My guess is that they don’t raise rates. The chinese need to loosen their currency and let it rise against the dollar. Hopefully they will (continue) to do so slowly and we will have a nice gentle fall over the next decade. I agree currency shocks are bad. But, weaker dollar=good. We buy fewer imports and sell more exports. Wail about M3 (M9, whatever) and housing prices all you want, but until the CPI shows real action or there is a dam-busting currency crash, the probability for raising rates is about zero for 2007. The european central bank (alert: “rumors via bloomberg”)has indicated it is not worried about a weakending dollar till it hits 1.45 (!) versus euro. So, don’t expect any help in coordinating walking the dollar back up. Given the doom and gloom expectations about the housing market on this site – I would expect less worry about inflation….real-estate busts are nice inflation killers (see: Japan, the last decade or two). Sometimes too nice. I too long for an end to the free-money decade, but I worry about deflation as much as inflation in the years ahead.
