Bernanke's take on economy

Testimony puts scare into bond market

Upward pressure continues on long-term rates: the 10-year T-note at 4.65 percent has jumped the March range, and mortgages are at risk to lose the 6.25 percent level.

The economy has slowed to growth near 2 percent, but shows no sign of serious impact from the housing recession. This morning, personal income and spending each rose by .6 percent in February. Construction spending, expected to drop, instead rose .3 percent.

Weekly applications for mortgages are holding in a steady band. If a mortgage credit crunch were beginning to bite, we would see a decline by now. Refinance apps are running stronger than would be explained by interest-rate-advantage models, indicating that large numbers of ARM borrowers are successfully escaping their upward resets.

The corporate sector is showing some stress: earnings are falling, many estimates calling for mid- to low-single-digit growth, a small fraction of performance in the last several years. Capital expenditures are unexpectedly weak, orders for durable goods in a sustained decline. However, balance sheets are strong, and after a long run the downshift could be no more than a cyclical wobble.

The consumer is king: If spending and job growth continue (the payroll numbers next Friday are crucial), then GDP growth will continue. At a subdued rate, but given the Fed's hope for gradually declining inflation, the ideal outcome.

If growth and inflation behave, fine. However, what if inflation does not "gradually decline," as in Fed forecasts since summer 2006? Will the Fed have the courage to choose inflation-fighting over GDP preservation?

The immediate answer is not so hot: long-term rates broke upward during Federal Reserve Chair Ben Bernanke's Wednesday testimony to Congress.

Read the entire Lou Barnes article at Citywide Services