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Years of slow recovery, low rates lie ahead
During the Inquisition, the first step in extracting a confession or recantation of heresy was to show the accused the instruments to be used in the next stage. A glance at tongs, or the rack, and many would sing on the spot.
So it was this week. The Fed inflicted no pain at all, just talked about the potential decision ahead, not yet made, considering at some point, maybe, depending, and if made, whenever, just a little pinch.
You’d have thought every bond trader on the planet had been hanged upside down by precious body parts. However, even their shrieking was hard to hear above the yammering by the alternate-universe mobs. The Fed did nothing more this week than to acknowledge new doubts lying in plain sight.
Nobody knows the slope or durability of recovery. At best, the economy might be entering the outer edge of self-sustainability. In prior periods when the economy ran away from the Fed, the absolute precondition was a surge in credit, which today without QE is still contracting. Inflation appears to be falling for several reasons, but Bernanke was careful to say this week that long-term expectations are not declining.
Still, mortgage rates have yet to cross 4 percent, even though the yield spread between mortgage-backed securities (MBS) and 10-year Treasurys has widened. You can be certain the Fed does not like that widening. It’s a sign of ongoing distress in markets that still prefer ultimate safety.
Making all of this so difficult to process: the expensive-suited, highly regarded and well-connected so seriously interviewed on the telly. They may as well be standing behind your head slamming a ladle into a skillet.
They’ve just about worn out the money-printing-inflation line, so now ooze to arguing the inevitable failure of central banks.
The U.S. economy is uncertain enough without adding imaginary threats from overheating or Fed tightening. Or by offering fantasy prescriptions. More volatility, yes, but slow recovery and low rates probably for years ahead.
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