The Wall Street Journal commented in a puff piece on the recent rise in interest rates:
Count us among the optimists who think this is good news, a sign that markets are concluding that the economy is improving as major policy obstacles recede and the risk of deflation vanishes, if it ever existed.
Ben Bernanke stated the objective of QE2 was to lower interest rates (or at least to maintain them at low levels). Clearly that has not happened. Whether Bernanke was wrong again or possibly masking some other reason for QE2 is not relevant to judging the Journal’s optimism. It likely is relevant in judging Bernanke and his capacity to do his job properly.
Interest rates are clearly rising. Most people, including Bernanke, would consider that bad news for the economy because higher rates generally dampen business investment and hiring. Ultimately they translate into lower stock prices because of the discounting process assumed to value future cash flows. They certainly are bad news for the government deficit as new debt and rollover debt will be financed at higher rates than projected, increasing the deficits.
Is the WSJ rationalizing this news in an effort to produce a “green-shoot?” Are they being pollyannish in order to bolster confidence in markets and the economy? Or, is there validity in their claim?
All prices, including bonds, are ultimately determined by the interaction of supply and demand. The WSJ believes