Mortgages are sticky near 6.5 percent, Treasurys getting most of the flight-to-quality benefit from the stock market dive.

Economic data this week were slim and predictable: Consumer confidence fell again, and rebate checks plumped May spending and income, but gave no durable, corner-turning boost. The "personal consumption expenditure deflator" in the spending/income report confirmed the remarkable (and painful) "core" inflation performance, only a 0.1 percent gain: Prices for everything except food and energy are on or over the edge of deflation.

This week was all Fed and markets. Analysts’ responses to the Fed’s meeting have described two different economies and mutually exclusive policy responses: one, the mainstream view that the economy is too weak for the Fed to raise its rate; the second that inflation-fighting and dollar-defense are paramount.

The disagreement itself is traditional, but the extraordinary situation — energy shock combined with 1930-style banking collapse and unprecedented emerging-market growth and trade and currency stress — has added extraordinary heat and uncertainty.

There also appears to be an unusual political divide between the two views: The insurgents are right-side and stock-market champions in editorial dominance at CNBC, the WSJ, and Fox, joined by a few hard-headed and punishing characters in the Fed’s own regional banks. The credit markets from late May until this week traded with the insurgents: The economy was not so bad, and the Fed should and would begin by August a sustained series of rate increases. Thus market rates rose in anticipation. The Fed’s post-meeting statement made clear that near-term rate increases are unlikely, and the inflation/dollar defenders immediately accused the Fed of a lack of courage.

The object of the dispute is the Fed’s set-point for the overnight cost of money, at 2 percent deemed too low by the insurgents. They claim that if the Fed began to raise it, the dollar would strengthen, dollar-denominated oil prices would fall, and so would inflation.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

***

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