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The Fed Is a Much-Needed Wet Blanket

Ben Bernanke's cautionary thinking is good for stocks


Despite a dozen consecutive weeks of healthy economic news, Federal Reserve Chairman Ben Bernanke continues to throw cold water on the U.S. economic recovery. Last Thursday, he warned Congress that a sudden financial crisis was possible unless Washington comes to grips with the budget deficit … quickly!

It often has been said the Fed’s role is to “spike the punch” during recessions and lock up the liquor cabinet when the economy is roaring. But Ben Bernanke is acting like a designated driver by spiking the punch bowl with low interest rates while talking down our chances for sustained recovery.

In his latest role as the nation’s economic chaperone, Bernanke told the House Budget Committee, “Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that without corrective action, our fiscal trajectory will move the nation ever closer to that point.”

Bernanke’s caution is good for stocks. Since the Fed continues to talk down interest rates, big companies continue to issue new bond debt at record-low rates. According to the Barclays Capital index, the average yield on investment-grade bonds fell to a record low of 3.07% last week. On Wednesday, Procter & Gamble (NYSE:PG) sold 10-year bonds with a yield of only 2.3%, while IBM (NYSE:IBM) sold five-year notes yielding only 1.25%.

Some big companies can now issue short-term debt below LIBOR rates. For example, Procter & Gamble just sold two-year notes that yield 8 basis points less than the three-month LIBOR rate. This is incredibly bullish, since companies will likely continue to borrow at these ultra-low interest rates and aggressively buy their stock back, which, in turn, boosts their underlying earnings per share, pushing the market up.

Article printed from InvestorPlace Media,

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