Bernanke acknowledged this ,morning that the back up in US bond yields was principally a sign of US deficit concerns. KC Fed president Hoenig is amplifying the point, blaming inflation fears, essentially the same phenomenon. Hoenig says the market is signaling that monetary policy must be brought back into better balance. As the economy recovers, demand will increase and rates must rise, Hoenig says.The US is living beyond its means and failure to curb debt will lift rates, he says.
A recovery will begin late this year or early next year he says, but it will be weak, echoing Bernanke before the House budget committee earlier in the day.
It should be heartening to the market to hear the Fed focus on on rising debt levels. How much succes they will have is questionable as Obama says he wants health care reform, with a multi-trillion dollar price tag, done before October.
The dollar continues its broad recovery as the reflation trade is aggressively pared ahead of the ECB meeting tomorrow and payrolls on Friday. EUR/USD trades at 1.4110, AUD/USD at 0.7934.