Bernanke Mum on Possible Rate Cut

Includes: AGG, DIA, SPY
by: Judith Levy

In a speech in Berlin Tuesday, Fed Chair Ben Bernanke gave no explicit hints about the Fed's inclination to lower short-term interest rates. The market is expecting the Fed to lower the benchmark fed-funds rate at its FOMC meeting next Tuesday. Bernanke did say the "global saving glut" is keeping a lid on interest rates. China has $1.3 trillion of foreign-exchange reserves and household savings, representing a fifth of its economy. Foreign investors hold half of Treasuries outstanding, which has helped push benchmark 10-year note yields down to an average 4.37% in the past five years. Bernanke said the U.S. current-account deficit -- what Bloomberg terms "the flip side of surplus savings abroad" -- can't go on forever. The risk is that "foreign investors would ultimately become satiated with dollar assets, and financing the deficit at a reasonable cost would become difficult." Bernanke said factors other than the savings-investment balance have an effect on long-term interest rates, including demand for long-term securities -- which varies according to concerns about their risks. In related news, the WSJ observed Tuesday that Fed officials are not expressing consistent views on the downside risks to the economy posed by the credit crunch.

Sources: Wall Street Journal I, II, Bloomberg, Reuters
Commentary: Gauging the Current Economic Scene a Week Before the Next FOMC MeetingWeak Jobs Report Cements Fed Rate CutIs There a Dark Clue Hidden in the Non-Farm Payroll Numbers?
Stocks/ETFs to watch: SPY, DIA, AGG, SHY, IEF, TLT
Related: Fed Chairman Ben S. Bernanke's speech to the Brandenburgische Akademie der Wissenschaften, September 11, 2007

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