Dallas Fed Has Requested A Rise In Discount Rate To 100 Bps, Fisher Joins Hoenig Asking For Drop Of "Extended/Exceptional" Language

Tyler Durden's picture

It appears the Fed meeting on the Discount Rate that was held last week behind closed doors is about to yield results. In a Q&A with reporters following a luncheon sponsored by the Levy Economics Institute, Dallas Fed's Richard Fisher said that "his Bank's board of directors recently requested an increase
in the primary credit rate. The request was made out of a
desire "to normalize" the spread. "We would like to get it back to 100"
basis points.
"According to Market News, Fisher "also told reporters he opposes the Federal Open Market
Committee's continual assertions that it expects the federal funds rate
to stay 'exceptionally low
... for an extended period.'"Furthermore, when discussing the steepness of the curve, Fisher hit the nail on the head: the curve is record steep due to a "limping" economic recovery (at record underemployment and an inventory restocking based GDP boost, we wait with baited breath to see just where this recovery is), but mostly due to record treasury supply. And because auctions have not busted yet, banks, whose PDs bid for these very auctions, especially on the short end, help to create a record steep curve, thus allowing them to borrow at zero costs and lend (assuming there is anyone out there who actually wants to borrow) at whatever rates they choose, thus guaranteeing themselves record profits for so long as the US continues to issue an average of $10 billion in debt a day! If you see this as a perverted Catch 22, you are not alone. The only one getting raped in all of this, has always been, and continues to be, the US middle class. At some point, the debasement to the dollar which all this printing results in, will catch up with consumers, but by then all the wealth in NPV terms will have long been transferred to the banks, their shareholders, and their managements.

More from Market News:

Earlier, in comparing the United States and debt-hobbled Greece, Fisher observed that the U.S. now has a "steepening of the yield curve."

"Part is due to the strengthening recovery," he said, though he called it "a limpid recovery."

But he said the yield curve is also steepening because "the price of (Treasury) debt is being affected" by federal deficit financing.

"Something has to be done," he said, adding, "the worst thing to be done would be for the Fed to monetize the debt."

"The fiscal authorities have to get their act together," Fisher went on. "Until they do the price will be affected." And he repeated that "the worst possible outcome would be for the Fed to accommodate" fiscal policy.

Turning to the issue of inflation, Fisher said wage pressures are the least of the economy's problems just now. "There is way too much slack in the system," he said, adding that there is "enormous excess capacity."Far from t borrowing.

As a result, he said, "we have some of the lowest inflation pressures we've seen in 33 years."

But Fisher cautioned that, as time goes on, the Fed will need to "be mindful" of the potential for the roughly $1 trillion of excess reserves to generate inflation pressures as and when they begin to flow into the economy in the form of expanded bank lending.