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Interest rates fall, gold at new high, after Bernanke says Fed might do more

Treasury bond yields fell Monday after Federal Reserve Chairman Ben S. Bernanke left no doubt that the Fed was committed to its $600-billion bond purchase plan -- and that the program could be expanded further.

Bernanke also may be moving another market: gold, which hit new highs.

Bennov30 The Fed chief, appearing on CBS’ “60 Minutes” on Sunday, forcefully defended the central bank’s bond buying -- so-called quantitative easing -- which is aimed at keeping longer-term interest rates suppressed. The Fed launched the latest program after its Nov. 3 policy meeting, pledging to complete $600 billion of open-market Treasury purchases by mid-2011.

The plan has sparked intense attacks on the Fed by critics who say Bernanke risks stoking inflation by flooding the world with more dollars, and that there’s no assurance lower interest rates would bolster job creation.

More worrisome for the Fed, perhaps, is that Treasury yields have risen rather than fallen over the last month. The five-year T-note yield hit a four-month high of 1.67% on Thursday, up from 1.03% on Nov. 3.

But on Friday the five-year T-note slid to 1.62% after the government’s dismal November employment report. It fell further, to 1.52%, on Monday, after Bernanke told CBS that it was “certainly possible” that the Fed could boost its bond-buying program beyond $600 billion. Longer-term Treasury yields also eased.

Bernanke was unapologetic in the CBS interview, reiterating his belief that the greater danger facing the economy was deflation, not inflation:

CBS: What did you see that caused you to pull the trigger on the $600 billion, at this point?

Bernanke: It has to do with two aspects. The first is unemployment. The other concern I should mention is that inflation is very, very low, which you think is a good thing and normally is a good thing. But we're getting awfully close to the range where prices would actually start falling.

CBS: Falling prices lead to falling wages. It lets the steam out of the economy. And you start spiraling downward.

Bernanke: Exactly. Exactly. That's deflation and that's what happened in the Great Depression.

CBS: Some people think the $600 billion is a terrible idea.

Bernanke: Well, I know some people think that. But what they are doing is they're looking at some of the risks and uncertainties with doing this policy action, but what I think they're not doing is looking at the risk of not acting.

The November employment report, which showed the economy created a mere 39,000 net jobs, played into Bernanke’s hands -- although the CBS interview was conducted earlier last week.

Meanwhile, gold closed at a new all-time high (unadjusted for inflation) on Monday, rising $9.90 to $1,415.30 an ounce in New York futures trading. That topped the previous record closing high of $1,409.80 set Nov. 9. The metal is up 29% this year, more than three times the 9% rise in the Dow Jones industrial average.

The Bernanke interview may have been positive all around for gold. The inflation-wary couldn’t have been comforted by the Fed chief’s willingness to expand the bond-buying program.

At the other end of the spectrum, anyone fearful that the economy might yet fall off a cliff -- and therefore looking at gold as a place to hide -- could latch onto Bernanke’s warning that “we're not very far from the level where the [recovery] is not self-sustaining.”

-- Tom Petruno

Photo: Fed Chairman Ben S. Bernanke. Credit: Matt Sullivan / Reuters

 
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