Latest tsy tips results indicate ‘contained inflation expectations’ as well.

I still have that nagging feeling that the 0 rate policy is highly deflationary and without some supply shock, like a spike in crude prices, prices in general will remain weak.

The weak core CPI and high unemployment rate continues to keep a lot of daylight between current conditions and the Fed’s dual mandate.

And the discount rate hike shows an ongoing lack of understanding of their own monetary arrangements.

Up until a few years ago the discount rate was kept a bit below the fed funds rate, which facilitated easier control of the fed funds rate.

This policy changed in a misguided effort to make the discount rate a ‘penalty’ rate which is a throwback to a fixed fx/gold standard paradigm and is entirely inapplicable with our current non convertible currency and floating fx.

All they’ve done by raising the discount rate is make it a bit more problematic to control the fed funds rate should technicals cause a system wide reserve deficiency.

Putting a penalty rate in for solvent banks (the FDIC is charged with removing insolvent banks) having funding difficulties is a throwback to the long discredited and illogical notion of using the liability side of banking for market discipline.

for more detail click here

Subject: Fed’s Lockhard on Reuters

Front end USTs getting very well bid on the back of these comments…

10:11 19Feb10 RTRS-FED’S LOCKHART –


10:13 19Feb10 RTRS-


10:14 19Feb10 RTRS-


11 Responses

  1. In your proposals for the Fed, etc., why don’t you eliminate required reserves? Is there a reason not to?

    You could say then that deficits accumulate as reserve balances at the Fed (as opposed to excess reserve balances).

      1. Yeah .. as you said earlier – he may be talking of money multipliers because the others want to speak/hear in that language.

        In the video you posted, Mark Thoma says that the government can be in deficit forever (in the end) and that Bernanke said the same recently in a weekend NYT article – can’t find the article, though.

      2. I noticed that today – just watching the Thoma piece this a.m. by coincidence – quite interesting and quite surprising

      3. MT is widely read, judging from the links he provides. Maybe he is following some of the MMT links in his comments and is learning something. 🙂

    1. At least two reasons

      1) In normal times interest rates on private debt transfer income between private parties. Therefore changing interest rates has little affect on aggregate demand except in as much the propensity to spend varies between debtors and lenders. But LOWERING interest rates on public debt reduces the transfer of income from the public sector to the private sector which reduces net private sector income, reducing aggregate demand.

      2) At Zero interest rates, the CB tends to instigate quantitative easing which usually takes the form of a transfer of private, high interest paying debts to the public sector in return for non interest paying reserves or as currently is the case, very low interest paying reserves. Again net income is transfered from the private to public sector, reducing aggregate demand.

      1. Winslow R.: Re your first point, assuming interest paid by govt is a net increase in govt spending, then obviously you are right. But why that assumption rather than the equally plausible assumption, namely that this interest cost is born by taxpayers (in which case the effect is neither reflationary nor deflationary)?

        Put another way (and putting it in MMT phraseology) the vast bulk of the reflationary effect of government spending is countered by the deflationary effect of tax, thus it is reasonable to assume that the reflationary effect of interest payments by govt are countered by tax. Put it yet a third way, no one would argue that the effect of spending govt money on school books is reflationary.

        Put it a fourth way, isn’t it reasonable to assume that specific items of govt spending have no reflationary or deflationary effect, and then take any excess of TOTAL govt spending over TOTAL govt income (i.e. the deficit) and treat that as a separate item?

        Re QE, I’ve always regarded this as ineffective (as a reflationary tool). Your point about QE being deflationary because it transfers high interest stuff to govt is a good point: I hadn’t thought of that. This is an additional reason for thinking that QE is ineffective.

        However I think you are stretching the argument a bit in claiming that QE is actually DEFLATIONARY. Governments have implemented QE, amongst other reasons, because they think it is reflationary. If it is actually deflationary, then governments have made the most almighty blunder!

        But basically my answer to your second point is the same as above, i.e. low interest rates and QE are pretty well separate issues. I.e. governments can reduce interest rates to near zero without too much QE. As you yourself put it “At Zero interest rates, the CB tends to instigate quantitative easing”. I agree: the word “tendency” is more appropriate here than “necessity”.

  2. there are also supply side deflationary forces as excess capacity is cheaper with lower rates, as is investment and business costs in general.

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