Round two to Ben Bernanke. Shortly after he took over as Federal Reserve chairman, some bond market investors fretted that he would be too soft on inflation as an end to the interest rate tightening cycle approached. Once the Fed had paused, the talk turned to whether it had actually gone too far. Towards the end of 2006, the received wisdom became that housing market weakness would take a knife to economic growth and force the Fed to cut rates.

As the Fed held rates for the fifth time in a row at 5.25 per cent on Wednesday (this time unanimously), the bond markets appear to have come round to its view. Yields on 10-year Treasuries have bounced up by 40 basis points since their December low. Investors have become more comfortable that the economy will remain sound and inflation, while still uncomfortably high, will moderate. The strong fourth-quarter figure for gross domestic product growth of 3.5 per cent, even with a serious drag from autos and housing, may yet be revised, but is encouraging. And recent inflation indicators give some credence to the hope that it will start falling this year although the Fed clearly remains vigilant.