In his second day of testimony on Capitol Hill this week, Ben Bernanke’s message seemed to be that a credit crunch-fueled recession is more of a concern than inflation right now. Which signals that more rates cuts are coming. Mortgage bonds have rallied on the news, bringing rates down. Next Fed meeting is March 18, and remember, bond markets (and thus rates) got much better before the last 4 Fed meetings because of expected cuts, then got worst after the actual Fed cuts.
Regarding recession, the commonly accepted definition is two consecutive quarters of negative GDP growth. Bernanke said that the National Bureau of Economic Research is the organization that officially calls a recession. But even he said that it can be “subjective” and a recession can often be called “after the fact.” Amidst all the noise and coverage from the 2-day testimony, this is the Basic Point: Nobody knows if inflation or recession is the bigger issue right now, not even the Fed chairman. So volatility will continue as markets battle this out. Rates rise on inflation concerns because the Fed will hike rates to control prices. Rates drop on recession concerns because the Fed will cut rates to stimulate growth.
We may get more rate cuts to ease the credit crunch, but don’t count on them being around for long before rate hikes again.