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Is growth sustainable?

By Greg McBride, CFA · Bankrate.com
Wednesday, April 7, 2010
Posted: 9 am ET

The minutes of the March 16 meeting of the Federal Open Market Committee were released Tuesday afternoon. The Fed remains committed to keeping rates low, citing the likelihood of only moderate economic growth over the next two years.

In preparation for the meeting, the Fed staff said that both economic growth and core inflation wouldn’t rise as much as they thought. The minutes also refer to an uptick in consumer spending but noted that income “appeared less supportive of spending.”

This begs the question of whether we’re in a sustainable recovery. The stock market clearly thinks so and recent increases in bond yields indicate that even bond investors may be warming to the idea. Another take on this isn’t whether the recovery is sustainable, but is the current pace of recovery sustainable? High unemployment and anemic growth in household income would suggest it is not, and the Fed seems wary about that was well.

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2 Comments
Greg McBride
April 16, 2010 at 10:10 am

Ben Bernanke won't come out and say it but keeping short-term rates at near zero levels in order to help banks earn their way out of trouble is definitely part of the game plan. And all the more reason why the Fed is in no hurry to raise interest rates. Yes, savers are getting drubbed now and "the beatings will continue until morale improves" as the saying goes. Unfortunately savers may end up paying an even higher price in the long run if inflation takes off.

Dave
April 16, 2010 at 9:51 am

Greg-

The last two times the spread on 10-year Treasuries over 1-year Treasury Bills was this steep (over 3 percentage points), was in 1992 and 2003. Both times strong recoveries were under way. It seems to me the Fed may be keeping rates low to help banks continue to pump up their profits - another bailout mechanism to help the industry recover from poor decisions. Unfortunately, taxpayers and savers continue to pay the bill.