Over all, we expect the economy to keep chugging along.  We think that GDP will slow from the 4% pace and potentially see sub 3% growth later in the year.  Core inflation will increase from 2.2% to about 2.8% as higher energy, labor and raw material costs work through the system.  With GDP slowing and inflation remaining low, the Federal Reserve, led by new chairman Ben Bernanke, will stop raising rates early in the year.  With slowing GDP, we may even be looking for rate cuts later in the year.  A year-end rate of about 4 ¾% is a reasonable expectation.  Long rates should rise as foreign banks slow their buying of US Treasuries as the dollar falls and their total holdings continue to grow.  China’s total holdings of US debt will approach $1 trillion.

Energy will stay high with oil in the $45-$65 range as long-term supply and demand imbalances become more apparent.  The potential for short term spikes due to hurricanes or geopolitical problems are very possible. The US consumer seems to have become comfortable with gasoline below $3 a gallon.  Anything higher we believe will negatively impact their spending habits. China will become more aggressive in acquiring worldwide reserves to ensure their future needs.  More consolidation of U.S. energy companies would not surprise us.