Goodbye, Mr. Greenspan. Hello, Mr. Bernanke. Well, not so fast: Alan’s last day is January 31, 2006, at which point he will go out of office with another rate hike. There is nothing to indicate that Ben Bernanke will change Greenspan’s “measured pace” of rate hikes through 2006. As readers of this column know, and as listeners to the last webinar know, my opinion is that the Fed has already started to tighten too much, yet intends to continue its effort to pop the “speculative excesses” of the housing bubble.

The worst of inflation risk is behind us. Energy prices have already started to come down as demand reacted to the Katrina/Rita-caused price hikes and as refinery production has rebounded. Retailers, “spooked” by the possibility of a slower holiday season, are poised to be aggressive with their prices (remember: the primary reason for Wal-Mart’s poor showing last year was supposedly their decision to not lower prices enough for the holidays, while others, like Target, did; they won’t let this happen again). Core inflation (excluding food and energy) never moved all that much since sellers still had problems passing on price increases in energy, benefits, and payroll to their customers. Those who are most concerned about inflation point to a recent rise in the price of gold. Their case is hard to refute, other than to cite some of the issues above. Sure, many commodities are up, partly because of the rebuilding of the Gulf Coast, or more accurately, because of market assumptions about what the effects of the rebuilding of the Gulf Coast will be. Most commodities have been off their highs, especially oil (a “shock” which the economy had tolerated well before the hurricanes) and gasoline, which is back around pre-hurricane levels.

What worries me is that we get closer every day to an inverted yield curve (short-term yields are higher than long-term yields). That implies three plausible explanations: 1) that there is an incredible demand for long-term debt; 2) that inflation is minimal; 3) that the financial markets are pricing in an economic slowdown. Perhaps it is a combination of all three. Perhaps the answer is to just issue more long-term (10-year and 30-year) debt, resulting in an increased supply that will raise the long-end of the curve. Until then, the potential of an inverted curve is the primary reason for my concern about a 2006 slowdown.