This was a quiet week, as markets were contained by Passover and Good Friday bookends. The 10-year T-note traded near 4.2 percent all week, just below an important technical mark at 4.25 percent; mortgages finished a little better than the worst of the Monday finale to the job-data panic, and are now 5.75 percent for the low-fee packages.

I get the feeling that the economy in February and March shifted into a kind of overdrive–not necessarily faster GDP growth, but a more durable, healthier pattern. Further, there are more signs every day that the Fed is succeeding in its effort to “reflate,” to bring the inflation rate up from sub-1 percent to about 2 percent.

Every Thursday morning comes the report of the number of new claims for unemployment benefits, and yesterday was a surprise. Claims fell by 14,000 to 328,000, marking descent to another plateau from the 340,000 level at which claims had been stuck for a couple of months, in the succession of plateaus from 450,000 a year ago.

In an unusual economic situation–as this one still is, out of any post-WWII pattern–it’s helpful to find cross-market confirmation, and we now have another one for an improving employment picture. The best jobs are in offices, and office occupancy is at last beginning to recover from the pit of the last three years. Prior to last fall, office occupancy rates (“absorption”) had fallen in 11 of 12 quarters. New data for Jan-Mar ’04 shows a net gain in office occupancy for the second-straight quarter; the vacancy rate fell by only a tenth of a percent to 16.8 percent nationwide, sky-high compared to the 7.5 percent in 2000, but in a superliner economy, trend changes are everything.

In the self-correcting world of real estate, commercial rents are still falling, now for twelve straight quarters, but helping to attract new tenants, and boosting tenants’ operations by lowering costs. The landlords can look out for themselves.

The appearance of reflation is even more out of our past experience than this post-bubble, excess-capacity recovery. Historically, central banks have succeeded in inducing inflation or accelerating it only by bad accident or incompetence; the only intentional effort in modern times has been underway in Japan for ten years, and success is still in doubt. We all presume that Milton Friedman’s law still prevails: “Inflation is first, last, and always a monetary phenomenon.” Translation: if the Fed leans on the “GO” button for long enough, sooner or later we’ll get inflation.

Higher inflation won’t show itself all at once. How and when it filters into the economy (or “creeps”, in the old political lingo), nobody can predict. The best of the aggregate measures of inflation, the GDP and national income deflators, are lagged by 90 days. We don’t yet have a trend change in prices, but I bet we will soon.

Conditions precedent to inflation are now all over the place, new ones appearing daily. Consider soy beans: the price of beans affects everything from cows to Crisco; beans have risen from$6/bushel to $10-plus in six months (China all of a sudden bought 13 percent of the crop), and the retail price of Crisco cooking oil is up 21 percent since November. The cost of energy shows every sign of entering a new price-versus-scarcity regime, having nothing to do with the Fed, though the weak-dollar policy does play a role.

The credit markets have priced-in a 0.25 percent hike in the Fed funds rate by August; half of all economists polled agree, and a growing number think the first move may happen as early as June. Me, too. The Fed next meets on May 4, and mortgage trading until then will be dominated by anticipation of changes in the Fed’s post-meeting statement.

That, and the wild card: Iraq. Security fear can help our rates; budget damage will surely hurt.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

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