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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

May 26, 2009 at 9:45 AM

Signal from the Fed: Low rates are here to stay awhile

Top of the News: Nobody really knows why the market moves in a given day. This morning’s strong showing is being credited to improving consumer confidence — but, ooops, there’s that continuing housing bust.

kohn_don.jpgTraders might also being reacting favorably to a weekend speech by Federal Reserve Vice Chairman Donald Kohn (left). Boil out all the careful Fed-speak and Kohn says interest rates are likely to remain this low for quite some time, whatever signs of economic revival show themselves.

For companies worried about pressure on their ability to borrow and deal with existing debt, it’s good news. Same for consumer borrowers. Critics might say Kohn and his colleagues are in thrall of the great economist Alfred E. Newman (“What, me worry about inflation?”).

The inflation threat is real: The government has created trillions of dollars, mostly to rescue the banks and its risky business with the likes of AIG and the shadow banking sector. All that new money, and borrowing by the federal government, has the dollar under pressure. As the 1970s showed, it takes years for inflation to roar into a conflagration. And unlike the 1970s, the U.S. is now weaker internationally from an economic and fiscal standpoint. When the Fed has to put the brakes on inflation with higher interest rates, the result is often another downturn.

Yet Kohn, and obviously Chairman Ben Bernanke, believe that major inflation won’t materialize. And their thinking says much about the Fed’s view of a potential recovery: It will be weak. Said Kohn, “In my view, the economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households.”

The Fed’s big mission over the fall and winter was to avoid another 1930s deflation. It appears to have succeeded. Now we’ll see if its bets continue to pay off.

Today’s Econ Haiku:

A four-day work week

A pit stop in the rat race

One almost feels French

Check out the winner of last week’s Econ Haiku contest, and reader contributions.

Comments | More in Macro/Big picture

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