You got to provide a fair return (inflation plus 2% to 3%) to bond investors, otherwise, you will be driving conservative investors to risky equities, cause dollar investment draining by foreigners and destabilize the huge bond market. The Fed's problems is that there is a lot of "carry trade" out there that needs to be unwound, thus the feds will make quite clear rates are rising and give ample time for these carry trades hedges (buying long term and selling short short term bonds). The feds can safely raise rates all the way to 3% (from the current overnight rate of 1%), without causing dislocations,TLT will probably not go much above $84 before it slowly drifts back down over the next few months. Another consideration which the feds must take into account is availability of ammunition if the stretched out consumer no longer provides buying power for the recovery (I doubt business is going to take the slack with a lot of additional capex). As long as new jobs creation exceeds about 250,000 jobs per month, stretched consumers and the lack of additional real estate reliquifaction can be balanced by new consumer having a paycheck available to "consume". If that job growth continues, the recovery can be self sustained for longer than I anticipated earlier. I still think, however that late in 2005 another retrenchment in the economy will be coming (whether Republicans or Democrats take over in November), and that should be signalled by the markets a good six months ahead of time. Right now, I am almost ready to push the top of this cyclical bull to the late September early January 2005 time frame (I want to see how the retrenchment from the last 100 Naz points run is "absorbed, so far so good), with Naz top above 2500.
