Ben Bernanke Wrestles with Congress and Interest Rates

Federal Reserve Chairman Ben Bernanke's recent warning to Congress about the federal budget deficit was not misplaced, but it was a little curious. This deficit has been a long time in coming. While its growth has been accelerated by emergency measures to address the financial crisis, the seeds were sown when the government continued to run deficits right through the last economic expansion. If you can't balance the budget during good times, it's going to be really hard to control when a recession hits.

Bernanke's sudden concern about the deficit gives the impression of someone just waking up to a problem that should have been obvious long ago. Still, better late to the party than not show up at all.

Bernanke's immediate concern is with keeping interest rates low to stimulate the economy. Beyond that though, there is the risk that a runaway deficit will erode the credibility of the U.S. dollar, which would lead to inflation. The question is whether Congress will have the political will to address the deficit now, or whether they will wait till the dollar gets really punished before they act.

In the meantime, it is starting to be the worst of all interest rate environments for consumers. Rates on longer-term debt like mortgages are going up, while short-term rates on savings vehicles like certificates of deposit, money markets, and savings accounts keep getting lower. Stay tuned though -- conditions are volatile, so things can change quickly.

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