Serene At The Fed?

It's not hard to figure out why interest rates are shooting up. Sure, inflation is still hibernating, but signs of hypergrowth abound. Fourth-quarter gross domestic product was revised upward to a stunning 6.1% annual rate on Feb. 26. On Mar. 1, the National Association of Purchasing Management reported that manufacturing expanded in February for the first time in nine months. Personal income in January jumped 0.6%. The Conference Board is recording the highest-ever consumer confidence ratings, and its index of leading indicators leaped 0.5% in January. Then, on Mar. 2 and 3, Detroit reported that vehicles sold at a torrid 17 million-unit annual rate in February.

With all this good news piling up, the bond market has crumbled. Traders are convinced the Federal Reserve will have to boost interest rates to cool off an overheated economy. On Mar. 3, yields on 30-year Treasury bonds hit 5.7%. That's nearly a full percentage point above their low last fall, after the Fed cut three times to head off a recession in the U.S. The cuts did the trick--and more.