THE FED Bernanke: Curve not slowdown sign E-mail | Print | | Disable live quotes By Greg Robb, MarketWatch Last Update: 8:54 PM ET Mar 20, 2006 WASHINGTON (MarketWatch) -- The recent inversion of the yield curve is not a signal of a coming period of economic weakness, Fed chief Ben Bernanke said Monday. "Although macroeconomic forecasting is fraught with hazards, I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come," Bernanke said in a much-anticipated speech to the Economic Club of New York. Read full text of his speech Bernanke's remarks were fairly academic and he gave no hints about the path of monetary policy decisions at the FOMC meeting on March 27-28. He said that the implications of low long-term bond yields on monetary policy "are not at all clear-cut" and depend more on the cause behind the low rates. If long-term bond yields are low because investors need less compensation for risks, this could mean that rates should go higher. But if rates are low because of macroeconomic conditions, then the required policy interest rate would be lower. "The bottom line for policy appears ambiguous," Bernanke said. He said the bond market "is a pretty confusing and uncertain guide to the state of policy." "Given this reality, policymakers are well advised to follow two principles familiar to navigators throughout the ages: First, determine your position frequently. Second, use as many guides or landmarks as are available," Bernanke said. Economist reaction Economists said the Bernanke speech was not groundbreaking, but perhaps tilted slightly toward the view that the Fed rate hikes would last a little longer and go a little higher than the market now expects. Futures market now expect the federal funds rate to peak at 5% in May. See full story. John Ryding, chief U.S. economist at Bear Stearns, said in a television interview that Bernanke's speech was consistent with his expectation that the Fed would hike rates to 5.25% before pausing. Maria Fiorini Ramirez, head of an investment firm that bears her name said Bernanke was very clear in contrast to his predecessor. "I think the Fed feels very comfortable about economic growth and don't seem too shy about a tightening a bit longer," Ramirez said. Jim O'Sullivan, managing director of UBS Investment Research, said "there was no sign that the Fed is about to stop," but added that the speech "was not particularly hawkish either." Trade gap and housing In the question and answer session, Bernanke said the G-7 prescription to bring down the U.S. current account deficit has not made a great deal of progress, but said there was still hope that it might work. "So far, the actual actions taken have been relatively modest, but there is some hope, I think, that, going forward, these actions will advance further and we will see more progress in the current account," Bernanke said. The G-7 has called for the U.S. to increase national savings, for Europe and East Asia to spur domestic demand, and for China and other Asian countries to allow their currencies to be more flexible. "I do think there is some chance we will see increased private sector savings in the next year or two if housing prices were to moderate," Bernanke said. This would help raise the national savings rate, "and would be entirely consistent with continued growth at or near potential, so I don't think it is a problem for the sustained expansion," Bernanke said. Bernanke said the latest economic evidence supports the Fed's forecast of only a moderate slowdown in housing activity, but said it remains very early. Housing remains a risk factor going forward, he said. The buildup of household debt may not be a particularly serious problem for the economy, he said. Many homeowners have used mortgage debt to pay off higher costing credit card debt, he said. In addition, there will not be a sharp, sudden re-pricing of adjustable rate mortgages. The Fed estimates that the re-pricing of these instruments will happen "slowly," Bernanke said. Only 10% of these loans will re-price in 2006, he said.