The Federal Reserve is meeting again this week, and I expect the central bank will keep interest rates low. One of the major reasons is that as interest rates rise, the government’s budget deficit will get even worse. Uncle Sam already owes $12 trillion and those interest payments costs taxpayers a lot of money.
Ben Bernanke said recently that although the economy has improved, we still have a long way to go to see a sustainable recovery. Specifically, Bernanke said that we’re looking at an extended period of “low rates of utilization, subdued inflation trends and stable long-term inflation expectations.”
Bernanke seems to believe that the economy will do well, but the growth rate will only improve employment at a modest rate. The key part in the Fed’s policy statement has been that the Fed will keep rates low for “an extended period.” Although rates will most likely stay low, that phrase could be taken out this week. If it is removed, then we may soon see the beginning of a major shift in the Fed’s policy and the market will likely celebrate with a strong rally.