Keeping rates low indefinitely does act as a stimulus of its own.  Keeping rates at zero without any rate hikes to what would still be low rates also takes away any real firepower in the future for the Federal Reserve when the next recession or period of economic weakness comes.  Today’s testimony to Congress by Fed Chairman Ben Bernanke is effectively a pledge of new steps to boost the economic recovery process.  Bernanke is hanging on to the “extended period” as far as low rates are concerned.

We recently highlighted 15 safety nets that will protect the U.S. from a true double-dip recession and then more data from a Thomson Reuters in-house call argues even more pointedly against a “real” double-dip recession with more historic data.  Nonetheless, the economic recovery is already softer than what we saw in the first quarter and at the end of 2009.  There is also effectively zero real growth when it comes to the jobless situation and unemployment.

In Bernanke’s testimony to Congress, he noted that the economic outlook is still unusually uncertain. He expects that moderate growth will be accompanied by low inflation (and lower than expected inflation) for several years ahead. Bernanke believes the Fed can still take further actions to boost growth despite there being a slow pace of employment recovery.

While the housing market remains weak, Bernanke sees household spending and business demand sustaining growth.  As far as loan issues, the loan losses may also be peaking.

Senator Shelby asked if the FOMC was out of policy tools, and Bernanke said that on top of buying more securities, the Fed could modify its language and that it could lower rates on reserves.

On Federal Reserve asset sales, Bernanke says that this will be gradual and the Fed is mulling several ways to shrink its portfolio.  Most importantly, Bernanke has noted that there is no shift in the Fed’s economic policy as the economic outlook has recently weakened.

Our own surveys taken over the last few weeks leave little real hope of any rate hikes in the near-term.  We received 897 responses, and the vote as far as when rate hikes will come is as follows:

• Before the end of Q3-2010 3%
• Q4-2010 8%
• Q1-2011 18%
• Q2-2011 19%
• More Than a Year From Now 52%

The 10-Year Treasury Note is yielding 2.91% and the 30-Year Treasury Bond is yielding 3.91%.  Stocks have so far not liked what was said because the DJIA is now down almost 120 points at 10,110 and the S&P 500 is down 13.75 at 1,069.73.

Jon C. Ogg

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