The Fed’s statement last week switched from a May forecast for a moderating economy to a declarative: economic growth is moderating. Now.

Unlike a certain past-Fed president, the Fed has no history of alternate meanings for the verb “to be” — is means is. Fed Chair Ben Bernanke got it dead center: every current-condition datum released this week reflected a slowing economy. Moderately slowing, but slowing, which has held long-term rates just below their highs.

This morning’s payroll data for June disappointed everyone except bond traders, the actual 121,000 gain less than half of many forecasts. The twin surveys by the purchasing managers’ association slid in June, below the May readings and below forecast. Note that this moderation should not be confused with a pre-recession table-edge: unemployment is at or below the lowest tolerable for inflation risk, 4.6 percent; there is no up-tick in layoffs; and wage growth at almost 4 percent year-over-year is as high as it can be and stay in balance with productivity gains.

As the Fed’s August meeting approaches, you can bet that Bernanke and his voting colleagues will be asking themselves every day, will this moderation, if it continues, suffice to get inflation back in the sub-2 percent box? Will the over-extended consumer fall out from under the great strength in business conditions, or will business and trade continue to pull the economy along at a growth rate too close to capacity constraints?

Before, after and during those questions, they will glance for help or hurt in the energy market. This week was a bad one — oil holding its new $75 level. Several references near the Fed suggest consensus that it may be able to manage the spike to $70 without either recession or a ’70s-style wage-price spiral, but the inflation consequences of another move to $80 and beyond could not be contained without rather a lot of Fed-induced pain.

The bond market today says that we and the Fed are close to that point already. The 6-month T-bill at 5.28 percent has begun to price a 5.5 percent Fed on Aug. 8, and the Fed-funds futures market shows a two-thirds probability of five-fifty. However, every Treasury security from two years’ maturity to 30 today pays a yield between 5.1 percent and 5.16 percent, a unanimous prediction that if the Fed goes higher from here it will soon have to retreat.

In the endless we-know-that-they-know-that-we-know-that-they-know game between bonds and the Fed, I think that some of the low yield response by bonds to the Fed’s hike last week shows new belief that the Fed is going to have to overshoot whether it wants to or not. From December until now, the floor under bond yields rose with the Fed; this week is a distinct break in pattern.

In another break from pattern, geopolitical scares are not having their normal effect. A volley of North Korean missiles caused not a flicker on bond screens — no flight to quality at all. Media whizbangs claimed that $75 oil was the fault of the missiles, but if you can connect those dots to the Persian Gulf, you’ve got a different globe than mine.

As foreign institutions are dominant buyers and owners of U.S. Treasurys, their market reactions to security threats I think constitute a compelling vote on the seriousness of a given threat — new or renewed. The Bush administration has repeatedly scattered Democrats by shouting “Wolf!” at them, but it’s been hard to tell how dangerous the world really is.

If Asia is not nervous enough about Kim Jong-il’s fireworks to load up on Treasurys, nor the holders of the Middle Eastern cash hoard to buy in response to Iran, then we should cool the security frights, too. Instead, focus on the real wolf: oil prices are rising because of demand, and the inflation problem is real.

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

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