After improving noticeably (and rapidly) over the last two weeks months, both the financial markets and U.S. economy have arrived at essentially the same place: higher expectations. In early 2009, financial market participants found acceptable that the U.S. economy merely stopped getting worse, or that the U.S. government had a viable plan to address housing, the banking system and the mortgage crisis, and that the Federal Reserve was not repeating the monetary policy mistakes of the 1930’s. Now, as May turns into June, and the economy enters the 17th month of the recession that began in December 2007 (making it the longest recession sicne the early 1930’s), financial markets are no longer satisfied with an economy that has "stopped getting worse." The market wants to see real sustainable growth in the economy – not just less negative readings. On the policy front, the market now wants to see the proof that the government’s policies on housing, the banking system, and the mortgage crisis working. On monetary policy, markets have come around to the view that the Fed has not repeated the monetary policy mistakes made in the early 1930’s that deepened the Great Depression, but now are beginning to worry more about the Fed’s "exit strategy", and its potential impact on inflation.

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