Widened deficit worries financial markets, America on the brink of inflation

Mounting U.S. trade and budget deficits and a weak auction of government debt make businesses more and more worry about US economy in spite even the Fed’s report which states that businesses see some signs of moderation in the contraction, even though conditions were weak or deteriorated further in May. As U.S. Treasury reported on Wednesday the federal budget deficit logged a bigger-than-expected $189.7 billion in May.

Instead, financial markets expect increased inflation and undercut any fledgling rebound in consequence of US government’s massive spending and Fed cash infusions.

Suggesting investors expect that government would pay a premium because of its deficit, government raised yields on the benchmark 10-year Treasury note above 4% for the first time in 8 months. US stocks yields changed little.

"The risk of rising yields should not be discounted," said Joseph Brusuelas of Moody's Economy.com. "If continued, they will reduce home mortgage refinancing and curtail corporate borrowing, both critical to an economic recovery."

As a consequence of worries about widened government budget deficit long-term Treasury bonds yields have arisen in recent weeks. This rise in bond yields, coming despite the Fed's pledge to buy $300 billion in long-term Treasury securities in order to lower borrowing costs and stimulate economic activity, can prevent renew of consumer spending or home buying. As a result of higher long-term bond yields home mortgage interest rates also raised (from 4.61% in March to 5.57% for average 30-year fixed-rate mortgage).

Labor markets remained week despite Fed’s aggressive actions. Waged are generally flat or falling, according to Fed’s report. Prices at all stages of production also are in the same condition, except prices for oil.

However, Fed also reported that some areas saw signs that the pace of decline was easing.