From The Daily Capitalist:
Chairman Bernanke reaffirmed again the Fed's commitment to low interest rates because the U.S. economy is still weak. Bernanke also said that the federal government's fiscal situation "looks dark" and that he is worried about the ability of the Treasury to sell debt:
“Interest rates might rise because of a lack of confidence by creditors in the long-term fiscal stability of the government,” and “high interest rates tend to slow the economy,” he said.
Today's auction of paper by the Treasury saw rates creep up. Not a good sign for them.
Bernanke ticked off the latest positive signs in the economy, but was cautious about the sustainability of the perceived recovery. In his written testimony before Congress today, he said:
At its meeting last week, the FOMC maintained its target range for the federal funds rate at 0 to 1/4 percent and indicated that it continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
Let me translate:
Business is still lousy, credit has dried up and we can't shake it loose, and unemployment remains a huge problem for us. We keep trying to inflate but nothing works. So, we'll just keep doing what we've been doing. We can't think of what else to do right now.
The rest of his testimony dealt with the issue of how to drain the money pond once recovery starts to kick in. When you have no new ideas on how to spur the economy or free us from the "liquidity trap,*" you talk about exit strategy.
As I've said before, their exit strategy is a big gamble for the Fed. If banks decide they want to lend, they will because they need to service their customers and make money. Getting interest on their deposits with the Fed might not be sufficient to overcome their business requirement to generate loans.
Watch for a hasty retreat from any tightening in Q3 or Q4 when the numbers go south.
* I believe that the so called liquidity trap is something the Fed and Treasury created with the bailouts, TARP, TALF, mark-to-make-believe, and extend and pretend. Credit will remain stuck until banks rid their balance sheets of bad debt, which now is mostly CRE related.