30-Year Treasury Yield (1977-2003)
BOTTOM LINE: It is not a coincidence that interest rates have fallen as unit labor costs fall. 70% of inflation is comprised of unit labor costs, while only 5% is comprised of commodity costs. It is very likely the Fed will begin raising rates in the next few months, however the frequency and magnitude of their subsequent hikes will probably be less than investors currently anticipate. The current slack in the labor market and deflationary forces emanating from developing countries should keep unit labor costs in check for the foreseeable future, thus allowing the Fed to raise rates at a relatively slow pace compared to past periods of Fed tightening.
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