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Will the Fed Go Too Far?

Here are highlights of the notes from weekly meeting of Standard & Poor's Global Investment Policy Committee, held May 17, 2006:

Economic Outlook

Longer-Term: S&P expects the core CPI to reach 2.5% by year-end. Inflation is a lagging indicator, and if the Fed chases the inflation rate too closely, we think it will overreact and raise interest rates too much. If the evidence of slowing growth seems clear, we believe the Fed will no longer raise rates. If the evidence is unclear or the economy continues to surprise on the upside, however, we think the Fed could go too far by raising rates to 5.5% or higher, and then be forced to loosen them in 2007.

S&P's Recommended Investment Allocation

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