by Calculated Risk on 6/11/2006 10:26:00 PM

Stephen King paints the picture: Warning signals that have made the Fed ultra-cautious

We have reached one of those occasional critical junctures in the world economy, one of those multiple forks in the road where, for both policymakers and markets, choices really do matter.

One road threatens inflation. Another risks a possibly serious economic slowdown.

And a third, the worst of all worlds, leads in Escher-style madness to both destinations.

And Dr. Duy argues the Fed will choose to raise rates: Ascendancy of the Hawks

Bottom line: The Fed is poised to tighten at the end of this month.

Perhaps most interesting to me is that Dr. Duy suggests the Fed isn't very concerned about the slowdown in the housing market:

Fed officials will discount the impact of the housing slowdown. The focus on housing we saw last year appears to have reflected Greenspan’s views. I should have picked up on this earlier. From MarketWatch: "Poole said the financial press puts to much focus on "highly visible" sectors like the housing sector, even though it only amounts to a small fraction of overall GDP growth." The Fed discounted the impact of the NASDAQ meltdown as well – technology was thought to be too small a part of the economy. The housing slowdown will be even easier to discount, as it will happen in slow motion.

I think the housing slowdown will have a far greater impact than Poole is suggesting. Duy is concerned too:

I would rest easier if the economy didn’t look to be slowing, or if experience had not taught me to be wary of asset market (in this case housing) reversals.