Tuesday, June 3, 2014

Bernanke - Fed Funds Rate Will Not Exceed 4% for a Long Time
Ben Bernanke made these comments in mid-May and he basically said the fed funds rate would not exceed the long term average of 4% for a long time.  This 1950s style interest rate environment is largely due to a weak economy and a weak labor market.  A weak economy will keep the inflation rate moderate and should keep the stock market increasing in value.  With low interest rates stock market P/Es should increase moderately.  Interesting comment.  I suspect that he is correct.
The article is in italics and the bold is my emphasis.  From Reuters:
In a series of quarter-million-dollar dinners with wealthy private investors, Ben Bernanke has been clearer than he ever was as chairman of the Federal Reserve on his expectations that easy-money policies and below-normal interest rates are here for a long time to come, according to some of those in attendance.
Bernanke, who retired from the U.S. central bank in January, has predicted the Fed will only very slowly move to raise rates, and probably do so later than many forecast because the labor market still has a lot more room to recover from the financial crisis and recession.
The accounts of the discussions come from attendees as well as those who heard second-hand what was said at the dinners, where hedge fund managers and others willing to foot the roughly $250,000 bill for each event asked the former Fed chairman questions in a free-flowing round-table fashion over recent weeks.
Bernanke has no constraints on expressing his views in public or private, providing he does not talk about confidential Fed matters. He declined to comment on any of his remarks at the private events.
The demand for Bernanke's time shows that many of Wall Street's highest-profile brokers and investors see him as holding rare insight on how the Fed will react in the months and years ahead - and are prepared to pay big bucks to get private access to those views.
At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed's main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke's lifetime, one source who had spoken to the guest said.
Under his direction, the Fed took the fed funds rate, its key policy lever, to near zero in late 2008 as the financial crisis raged. The central bank has held it there ever since in a bid to stimulate a stronger rebound in the world's largest economy.
Another dinner guest was moved when Bernanke said the Fed aims to hit its 2 percent inflation target at all times, and that it is not necessarily a ceiling. . . .
. . . . Since leaving the Fed at the end of January after serving eight years as chairman, Bernanke has taken a position as a distinguished fellow at the Brookings Institution, a think tank in Washington. . . .
. . . . He is known to be close with his successor, Janet Yellen, adding to perceptions that he should know what the thinking is at the Fed months after his departure. It is a particularly sensitive time as Yellen works to reverse the biggest monetary stimulus experiment ever - and investors who understand how the Fed is going to proceed have an advantage over those who don't. . . .
. . . Bernanke's last major act as Fed chairman was to announce, in December, plans for the winding down of the central bank's huge stimulus, a bond-buying program called "quantitative easing," which should end by this fall.
That was greeted by a sell-off in the bond market, where expectations for future interest rate levels are particularly important, because many investors believed the Fed would move on to raising interest rates in fairly short order. The yield on the benchmark 10-year Treasury note ended the year just above 3 percent, the highest since the summer of 2011.
To the surprise of many, however, bonds have rallied back hard this year, driving the 10-year yield down by half a percentage point. The shift comes as more and more investors come to embrace a view Bernanke has been sharing with his dinner guests: There is just too much slack remaining in the economy to support a rise in interest rates. . . . 
The investors have asked Bernanke about everything from how the Fed will shrink its $4.3 trillion balance sheet to why exactly it didn't start to cut bond purchases last September, when expectations were high.
By most accounts, Bernanke has been candid and sometimes feisty, defending his eight-year record of steering the U.S. economy through the deepest recession in decades. Often using the pronoun "we" to describe the Fed, he has been careful not to contradict Yellen's public comments, in which she too has stressed that the labor market is far from fully healed.
In its first policy statement under Yellen, in March, the central bank said the federal funds rate may need to stay below average even after it reaches its goals for employment and inflation.
In one dinner-table exchange with investors, Bernanke argued that fiscal tightening, constrained financial markets and lower U.S. productivity all point to lower real rates than would be considered normal for a long time to come.
Based on trading in the massive Eurodollar futures market, investors have in recent months tempered expectations of rate rises in the years ahead; as it stands, they don't expect the fed funds rate to return to 4 percent until 2022. As recently as last September, futures markets signaled they thought this would happen by the end of 2018.
At the dinners, Bernanke has also argued the Fed would want to delay raising rates if the tighter financial conditions created could threaten to harm the economy. He has also stressed that financial stability concerns would more formally be considered in policy-making, according to the sources. . . .

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