Putting together comments made today by Fed Chairman Ben Bernanke and Pimco bond guru Bill Gross offers the following critical suggestion to Congress: It would be a really good idea to put a deficit plan together before the Fed finishes its quantitative easing program in June.
Bernanke, in answer to a question in testimony on the Hill today, said that higher deficits, all things being equal, mean higher interest rates.
This, Bernanke said, would be "bad for the recovery and bad for financial stability." (Watch video of Bernanke's remarks below.)
And, "it would obviously go against efforts of the Fed to keep rates low."
So on the one hand, we have the Fed buying treasuries to keep down interest rates across the economy, while Congress and President Obama are engaged in deficit spending, which if not addressed over some period of time, could push up interest rates.
But the Fed has said it will stop purchasing these bonds in June after taking on, on net, an additional $600 billion of treasuries.
Enter Bill Gross, who buys a boatload of these bonds, warning that the Fed's exit from this market is going to leave a gigantic hole come June. He believes the Treasury will be able to sell its paper, but it will have to offer a higher rate to bring some investors back into the market. (Watch video of Gross' comments to CNBC here.)
Gross suggested 4 percent was not crazy. He added that part of the problem is that the government supply of paper (that is, its deficit) remains high despite the Fed's withdrawal.