DAVID GREENE, HOST:
In addition to the president and Congress, the Fed is also weighing its options for how to help the economy. Federal Reserve Chairman Ben Bernanke says the U.S. economy is facing some significant risks. Bernanke's remarks before the Joint Economic Committee of Congress yesterday disappointed a lot of investors who were counting on the Fed to revive growth. As NPR's Jim Zarroli reports, Bernanke spoke at a time when interest rates on government debt are hitting lows not seen since the Great Depression.
JIM ZARROLI, BYLINE: Here's another sign of just how weak the U.S. economy is right now. Last week, the interest rate on the 10-year Treasury bond issued by the government fell to one and a half percent. That means if you bought such a bond and inflation stayed about where it is now, you wouldn't make any money. John Canavan covers the credit markets at Stone and McCarthy.
JOHN CANAVAN: You would get your principle back. Now, in real terms, if inflation over the next 10 years is more than one-and-a-half percent, then yes, you would wind up with a little less money than if you simple hoarded the cash.
ZARROLI: And yet people all over the world keep buying U.S. Treasury debt. The rates on Japanese and German debt are even lower. Why would anyone buy a bond with such a poor return? For one thing, Canavan says a lot of fund managers all over the world have money to invest right now, and they're required to do something with it. They can't just hold it as cash.
CANAVAN: They have to find a place to invest. So for Treasuries, they're willing to accept the risk of walking away with somewhat lower real returns in return for just getting it all back.
ZARROLI: In this highly volatile world economy, with much of Europe in a recession and China slowing, investors just don't know where to put their money. And so they'd rather sink it in U.S. government debt. They might lose a little money there, but at least the losses won't be too great. Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, is a little perplexed by how risk averse investors have become. He says there are a lot of good investment opportunities right now like corporate bonds and stocks that pay dividends, and yet investors don't bite.
JOSEPH GAGNON: American corporations are sitting on a record pile of cash, just sitting in bank deposits and Treasury bills and bonds at these low rates, when they could be investing in something that would make a profit, and that's what I don't understand.
ZARROLI: He says a lot of this is because of a weakness in demand. It's the same reason companies don't want to build new factories or hire people. They're worried that they won't be able to sell what they make. Gagnon says in an environment like this, something unusual happens to the markets.
GAGNON: One of the things that really marks this crisis, and marks crises in general, is that interest rates on the safest assets decline more than other interest rates.
ZARROLI: He says investors always want a little more money the riskier an asset is. They demand a higher rate for a junk bond than a municipal bond, for instance. The difference between the two is called the spread. In fearful times like this, the spread tends to widen. Take mortgage rates. They've fallen a lot in recent years and it's been good for the housing market. But they haven't fallen as far as Treasury bonds.
Banks would rather keep their money in safe assets like Treasuries than lend it out for mortgages that could go bad. Gagnon, who used to work at the Federal Reserve, says the Fed can do things to bring mortgage rates down even further.
GAGNON: I think if they do more action, that's where I would focus it on, because that spread has widened lately and it could come down.
ZARROLI: The Fed has already been doing this, buying up long-term debt and making more money available to the mortgage market. But as investor confidence wanes, the Fed may decide it's time to step up its efforts. Jim Zarroli, NPR News, New York.
NPR transcripts are created on a rush deadline by Verb8tm, Inc., an NPR contractor, and produced using a proprietary transcription process developed with NPR. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.