This blog post originally appeared on RealMoney Silver on Nov. 8 at 10:14 a.m. EST.
-- Fed Chairman Ben Bernanke, Washington Post op-ed On Friday, I responded to Chairman Bernanke's Washington Post op-ed piece (published following Wednesday's Fed meeting), in which he cited that easy money will be a palliative to domestic economic growth by spurring confidence and higher stock prices. Bernanke further expressed his belief that a virtuous circle would be encouraged by: lowering mortgage rates, making housing more affordable and allowing homeowners to refinance; and reducing corporate bond rates, which will likely encourage investment. "It's hard to have a big impact on the short-term interest rate that is already zero, and on the bond market ... two things are working in opposite ways on the interest rate." -- Former Federal Reserve Chairman Paul Volcker "Lower risk-free rates and higher equity prices -- if sustained -- could strengthen household and business balance sheets, and raise confidence in the strength of the economy. But if the recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices, the Fed's price stability objective might no longer be a compelling policy rationale. In such a case -- even with the unemployment rate still high -- we would have cause to consider the path of policy. This is truer still if inflation expectations increase materially." -- Kevin Warsh, Member of the Board of Governors of the Federal Reserve I wrote on Friday that, while QE2 will anchor short rates to near zero, it remains unclear to me whether QE2 will generate much lower mortgage and corporate bond rates from here. If anything, government bond yields over 10 years in duration are going in the opposite direction. At last week's close, the 30-year U.S. treasury bond (which is not the beneficiary of Fed buying but is an indicator of future inflationary expectations) finished at its lowest level in price and highest in yield than at any time over the past several months. Since QE2 was telegraphed by the Fed in the late summer, the 30-year bond yield has risen by nearly 65 basis points vs. the shorter-dated 10-year U.S. note's yield, which up by less than 10 basis points. In this morning's Wall Street Journal op-ed Federal Reserve Governor Kevin Warsh warns that the Fed, by expanding its balance sheet, has become more of a price maker than a price taker in the government bond market. But, if market participants come to doubt these prices -- or their reliance on these prices proves fleeting -- "risk premiums across asset classes and geographies could move unexpectedly." In his Washington Post op-ed, Chairman Bernanke suggested that mortgage rates will move ever lower. I just refinanced my mortgage down to a 3.50% seven-year ARM. In the fullness of time, how much lower can mortgage rates drop from my rate of 3.50%? And, what if the U.S. 10-year note continues to rise in yield? It is the rate on which mortgages are principally based! The problem with the housing market's recovery is a large shadow inventory of unsold homes coupled with high unemployment. For months, a generational low in interest rates has failed to dent the weakness in the residential real estate markets. Moreover, it is my continued concern that the consequences of QE2 will be harmful (likely producing screwflation), which is bad for the average American consumer buying the average American home. I went on to take in isolation the Chairman's statement that higher stocks might improve personal consumption expenditures. 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