a measure that includes wages and government assistance, was flat from May. Overall prices rose 1.4% from a year earlier, down from 1.5% annual growth in May. The price index hit and slightly exceeded that level in early 2017 for the first time in almost five years, but has since settled lower.

The Fed targets a 2% annual inflation rate.

"One of the things that's really holding back inflation right now is just the weak wage growth", said Scott Anderson, Bank of the West chief economist. "When they move higher they are likely to move reasonably fast".

In theory, wages should pickup as slack in the job market diminishes and employers have to compete more aggressively for scarce workers.

Despite recent soft inflation readings, Fed Chairwoman Janet Yellen said at her congressional testimony in July that it was "premature to conclude that the underlying inflation trend is falling well short of" the Fed's target.

"We've been in a period of stagnation since 2008 as a outcome of the sharp decline of capital investment and productivity growth", Greenspan said during a telephone interview. He continued, saying "We are moving into a different phase of the economy - to a stagflation not seen since the 1970s".

Peter Hooper, chief economist for Deutsche Bank Securities, sees an eventual upturn in prices.

Some Fed officials, though, have expressed concern in recent weeks about pushing ahead with interest-rate increases in light of the softening inflation data.

Greenspan, who has talked about a bond market bubble for a couple of years, adds in the interview, "when the bond-market bubble collapses, long-term interest rates will rise".

Headline inflation slipped in June on an annual basis.

Consumer spending propelled economic growth in the second quarter, the Commerce Department reported last week. That was up from the first quarter's 1.9% growth pace for household outlays.

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