Susan Bies, a Federal Reserve board governor, yesterday joined a chorus of central bank officials expressing concern over rising inflationary pressures, as financial markets braced for a further increase in interest rates.
?We?re in a period of transition and transition means we don?t exactly know where we are going to stop,? the governor said.
Financial markets appeared to give a vote of confidence in Ben Bernanke?s inflation-fighting credentials a day after the Fed chairman issued a warning over recent price rises. The dollar and bond yields both rose and equities fell as traders digested Mr Bernanke?s comment that the core inflation rate was now at or above the upper end of the range consistent with price stability.
Ms Bies?s comments on the economy closely tracked Mr Bernanke?s, creating the impression of a concerted effort by Fed officials to talk tough to contain expectations of future price increases.
In the past week there have been hawkish comments from William Poole, president of the St Louis Fed, and Michael Moskow of the Chicago Fed.
On Tuesday, the spread between nominal and inflation-protected 10-year Treasury notes ? one measure of long-term inflation expectations ? narrowed by six basis points to 2.59 per cent.
Before Mr Bernanke?s comments, the Fed funds futures were pricing in a 50 per cent chance of a June rate rise; yesterday they were pricing in an 80 per cent chance.
Meanwhile, the premium on 10-year Treasury bonds over two-year notes narrowed by 3bp to just 1bp. Such a flat yield curve is traditionally a sign that the market expects slowing growth and contained inflation.
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