Bernanke - recession, inflation not problems

Bernake insists that the flat yield curve does not warn of economic slowdown in the near future. The Financial Times provides this report of his testimony to Congress:

“Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant slowdown to come,” Mr Bernanke said, in a speech delivered in New York on Monday night.

The Fed chairman said that – unlike in past episodes where a flat yield curve had preceded a recession – both short and long-term interest rates remained low. Also, other financial indicators, including narrow corporate bond spreads, suggested that market participants did not harbour “significant reservations” about the economic outlook.

But he said the low level of long-term rates had “ambiguous” implications for the central bank’s policy decisions, as low rates reflected forces boosting US economic performance as well as the drag from the trade deficit.

Mr Bernanke said low long-term rates were in part the result of a decline in the “term premium” investors demand for holding longer-dated securities. This was stimulating economic activity and requiring tighter monetary policy to offset the effect of overall looser financial conditions in the economy.

The lower term premium in part reflects well-anchored inflation expectations, and expectations that the steadier macroeconomic performance of recent years would continue, he said.

OK. He's the expert. So I am not going to worry (too much) that the recent reduction in home prices on the East and West Coasts mean that a sharp drop in American economic activity is likely in the near future. At least, there may be some countervailing economic activities outside real estate and real estate-related economic activity.