As long as inflation remains under control, the Fed can continue to maintain its ultra-low interest rate policy. Last week, the Treasury Department sold $15 billion of 10-year Treasury Inflation Protected Securities (TIPS) with a negative yield of -0.046% (the first-ever negative yield at a Treasury auction). This essentially means that inflation expectations are very low, and Treasury rates will remain ultra-low.

The Fed will announce its first-ever interest rate forecast this week after the FOMC meetings on January 24-25. Since the Fed has already said it will keep key interest rates low through mid-2013, it will be fascinating to see what new “forecast” the Fed could offer. I strongly suspect it will predict higher rates in the future in a futile attempt to slow the foreign exodus out of Treasury securities.

The Fed’s ultra-low interest rate environment is hurting the income needs of retired Americans, but it’s helping in other ways — reducing the cost of the federal deficit, hastening the end of the housing market decline and pushing millions of investors away from ultra-low-income bonds and into higher-yielding stocks. S&P 500 companies continue to offer a higher average dividend yield than 10-year Treasury bonds.

The Wall Street Journal recently reported that some Fed officials “believe low inflation and high unemployment could warrant low rates for longer” than mid-2013. Like the Bank of Japan, the Fed is losing its flexibility to raise interest rates, meaning we could see ultra-low interest rates for decades. As bad as that sounds, at least an ultra-low interest rate environment is great for stocks, since more and more frustrated savers are likely to turn to high-dividend-yielding quality stocks.