Bond Outlook [by bridport & cie, May 6th 2009]
| Ben Bernanke has announced that the recovery is in sight for the end of the year. He must be reading our Weekly! Just so long as “recovery” is understood to be the end of the fall in GDP. Do not expect much more than stabilisation thereafter. |
| Of greater importance in his recent speech was the recognition that inflation is a huge danger if and when stimulus packages bring GDP declines to an end. Bernanke has a plan to withdraw liquidity from the market when he judges the moment to be appropriate. Whether he can judge that moment, and whether he can withdraw assistance at the right speed to control inflation without killing the recovery, will be his greatest test. |
| His plan is more subtle than just raising interest rates. It involves five actions beyond the Fed’s traditional open market intervention. Here is our understanding: |
| 1. Many short-term loans will mature anyway and will not be renewed |
| 2. The Fed will pay interest on reserves deposited with it, so as to set a floor level for interest rates (that is a different mechanism from open market intervention) |
| 3. |