By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y.
(MarketWatch) — This may come as a surprise to Ben Bernanke, but more inflation and lower interest rates do not go together. Never did; never will.
Having pushed short-term interest rates as low as they can go, the Federal Reserve chairman is now setting his sights on long-term interest rates. He wants lower bond yields, thinking that such rates will encourage both lending and borrowing.
It goes without saying that lower long rates will tempt more people and businesses to borrow. However, lower rates on long-term Treasurys can also serve as an inducement to the banks to lend, since they will be able to obtain a higher return from such a loan than they can from a buying a Treasury.
But this is not all. The Fed head also wants to boost the rate of inflation, which is certainly possible ( See my column of Oct. 19). He figures that rising prices will encourage people to step up their spending before prices go even higher. In turn, this will give a lift to the struggling economy.
In setting his sights on achieving these twin objectives, Dr. Bernanke apparently thinks that he can change the way the financial markets operate. He will soon learn that he can’t.
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