• We are now convinced that the Federal Reserve is going to tighten through year-end and into 2006, and we have raised our funds forecast from 4% to a peak of 4.5%. We’ve done so even though we think that inflation worries are overdone. Moreover, because of that view, we are not turning bearish on long-term bonds. • The recently released FOMC minutes were on the hawkish side, and we certainly did notice the plural in the comment “further rate increases probably would be required” to “contain inflationary pressures.” The Fed sees Katrina’s effect as temporary when it comes to growth, but longer-lasting when it comes to underlying inflation. The minutes were also sprinkled with concerns about fiscal policy and its inflationary implications. In addition, Fed staff economists raised their forecast of both growth and core inflation for 2006 (the former reflecting the rebuilding effort, the latter reflecting the spillover
