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By Sonya Morris, CFA | 10-23-2009 04:14 PM

Fed Has Time Before Inflation Hits

Baird's Mary Ellen Stanek says labor market dynamics suggest tame inflation for a while, but investors should still stick to high-quality bonds with short to intermediate durations.

Sonya Morris: Speaking of that colossal governmental response, just basic Economics 101 tells you that's sort of no-brainer inflationary situation, yet we're hearing both sides. We're hearing that inflation is down the road, but there are other managers who are more worried about deflation. Where do you come down on that?

Mary Ellen Stanek: We think it's worthy to be concerned about it. Certainly paying a lot of attention, putting up a lot of screens to try to determine at what point the Fed begins to extract some of this liquidity.

And the way we think about it, the private sector went on strike a year ago last fall. Post-Lehman, completely pulled back. And so the federal government put its own balance sheet in to effectively save us from even more catastrophic downward pressure on asset values and pricing.

So the big question is, how much is too much? And it was a massive response, but they did not want to run the risk of another 1929, early '30s Great Depression kind of scenario. So erred on the side of a lot of liquidity.

We watch a couple of things. One is the labor markets. We see very high unemployment levels, probably going higher. We look at costs of labor, unit labor costs. And we continue to see downward pressure on the price of labor.

Typically inflation, to get inflation rising dramatically and become problematic, you have to see it typically start moving into the wage structure and benefits structure. We're seeing just the opposite.

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