Bernanke Is Upbeat About Economy

Relatively low long-term interest rates aren’t signaling an economic slowdown, and increases in consumers’ mortgage debt may not be a serious problem, Federal Reserve Chairman Ben S. Bernanke said Monday.

Bernanke’s remarks reaffirmed expectations that more Fed rate hikes are coming, analysts and traders said.

The small difference between short- and long-term interest rates -- reflected in the so-called flat yield curve -- is not indicating “a significant economic slowdown,” Bernanke said in remarks to the Economic Club of New York.

To the extent that the difference between short- and long-term rates is narrowing because investors are willing to accept less risk because of stable inflation, “the implications for future economic activity are positive rather than negative,” Bernanke said.

Low long-term rates complicate the Fed’s job of managing the economy because they blunt the effects of hikes in the Fed’s benchmark short-term rate.

Yields on 10-year U.S. Treasuries, seen as a benchmark for long-term rates, are little changed since the Fed initiated the first of its current cycle of rate increases in June 2004, dulling the effect of higher borrowing costs. Monday’s 4.66% yield on the 10-year government note compared with the U.S. two-year note yield of 4.65%.

Long-term yields are typically higher than those on shorter maturities to compensate investors for the extra risk of waiting for repayment.

Former Fed Chairman Alan Greenspan called low long-term rates a “conundrum,” and Bernanke said the message from bond markets about what to do with monetary policy was “ambiguous.”

“If spending depends on long-term interest rates,” Bernanke said, and special factors lower those rates, then overall demand will be stimulated and “a higher short-term rate is required.”

The Fed chairman said low long-term yields might also be signaling too little demand for investment and an excess of savings, and that might argue for a lower required policy rate.

He was not conclusive on either argument. Bernanke also noted that Fed policymakers should use “as many guides or landmarks as are available” in setting short-term rates.

Economists and traders generally expect the Fed to raise its benchmark short-term rate by a quarter of a percentage point, to 4.75%, on March 28. Another quarter-point hike is expected at the Fed’s meeting in May.

Bernanke, in response to a question on housing and the economy, said consumer balance sheets appeared healthy, and the increase in mortgage debt “may not be a particularly serious problem” because families have replaced higher-rate consumer debt with home loans.

“Wealth has grown,” Bernanke said. “Families have made a lot of progress in restructuring their liabilities.” If house prices moderate, consumers could increase their saving, he said.

Bernanke said other indicators now showed “market participants do not harbor significant reservations about the economic outlook,” adding that corporate risk spreads “would seem to be consistent with continuing solid economic growth.”