"Commentary"-Bernanke Vs. The Bond Vigilantes
Friday, June 19, 2009SUSIE GHARIB: Tonight's commentator says the Federal Reserve is readying for a fight with the bond vigilantes. He's Bernard Baumohl, chief global economist at the Economic Outlook Group.
BERNARD BAUMOHL, CHIEF GLOBAL ECONOMIST, ECONOMIC OUTLOOK GROUP: Anyone watching extreme fighters slug it out inside the octagon knows how brutal those battles can be. But now get ready for a super contest between two formidable heavyweights. Whoever wins this match may well determine the future course of the economy. In one corner is Federal Reserve chief Ben Bernanke, who is ready to spend trillions buying mortgage-backed securities and Treasuries to bring down long-term rates. By lowering borrowing costs, Bernanke hopes to encourage more spending by consumers and businesses and thus hasten an economic recovery. However, in the other corner is a tough adversary -- the bond vigilantes. They comprise of U.S. and foreign investors who believe Washington's spending and borrowing are so out of control, they will fire up inflation, debase the dollar and endanger America's triple A credit rating. These investors are backing away from U.S. government securities, pushing yields up and buying commodities, like oil. Of course higher yields and more expensive oil could KO the economy and defeat all the Feds efforts. Who has the advantage in this all-important battle? History favors the bond vigilantes, unless the Fed launches a surprise counter-punch. A small increase in the Fed funds or discount rate in coming weeks to sop up some liquidity in the economy could trip up the bond vigilantes and lower both Treasury yields and commodity prices. It's a gutsy symbolic move, but it may work. I'm Bernard Baumohl.
